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 starting up your own company, what are the considerations around the initial setup? First, pre-trading expenditures (limited company) are expenses before incorporation (UK) or before you set up a business. Therefore, when we consider whether you can 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 expenditure before you start to trade. Therefore, besides thoughts on whether you can write off expenses before incorporation, are company formation costs tax-deductible? HM Revenue & Customs (HMRC) have their rules on pre-trade expenses. Therefore, we’ll investigate pre-incorporation expenses (HMRC) in this guide. Moreover, we’ll research what pre-commencement expenses you could incur in your business start-up. Further, we’ll look at when incorporation fees are tax-deductible.

When you start a new company, there are initial business start-up costs (UK). Therefore, what should you consider when you set up a limited company for your UK contracting business? Indeed, it’s vital to ensure you know the accounting treatment for pre-company and pre-incorporation expenses. Moreover, knowing what you can claim as part of your pre-trade expenditure is crucial. It is important to note that 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 a company, you’ll incur certain costs and expenses for starting a business. The pre-business costs will occur prior to the commencement of the trade. What’s more, these pre-business expenses before startup may vary in nature. Also, you may 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 business day. 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, regarding such costs, let’s investigate the treatment of pre-incorporation expenses.

Business start-up costs (UK)

When your business starts up, the set-up costs you’ll incur will include any UK incorporation costs, which may be a costly initial outlay. Therefore, as a new business, what are the rules on start-up costs? If you’re setting up a new company or 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 account for start-up costs before setting up your new company.

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

Common questions on pre-trading expenses

Many first-time start-ups, including contractors, have initial questions on pre-trading expenditure. Indeed, these will 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, this guide will examine the tax treatment of start-up costs before incorporation and the expenses incurred before the commencement of business.

Our other guides

Our contractor website has a fantastic first-timer’s UK contracting guide. This gives you a complete rundown of the steps to start up. What’s more, there are some critical differences between contracting and freelancing in the UK. Indeed, these are worth a look at, depending on your type of business.

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

Pre-incorporation expenses & how do they work? 

When you first start up

Your contractor pre-trading expenses (limited company) consist of the costs you pay before the trade or contract work starts. As a basic rule, trade can’t 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 basic facts concerning where you should 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 online fee of £50 (£71 on paper or £78 the same day online). 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 research the above further, the rules state you can’t 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 capital expenses. 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 the incorporation of the company are tax-deductible. Therefore, you’ll save tax on your additional pre-trading costs.

What types of contractor pre-incorporation expenses can you claim? 

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

  • Travel expenses before business started. This includes travel costs to attend business training courses, see recruiters, attend interviews, visit the bank, etc.
  • Training course costs could include professional training and exams before you start your contracting career.
  • Business insurance. You’ll set up insurance 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 include phone and broadband use for business purposes before your company starts.
  • Professional subscriptions to organisations you’re a member of. These must be relevant to your work 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 the above costs as expenses before the commencement of business, they should be incurred wholly and exclusively for the trade. If you note your pre-trading expenses, Corporation Tax can be saved in due course. Therefore, please obtain and retain receipts for all pre-business costs, and you can save tax for your business later.

What other key aspects are there to consider? 

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. The expenses are treated as though they were incurred on the first day of trading. As a result, that’ll reduce your tax bill for your first accounting period. Therefore, the savings are as follows:

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

Pre-incorporation expenses & VAT

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

  • Register your business if your sales exceed £90K pa (£85K up to 31 March 2024).
  • 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 are other benefits to doing so, such as being able to reclaim the VAT on your costs. Therefore, if you register, you can reclaim the VAT element of the expenses you incur before business incorporation on:

  • Any goods or products you bought up to four years before 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 treatment of VAT on pre-incorporation expenses.

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 pre-incorporation expenses receipts

As with all business costs, you should keep evidence to prove the money was spent. Therefore, you should do this for any costs you incur before setting up your company. Such evidence comes in the form of a receipt or invoice. Today, 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 paper and electronic receipts in an organised format. As a result, you can view these later if the need arises.

Pre-incorporation income

You may sometimes receive some income from your work before your company is set up. As a result, you may have received this income personally. Therefore, you could pay this into your company bank account once it’s in place. On the other hand, you could declare it to HMRC as self-employment income. This second choice will result in the requirement 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.

How do you set up as a limited company contractor? 

If you’re now setting up as a contractor for the first time, you’ve several initial tasks. These include setting up your company, appointing an accountant, and opening a company bank account. There’ll no doubt be other start-up tasks, too.

Besides the above tasks, you should investigate 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 need to take out Professional Indemnity insurance, although you may require other contractor insurance, 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 receive a fantastic 10% contractor discount on policies from one of the best contract insurance providers in the UK.

Final thoughts 

It’s vital to be aware of pre-trading expenses when starting your UK contracting business. These are expenses before incorporation; company directors and self-employed people will incur these. As a result, you should record any pre-trading expenditures and incorporation costs when you set up your company. As a result, you can save tax when you claim these later.

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’ll include the costs on your tax return in the self-employment section.

As a final note, we hope this guide is helpful 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: April 6th, 2024 / Categories: First timer guide, Starting Up Your Own Company /

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