The simple answer to this question is yes, you can claim for expenses incurred pre-trading once trading has commenced as long as they are wholly and exclusively for the purpose and use of your business activity.
Typical expenses incurred before you start trading could be rent, advertising, marketing, purchasing office supplies, equipment etc.
The great news is that there is tax legislation which allows pre-trading expenses to be included within your first year’s accounts and tax return providing certain conditions are met.
Pre-trading expenses can be used against income tax and corporation tax, so it does not matter if you are a sole trader, partnership or limited company.
So what are these rules/conditions?
Wholly and exclusively rule
Expenses can be deducted providing they meet the wholly and exclusively rule, this means the expenses incurred must have only been paid or required for the trade, if a proportion of the cost was for business use then the expense should be amended to reflect the business element.
When do I get relief for my pre-trading expenses?
Relief for your pre-trading expenses are applied on your first day of trading and will be included within your first set of accounts or tax return. Making a note of your pre-trading expenses could significantly reduce any tax liabilities with potential opportunities for tax rebates.
Using the cash or accruals basis
If you follow the cash basis rules where you only pay tax once you have paid or received money, then any capital items such as plant and machinery will be deducted as an expense.
If you follow the accrual basis where you pay tax on the invoices raised regardless of whether you have paid them then the capital items are not included as expenses and would instead follow the capital allowance rules.
VAT registered
If you register the business, you may be able to claim back the VAT on costs incurred before registering. This would be up to:
Four years for goods and capital items
Six months for services received
There are certain conditions which need to be met and we would be happy to discuss this with you.
So are there any things that you cannot claim for?
There are several pre-trading expenses which you cannot claim for because they are not recognised as revenue, instead, they are classed as capital because they ‘improve’ the business, these can be expenses such as:
Training courses – Acquiring a new trade is classed as capital and therefore the initial training and training for a new trade is not allowable
Licenses and registrations – costs incurred to establish a business such as a pub license or company registration is also classed as capital
Repairs and improvements – costs of repairs to a building before trading will be classed as capital if the work needed was to ensure it was then fit for trade. The repairs and improvement are a complicated area and worth getting advice before any money is spent.
Starting a business can be an expensive activity and with so much information to get to grips with so our advice would be to find an accountant sooner rather than later. Getting the right processes in place from the start will not only enable you to be better organised but you will have better control and a greater understanding of your finances and be able to make more informed decisions. If you would like to find out how we could assist you and your new business, get in touch we would be happy to help.