pre-incorporation expenses

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Introduction 

When you start your own UK contracting business, can you claim for your pre-incorporation expenses? What’s more, when you’re starting up your own company, what’s the considerations around small business incorporation costs? First of all, pre-trading expenditure (limited company) are expenses before incorporation (UK) or before you set up a business. Therefore, when we consider can you claim expenses before a business starts (UK), you’ll incur such pre-incorporation costs before you start your chosen trade. Indeed, in business, most new start-ups will incur pre-trading expenses and business start-up costs (UK) before they set up for real.

As a UK limited company contractor or small business, you may incur pre-incorporation costs before you start to trade. Therefore, besides thoughts on whether you can you write off expenses before incorporation, are company formation costs tax-deductible too? HM Revenue & Customs (HMRC) have their own rules on pre-trade expenses. Therefore, in this guide we’ll look at what are pre incorporation expenses (HMRC). What’s more, we’ll research what sort of pre-commencement expenses you could incur in your business start-up. Further, we’ll look at when are incorporation fees tax-deductible.

It may be quite costly in terms of business start-up costs (UK), when you first start a new company. Therefore, when you set up a limited company for your UK contracting business, what should you give thought to? Indeed, it’s key to make sure you’re aware of the pre company and pre-incorporation expenses accounting treatment. It’s also crucial to know what you can claim for as part of your pre-trade expenditure. Key to note, your business will receive tax relief on your allowable pre-trading costs. therefore, in this guide, we’ll research the initial expenses for a business, the company incorporation expenses accounting treatment and a business’s establishment costs accounting treatment.

Initial thoughts on claiming expenses before business started

What are pre-incorporation expenses?

Whether you’re a sole trader or have your own company, you’ll incur certain costs and expenses for starting a business. Basically, you’ll incur such pre-business costs prior to the commencement of the trade. What’s more, these pre-business expenses prior to startup may vary in nature. Also, you may have to spend a fair amount of money to get your new business off the ground. Therefore, are company formation expenses tax-deductible and are other business start-up costs tax deductible?

Besides the cost of incorporation, you’ll incur various costs before your first day of trade. On the other hand, you’ll incur such pre trade expenses before you make your first sale or start to provide your UK contracting services. Therefore, in respect of such costs, let’s look into the treatment of pre-incorporation expenses.

Business start-up costs (UK)

When your business starts up, the set-up costs you incur will include any UK incorporation costs and these may be a costly initial outlay. Therefore, as a new business, what’s the rules on start-up costs? If you’re setting up a new business now, the good news is you can claim tax relief on any genuine business expenses. Therefore, when you start your own business, you should be accounting for start-up costs prior to the setup of your new company.

Therefore, you can claim for your contractor pre-trading expenditure and any company incorporation expenses, as long as they’re bona fide as business expenses. As a result, you should keep a record of these and retain any receipts for your costs. Therefore, the expenses before incorporation will be part of the expenses in your business’ first set of accounts. What’s more, these expenses and costs will save tax in due course and you can claim them back from your business.

Common questions on pre-trading expenses

Many first-time start-ups, including contractors will have initial questions on pre-trading expenditure. Indeed, these’ll cover what they can claim in terms of business expenses before incorporation:

  • What are incorporation costs?
  • Are business start-up costs tax-deductible?
  • Can I claim expenses before a business starts?
  • Can you claim business expenses before incorporation?
  • How to record start-up expenses?
  • What are incorporation costs?
  • How much does incorporation cost?

Therefore, in this guide we’ll take a look at the tax treatment of start-up costs before incorporation. Also, we’ll study the expenses incurred before commencement of business.

Our other guides

On this website, we have a great first-timer’s guide to contracting in the UK. This gives you a complete rundown on the steps you’ll take when you first start up. What’s more, there’s also some key differences between contracting and freelancing in the UK. Indeed, these are worth a look at depending on your type of business.

Please also read our guide which covers tax tips for UK contractors. This contains a lot of great tips and sound advice which you should know when you own your own business. This includes our latest guidance for the best tax planning ideas. 

Pre-incorporation expenses and how these work 

When you first start up

Your contractor pre-trading expenses (limited company) consist of the costs you pay out before the trade or contract work starts up. As a basic rule, trade isn’t able to commence until you are:

  • In a position to supply the goods or services which your business will provide (e.g., you’ve bought some stock); and
  • Ready to provide the goods and services to your customers and clients.

These are both basic facts with regards to where you need to be before your trade starts.

UK company incorporation fees

When you set up a limited company, are incorporation costs tax-deductible? These costs will include The Companies House incorporation fee of £12. This is the standard amount payable when someone opens a new company in the UK. The costs could also include service costs by a third party for completing the company set up process for you.

If we look into the above further, the rules state that you cannot charge the company formation cost against Corporation Tax. As a result of the UK company incorporation costs tax treatment, the actual incorporation fee and third-party costs for forming a UK company are treated as a capital expense. Therefore, to sum up, you can’t claim tax relief on the actual incorporation cost through your company. On the other hand, it is the case that most other business formation costs and expenses incurred before incorporation of company are tax-deductible. Therefore, you’ll save tax on your other pre trading costs.

