IR17 29 November 1994 POST-CESSATION EXPENSES The Chancellor proposes in his Budget to introduce a new relief for expenditure incurred by individuals after a trade or profession has ceased, such as professional indemnity insurance premiums. The Chancellor's intention is to relieve genuine 'trading' expenses which do not at present qualify for tax relief. The change will take effect for expenditure which qualifies on or after today. DETAILS 1. At present no relief is available under the tax system for expenditure incurred after a trade or profession has ceased unless the expenditure is provided for in the final accounts or there are post-cessation receipts against which the post-cessation expenditure can be set. From today, certain post-cessation expenditure, closely related to the trading or professional activities while they were carried on, can be set against income and capital gains to the extent that relief is not available under the present rules. 2. The new relief will be restricted to individuals, and limited to particular types of loss or expenses which can be seen to relate directly to the trading or professional activities. These are * the costs of remedying defective work done, goods supplied, or services rendered while the trade or profession was continuing and damages paid by the taxpayer in respect of such defective work, goods or services whether awarded by a Court or agreed during negotiations on a claim; * insurance premiums paid to insure against the costs above; * legal and other professional expenses incurred in connection with the costs above; * debts owed to the business which have been taken into account in computing the profits or gains of the trade or profession before discontinuance but which have subsequently become bad; * the costs of collecting debts which have been taken into account in computing the profits of the trade before discontinuance. 3. If in the final accounting period of the trade a deduction was given for expenses unpaid at cessation, and those expenses remain unpaid at the end of the year of assessment in which the new relief is given, the amount of the new relief will be reduced by the amount of the unpaid expense. (If the unpaid expense is subsequently paid it will be eligible for new relief in the year of assessment in which it is paid.) 4. The new relief will be set against income and capital gains of the year of assessment in which the expense is paid. Where there is insufficient income or capital gains to cover the expenditure the unrelieved expenditure of that year will not be able to be carried forward under the new relief arrangements against future income or capital gains. (However the unrelieved expenditure will continue to be able to be carried forward under the present post- cessation relief arrangements to be set against any post-cessation receipts which may arise in the future.) 5. The new relief will apply to expenditure which qualifies in a period of seven years after a trade ceases. 6. If an insurance policy is taken out in relation to the expenditure for which relief may be allowed under the new proposal and amounts are received in connection with that policy, these amounts are to be treated as post- cessation receipts under the present post-cessation arrangements. The same treatment will be given to recoveries of expenditure from any other person and to recoveries of debts for which relief has been allowed under the new proposal. 7. Claims for the new relief must be made within two years after the end of the year of assessment in which the expense is paid. NOTES FOR EDITORS 1. Under Sections 103-110 of the Income and Corporation Taxes Act 1988 amounts arising from the carrying on of a trade or profession which arise after a trade ceases are taxable. In arriving at the tax liability on those receipts a deduction is allowed for expenditure which would have qualified as a trading deduction had the business continued. Any excess qualifying expenditure can be carried forward and be relieved against post-cessation receipts if they arise in later years. 2. The cost of the new relief will be about pounds 10 million a year