My VIP Tax Team question of the week: POB - Business Changes
My client is a self-employed plumber and is thinking of setting up an online trade of sourcing and selling parts to the plumbing industry which will operate alongside the existing business. Is there a commencement of new trade?

Apart from a statutory rule deeming all farming activities as a single trade in s9 ITTOIA 2005, a sole trader is free to carry on more than one trade at a time. This may be significant in preventing losses of one trade being set-off against another trading business.

The business activities of a sole trader are usually treated as one unless they are so fundamentally different from each other that they cannot be considered as one trade. However, this is a question of fact to be determined by the Tribunals.

In order to establish whether a new trade has started, it is vitally important to establish the facts.

In the tax case of Cannon Industries Ltd v Edwards (HMIT) (1963) 42 TC 625, the appellant company contended that it had commenced a new trade of purchasing, assembling and selling electrical equipment which was to run alongside its business of manufacturing gas appliances and plant.

Although each business was managed separately, there were joint administrative arrangements in place for both trades. These included bookkeeping, banking and the company accounts reflected both operations without distinction.

The Courts decided that based on the facts of the case, the assembly and selling of electrical appliances was an in fact an extension of existing trading activities. Per Croner-i Direct Tax Reporter, the factors influencing this finding were that the products were not totally unrelated and that the activities were carried on contemporaneously, not alternatively or successively or with dormant periods in between.

Similarly, the case of The Howden Boiler & Armaments Company Ltd v Stewart (HMIT) (1923-25) 9 TC 205 was concerned with whether a company was carrying on two manufacturing businesses.

Prior to the First World War, the company’s main activity was that of manufacturing boilers. In 1915, the company entered a contract to build armaments and extended it business so that it included boiler-making, engineering and armaments-making.

Although the armaments business operated out of separate premises, used its own separate workforce and kept separate accounting records from the rest of the company, all operations of the business were directed by the same management. All accounting records of the company were consolidated into one profit and loss account and balance sheet, and all expenses were charged against the company too.

Following the end of the war, the armaments business was closed down, the plant was sold, employees let go and the premises was subsequently rented out.

The company was assessed to taxes on its combined activities. The company appealed on the basis that it was operating two separate trades.

Based on the facts, the Courts concluded that the company was operating as two departments and not two businesses and was duly taxed on joint profits.

In contrast, the case of Scales v George Thompson & Co Ltd (1927) 13 TC 83 the company was carrying on two separate trades.

The company’s business involved ships: one part of the business operated a fleet of steamers; and the other part was involved in the business of underwriting ships. When the underwriting ceased, the company argued that these were separate trades.

In common with the cases mentioned above, this case centred around whether the company’s activities were made up of one or two businesses.

The Judge considered whether there was “any inter-connection, any interlacing, any inter-dependence, any unity at all embracing those two businesses…”.

Based on the facts, it was decided that both businesses could operate independently of each other; the ceasing of one business had no effect of the other and there was no inter-dependency between them.

There is further HMRC commentary on changes to business at BIM80500 and see particularly BIM80615 for the possibilities that can arise.

The situation can be different where professions or vocations are concerned. See the First Tier Tribunal case of Moore v HMRC (2011). Mr Moore was a professional musician who, when income from touring and session work diminished, supplemented his income by being employed as a teacher at a private school (taxed under PAYE) and also became a self-employed guitar teacher at a state school. The Tribunal held that the latter was part of Mr Moore’s overall income as a self-employed musician, not a separate trade.

If your client does operate two separate trades and one of the businesses runs into financial difficulties generating trading losses and eventually closing down, the losses cannot be carried forward and set off against the other trade’s profits.

However, for losses in the final 12 months of trading (terminal losses), there is relief against profits of the same trade of the tax year of cessation and the previous three tax years. The claim for the losses must be made with four years of the end of the tax year (ss 89-94 ITA 2007). Again, if there are two separate trades, this loss relief can only be given against profits of the same trade.

Not all plumbers have a retail business, and not all plumbing retailers offer plumbing services. However, there is no reason that a business cannot be created to provide both services. Based on the brief information provided, it does appear that the retail business is separate from the plumbing business, not the expansion of an existing business. However, the facts should be examined in detail before a decision is made.

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Tax Adviser

Patrick started his tax career in practice, and has also worked in industry in various operational and tax roles. He has experience of dealing with SDLT, Employment Taxes and HMRC enquiries. He is a member of the Chartered Institute of Taxation.

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