The types of costs for contractor pre-incorporation expenses

Besides the business formation expenses, the types of pre-trading expenditure that the owner of a UK contractor limited company or small business can treat as business cost for tax purposes will include:

  • Travel expenses before business started. This includes travel costs to attend business training courses, see recruiters, attend interviews, see the bank, etc.
  • Training course costs -these could include professional training and exams before you take up your contracting career.
  • Business insurance that you’ll set up at the outset however you can’t put this in place until you have a company.
  • Stationery, printing, and postage costs. This could include advertising costs too.
  • Phone bills and broadband charges. These’ll include and phone and broadband use for business purposes before your company starts.
  • Professional subscriptions to organisations that you’re a member of. These need to be relevant to the type of work you will be performing once your company is set up.
  • Pre-trading capital expenditure items such as office and computer equipment. This may include a PC or laptop and other hardware such as printers, drives and other equipment.

When you claim for the above costs as expenses before commencement of business, they should be incurred wholly and exclusively for the purpose of the trade. If you keep a note of your pre-trading expenses, Corporation Tax you’ll save tax on these costs in due course. Therefore, please obtain and retain receipts for all pre business costs and you can save tax for your business at a later date.

Other aspects to think about 

Contractor pre-incorporation expenses treatment

Once you start your contracting work or start trading, the pre-trading expenditure relating to your trade profession or vocation is treated as a deduction in computing the profits for your business. In effect, the expenses are treated as though they were incurred on the first day of trading. As a result, this’ll reduce your tax bill for your first accounting period. Therefore, the savings will be as follows:

  • If you have your own company, it’ll save Corporation Tax.
  • If you are self-employed, it’ll reduce your Income Tax bill.

Pre-incorporation expenses and VAT

Your business may choose to register for VAT when you first set it up. The general rules on VAT are:

  • You need to register your business if your sales will exceed £85K pa.
  • You can opt to register your business voluntarily.

Many limited company contractors register for VAT, even if they’re not above the £85K threshold. This is because when you’re VAT registered there’s other benefits to doing so, such as being able to reclaim the VAT on your costs. Therefore, if you register, you can also reclaim the VAT element of the expenses you incur before business incorporation on:

  • Any goods or products you bought up to four years prior to setting up your business.
  • Any services you incur up to six months before the start of your trade.

The Corporation Tax Act 2009 covers pre-trading expenses in more detail and BIM46351 and BIM46355 give further information. Please also see VAT notice HMRC VIT32000. This VAT notice explains the process in more detail when you reclaim VAT on pre-incorporation expenses treatment.

Once your trading starts, you can claim much of the above-listed costs. This is as well as any other new costs you incur while you run your new business.

Keep your receipts for pre-incorporation expenses

As with all business costs, you should keep evidence that the money was spent. Therefore, you should do this too for any costs you incur before you set your company up. Such evidence comes in the form of a receipt or invoice. In this day and age, 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 via email. Therefore, you should store your receipts, both paper and electronic, in an organised format. As a result, you can view these later on, if the need arises.

Pre-incorporation income

In some cases, you may receive some income from your work before your company is set up. As a result, you will have received this income personally. Therefore, you could pay this into your company bank account once this is in place. On the other hand, you could declare it to HMRC as self-employment income. This second choice will result in the need to register for self-employment with HMRC. Therefore, in most cases, it’s best to choose the former option if it relates to your contracting income through your new company.

Setting up as a limited company contractor 

If you’re now setting up as a contractor for the first time you will have a number of tasks. These include set up your company, appoint an accountant and open a company bank account. There’ll no doubt be other start up tasks too.

Besides the above tasks, you should also look into contractor insurance. Your new contract will state which types of insurance to get in place for your future work. Indeed, you’ll more than likely have to take out Professional Indemnity insurance although you may require other contractor insurances too. Through this contractor website you can get a contractor discount when you take out business insurance. Please use Code CAUK10 at checkout and you’ll a receive great 10% contractor discount on policies from one of the best contract insurance providers in the UK.

Final thoughts 

It’s key to be aware of pre-trading expenses when you start your own UK contracting business. These are expenses before incorporation and both company directors and self-employed people will incur these. As a result, you should record any pre-trading expenditure and incorporation costs when you set up your company. As a result, you can save tax when you make a claim for these later on.

Therefore, to sum up:

  • When you run a company, the expenses will show as costs in your company’s first set of financial accounts.
  • When you’re self-employed, you will include the costs in the self-employment section on your personal tax return.

As a final note, we hope this guide is a good help when you start your own new business. We explain what to think about when you claim your pre-incorporation expenses.

Link to Contractor Advice UK group on

LinkedIn    https://www.linkedin.com/groups/4660081/

Published On: January 4th, 2024 / Categories: First timer guide, Starting Up Your Own Company /

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