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HMRC internal manual

Business Income Manual

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Post-cessation receipts and expenses: meaning of post-cessation receipts: debts released after cessation

S249 Income Tax (Trading and Other Income) Act 2005, S193 Corporation Tax Act 2009

If a debtor is released from a debt after ceasing to trade this is a post-cessation receipt so long as it is not released as part of a statutory insolvency arrangement

On the flip side to BIM90030, a person is treated as having received a post-cessation receipt where:

  1. a deduction from trading profits has been allowed for an expense incurred, but that expense has not actually been paid, giving rise to a debt owed by the trader
  2. the trade has since ceased
  3. the debt is released, and
  4. the release is not part of a statutory insolvency arrangement.

If the release of the debt takes place as part of a statutory insolvency arrangement, the person is not treated as having received a receipt. Statutory insolvency arrangement is defined in S259 ITTOIA 2005 and S1319 CTA 2009.

Example

Plumbers Ltd repairs some of the plumbing in the premises of Clothes Horse (a packing company specialising in fashion which is run as a partnership) and invoices Clothes Horse for the work. Clothes Horse has financial difficulties and is unable to pay Plumbers Ltd; however, under generally accepted accounting practice (GAAP), the amount due to Plumbers Ltd is allowed as a deduction from Clothes Horse’s trading profits.

Clothes Horse’s trade and assets are then sold to Company A and Clothes Horse ceases to trade whilst still owing Plumbers Ltd the money for the work done. Following the sale, the individual partners of Clothes Horse become liable for the debt to Plumbers Ltd.

However, Company A has further plumbing problems, is advised that the standard of work performed by Plumbers Ltd was poor and informs the former partners. Rather than entering into protracted correspondence and potential court proceedings, Plumbers Ltd agrees to release the former partners from the obligation to pay.

Since Clothes Horse received a deduction for the amount owed and, following the cessation of the trade, the debt is released and is not part of a statutory insolvency arrangement, this is treated as a post-cessation receipt of the former partners of Clothes Horse.

Trades previously carried on by another person

As mentioned in BIM90020, the person who is taxable on a post-cessation receipt does not have to be the person who carried on the original trade. In the case of the release of a debt, it is the person owing the debt at the time of its release who is taxable.

This is the case even if:

  • the person owing the debt at the time of release is liable to Income Tax (ie an individual, trustee, personal representative or non-resident company) where the original deduction for the amount owed was given to a company liable to Corporation Tax, or
  • the person owing the debt at the time of release is liable to Corporation Tax where the original deduction for the amount owed was given to a person liable to Income Tax.

Non-resident companies are within the charge to Income Tax rather than Corporation Tax. If the company becomes liable to Corporation Tax, it is treated as ceasing to carry on the income tax trade for the purposes of S249 ITTOIA 2005.