Can I claim for pre-trading expenses?

Many businesses incur costs prior to forming a limited company. Often, business owners absorb these costs personally before their business is set up. For example, travel costs when seeing a client, the cost of legal or accountancy advice, the cost of business insurance policies etc.

If you have spent your personal money when setting up your business, it is possible to reclaim these pre-trading expenses. You just need to remember that the expenses must have been ‘wholly and exclusively’ for business and not personal use. However, you will need receipts and proof of purchase as well, the same as you would for any company trading expense.

For limited companies, the pre-trading expenditure is treated as if it were incurred on the first date of trade. You can include expenses from up to seven years prior to the commencement of trade. For capital expenditure which qualifies for capital allowances such as a laptop, there is no seven year limit. In a property business, pre-trading expenditure applies to costs incurred six months before the incorporated date.

What is the start date for my business?

For tax purposes, HMRC is interested in the date you started trading. This is when you started supplying your product or services for economic exchange. For example, the date the shop doors opened, the date of your first online sale, the date you ran your first course, the date of your first customer invoice, or the date you started consultancy work.

A standard approach for limited companies is to use the incorporation date as the commencement date, although if the limited company does not commence trading immediately a later date may be more appropriate.

If the limited company turnover is above £85,000 per annum, then the business will need to VAT register. Input VAT incurred on goods brought for the four years before VAT registration can be claimed if the goods are still held. Services received for six months before the VAT registration date can be claimed. For more detail please refer to HMRC VIT32000.

What counts as pre-trading expenses?

Typical business expenses include:

• Accountancy and legal costs
• Office rental
• Business insurance
• Marketing (e.g. domain names and web hosting, advertising)
• Travel costs (e.g. travelling to visit clients)
• Printing, postage and stationery
• Phone bills
• Business equipment (e.g. a PC, laptop)

What expenses do not qualify?

Some costs are not considered to be pre-trading expenses. These include training costs incurred prior to incorporation and preliminary activities, such as writing a business plan or negotiating contracts.

The rules to be aware of:

• The formation costs of the company cannot be claimed against tax. However, if you paid for it personally as the director, you can reimburse yourself.
• Expenses must be incurred “wholly and exclusively for the purpose of the business”
• Some costs cannot be claimed until you have started trading, such as training courses.
• Substantial expense claims may not be claimable and could need further advice.

If there are further questions, please get in touch with a member of our team.