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Introduction
When you start your own business, can you claim for your pre-incorporation expenses/expenditure? Pre-trading expenses are expenses before incorporation or when you set up your own business. When we consider, can you claim expenses before a business starts (UK), you will incur such pre-incorporation costs before you start your trade. Notably, in business most new start-ups will incur pre-trading expenditure before they are formally set up.
may incur pre-incorporation costs. Therefore, besides considerations around whether you can you write off expenses before incorporation, in addition are company formation costs tax-deductible too?
It may be expensive when you set up a new company or new business. Therefore, it is essential to make sure you are aware of pre-incorporation expenses accounting treatment. It is also crucial to know what you can claim for, and as a result, your business will receive tax relief on these.
Initial thoughts
What are pre-incorporation expenses?
Whether you are a sole trader or have your own company, you will incur costs before you start your business. These costs prior to the commencement of your trade may vary in nature. You may also likely have to spend a fair amount of money to get your new business off the ground.
It is likely you will incur various costs even before your first day of trade when you make your first sale or start to provide your services. Therefore, in relation to such costs let us consider the treatment of pre-incorporation expenses.
Start-up costs
When your business starts up, the set-up costs which you incur will include any incorporation costs and these may be a considerable outlay. As you are the person who incurs these costs on behalf of your new business, the good news is that you can claim tax relief for these if they are all genuine business-related expenses.
Therefore, you can claim for the pre-trading expenditure including any incorporation costs when you include these in your records as business expenses. As a result, these initial expenses and costs will reflect in your company’s overall financial position. Therefore, these expenses before incorporation will show as part of the overall expenses in your business accounts at the end of its first year-end.
Our official guides
We have a first-timer’s guide to contracting in the UK. This gives a complete overview of what to consider when you first start up. There are also some key differences to consider when you look at the differences between contracting and freelancing in the UK. These are also worth taking a look at. Please also read our article covering tax tips for UK contractors. This contains a lot of handy tips and sound advice which you should be aware of when you have your own business. This includes our latest guidance for the best tax planning ideas.
Pre-incorporation expenses
What to bear in mind
Pre-trading expenses consist of the costs you pay out before the trade commences. As a general rule, trade is unable to commence until you are:
- In a position to supply the goods and services which your business will provide (e.g., you have bought some stock); and
- In a position to offer to provide the goods and services to your customers and clients.
Company incorporation fees
When you set up a limited company, are incorporation fees tax deductible? Notably, most company setup costs are tax-deductible, however the actual cost of company formation is not deductible against Corporation Tax. The actual fee for forming a UK limited company is regarded as a capital expense. Therefore, you cannot claim tax relief on this through your company.
Which costs can you include for your pre-trading expenses?
The types of pre-trading expenditure that the owner of a UK contractor limited company or small business can treat as deductible for tax purposes will include:
- Travel costs when you travel to attend business training courses, see recruiters, attend interviews, see the bank, etc.
- Office rental and use of home as an office.
- Stationery, printing, and postage costs.
- Phone bills and broadband charges.
- Business clothing -this depends on what sort of work you do.
- Capital expenditure such as business equipment. This may include a PC or laptop and peripheral equipment.
Furthermore, when you claim for the above costs, they should be wholly and exclusively for the purpose of the trade.
Pre-incorporation expenses treatment
Once the business starts to trade, the pre-trading expenditure which relates to the trade profession or vocation is treated as a deduction in computing the profits. Therefore, the expenditure which you incur can be treated as being spent on the first day you began trading. As a result, this will reduce your tax bill. Therefore:
- If you have your own company, it will save Corporation Tax.
- If you are self-employed, it will reduce your Income Tax bill.
VAT implications for pre-incorporation expenses
If you become VAT registered (you need to do this if your turnover exceeds £85K pa, or you can also opt to register voluntarily), as many limited company contractors do, you can also reclaim the VAT element of your expenses which you incur before company formation on:
- Any goods or products you bought up to four years prior to commencement.
- Any services you incur up to six months before the start of trade.
The Corporation Tax Act 2009 covers pre-trading expenses in more detail. Please also see VAT notice HMRC VIT32000. This further explains the process when you reclaim VAT on pre-incorporation expenses treatment.
Once your trading starts, you can claim much of the above-listed costs. This is in addition to any other new costs you incur while you run your new business.
Keep your receipts
As with all business expenditures, you should keep evidence that the money was spent. This comes in the form of a receipt or invoice.
Nowadays, many retailers will ask for your email address with the move to digital. When you give them this, they can send the receipt to you digitally. Therefore, you should store your receipts, both paper and electronic, in an organised format, and as a result, you can view these later on if the need arises.
Final thoughts
It is essential to know about pre-trading expenses when you start your own business. These are expenses before incorporation and both company directors and self-employed people will incur these. You should record any pre-trading expenditure and incorporation costs when you set up your company and you can then save tax when you make a claim for these later on.
When you run a company, the expenses will show as costs in your company’s first set of financial accounts. When you are self-employed, you will include the expenses as costs in the self-employment section on your personal tax return. We hope this guide will be of assistance when you start your own new business.
Link to Contractor Advice UK group on
