7 July 2020

Change of business activity? – HMRC guidance

As a result of COVID-19, many businesses have been forced to stop trading during the lockdown or have changed the nature of their activities. Aside from the commercial aspects of a change in business activity, various tax implications may also arise, including the business’ ability to carry forward losses.

But what constitutes a change for these purposes? Although there is no clear-cut answer and each case will need to be considered separately, HMRC has recently updated its guidance concerning whether and when there has been a change in the nature of a trade during lockdown, as well as a number of other issues.

New trade or not?

Normally, if a business starts up a new activity which is unrelated to what it has done before, this would amount to a completely new trade. However, if the new activity is “broadly similar” to the previous activity, the profits and losses of the new and old activities should be merged and treated as one trade.

HMRC uses the example of a restaurant trade which starts manufacturing gowns and face masks; this would be viewed as the commencement of a separate trade. In contrast, where a business used to manufacture clothing and instead starts to manufacture gowns and face masks using the same staff and premises, this would merely be viewed as an extension of the same trade. This should provide some comfort to those clothing manufacturers who have changed their products and are now making protective clothing for the NHS.

However, each case will need to be considered individually and the position is not always obvious. Restaurants and pubs, for example, that have started selling takeaway food and have effectively converted themselves into food shops, will need to analyse their position.

Temporary trading breaks

HMRC has also confirmed that the temporary breaks in trading activity which many businesses have experienced will not be treated as a permanent cessation of trade provided that the business is then able to resume the same or similar activity after lockdown. If, however, the business is unable to start trading again then it will be necessary to work out when its trade ceased for tax purposes, based on the individual circumstances of the business.


The guidance also includes a reminder to taxpayers that if a business receives donations (for example, from the public or employees) which enables the business to meet revenue expenditure or to supplement trading income, the amounts received will be taxable as trade receipts.

The tax position of a business which itself makes donations is complicated and specific advice should be taken based on the particular circumstances. If a business donates trading stock to a charity for homeless persons then it is not treated as having sold the stock for tax purposes but that would not be the case if the stock is donated to non-charitable bodies, individuals or another business. In that case the stock would be treated as having been sold at its open market value, although HMRC states in the guidance that what represents market value would now have to take into account the disruption caused by COVID-19 and the lockdown.

That said, there is a specific relief for companies which make corporate donations of medical supplies and medical equipment for humanitarian purposes anywhere in the world and this is not just restricted to donations to registered charities.

Partial refunds

HMRC confirms in the guidance that where a business gives partial refunds on items such as gym membership and car insurance policies, these should be allowable if they are treated as trade expenses in GAAP-compliant accounts, on the basis that the original receipt would have been included in calculating trade profits.

Heather Corben is a Partner in the Corporate Tax team.


The current global crisis is evolving rapidly, and the rules and guidance for individuals, companies and other entities to manage its implications are similarly fast moving. Notes such as this may be out of date almost as soon as they are published. If you have any questions prompted by this article or on any other matter relevant to you, please get in touch with your usual contact at Forsters.

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