Many businesses have paused trading due to COVID-19, or switched production to essentials like ventilators. Both steps could have adverse UK tax effects, if treated as cessation or major change of that trade. There are practical ways for any business with UK subsidiaries to mitigate that risk.

The issue

In a number of areas, UK tax law operates by reference to a company carrying on a trade or ceasing to do so. Major changes to a trade's nature or conduct can also have significance. Ceasing a trade, for example, will end a company’s accounting period for tax purposes, and cessation or a major change can adversely affect the ability of a company to make use of carried forward tax losses. As a result, companies having trades affected in this way may want to consider the potential impact on their UK corporation tax position in this respect.

Guidance in the cases

This cessation issue has, in fact, arisen before, in similarly perilous circumstances. During WWI and WWII, the British government strictly limited non-essential production, and many companies switched to producing arms. The courts considered the tax consequences of these changes several times.

Their approach to temporary shutdowns was pragmatic. In a WWI case, Kirk and Randall v Dunn, a company had its assets requisitioned and won no business for years. However, it continued bidding for work. The court found that was evidence enough of an intention to keep trading. In a contrasting WWII case, Goff v Osborne, a company also lost all business due to wartime regulations. It sold up its book debts, held no meetings and filed no returns. The court found it had ceased trading. The clear indication is that intention, as evidenced by conduct, is a key factor.

The question of whether there has been a major change in the nature or conduct of a trade is potentially a more difficult one. There is limited case law on the point, the legislation offers little help and HMRC’s guidance does not address this sort of scenario. In Howden Boiler and Armaments Co v Stewart (a cessation case), a boiler-maker company started making arms, too. When the latter business ceased, the question was whether it had been a separate business from the boiler-making operations. The courts upheld the ruling that there had always been only a single business rather than two separate ones. One might therefore worry that, following that logic, beginning to manufacture ventilators (for example) might be seen as a change to the existing trade rather than a new, separate one. That said, given the extreme circumstances, one would hope that HMRC would take a sensible approach in dealing with businesses that have switched production to aid the efforts against COVID-19.

Practical steps

The central point of the cases is the intention to resume trading. Groups with UK subsidiaries or permanent establishments should consider certain steps to evidence that intention.

Most important is keeping contemporaneous records of two things. First, that any decision to stop or change trading was a temporary, crisis-driven measure. Secondly, that there is an intention to resume the original trade as soon as circumstances permit.

Beyond this, companies may already be planning how they will re-launch after lockdown. Documenting such efforts will in itself provide helpful evidence. Board minutes and the course of conduct (i.e. keeping existing customers warm and seeking or discussing the terms of future orders) will be important in that regard.