Dealing with tax on income received after trading ceases

Loose ends

The trader, a general builder, ran his business as a sole trader. When he called it a day he gave his one employee notice and told his subcontractors there would be no more work. He’s now left with a storeroom and yard, plus a some equipment and materials. These will be sold as soon as he can find buyers, which may take some time.

Final business accounts

The trader doesn’t need to wait until the business assets are sold to prepare his final accounts. Instead he should give his accountant an estimate of the value of the unsold equipment and materials, but not the property, to include in the accounts. He should estimate these according to what he could realistically expect if they were sold on the last day of trading.

Valuation of stock and materials

If the stock contains items which the business would have sold had it continued to trade, the value needn’t be as high as the normal selling price but should be discounted to what the trader could reasonably expect if he sold the items as a job lot. As for materials, especially if they have a limited lifespan, it’s reasonable to value them at less than cost. And if the trader intends to scrap them a zero valuation is acceptable.

The trader should value the items as low as he reasonably can. This will reduce the income tax bill for his final period of business. However, he shouldn’t go unreasonably low as this increases the risk of closer scrutiny from HMRC.

Valuation of vehicles

This is somewhat easier than for stock or materials. The trader can check the value of his van with local dealers, online valuation sites and local ads. His should pitch his valuation at the low end of these. Again this will reduce the final tax bill on the business. He should keep copies of online estimates etc. to back up his valuation in case HMRC disputes it.

Actual versus estimate

In practice, the items are unlikely to fetch exactly the amount the trader estimated. However, that’s not relevant; it’s the value of the assets on the date the business ceased which matters, not what they are sold for later. For example, if it took three months to sell the van in which time he used it for private journeys its value would be less than on the day his business ceased to trade. It would be wrong to use the later value in the final accounts. In other words, the right value to use for equipment and materials is the trader's best estimate not the actual price they fetch, unless the sale occurs very soon after the business ceased.

The storeroom and yard are a different story. Even when the business was trading their sale wouldn’t have affected the business profits. Their value at the time the business ceased is not relevant. Instead, any gain or loss is worked out after the property has been sold using the actual sale price. However, its use in the business can reduce the rate of capital gains tax that applies.