When you start your own business, can you claim for your pre-incorporation expenses/expenditure? Pre-trading expenses are costs that you incur before starting your trade. In business, most new start-ups will incur pre-trading expenses businesses before they are formally set up.
It may be expensive when you set up a new company or new business. Therefore, it is essential to make sure that you are aware of pre-incorporation expenses treatment. It is also crucial to know what you can claim for, and as a result, your business will receive tax relief on these.
Whether you are a sole trader or you have your own company, you will incur costs before you start up. These costs before your trade’s commencement will vary in nature. You may also likely have to spend a fair amount of money to get your new business off the ground.
Therefore, you are likely to have incurred various costs even before your first day of trading when you make your first sale or start to provide your services.
When your business starts up, the set-up costs that you have incurred may have been a considerable outlay. As you are the person who incurred these costs on behalf of your new business, the good news is that you may be able to claim tax relief for these. You can do this by including them in your records as business expenses. As a result, these pre-trading expenses will be reflected in your company’s overall financial position. This will show in your business accounts at the end of its first year-end.
We have a first-timer’s guide to contracting in the UK. This gives a complete overview of what to consider when first starting up.
There are also some key differences to consider when looking at the differences between contracting and freelancing in the UK. These are also worth looking at.
Please also read our article covering tax tips for contractors. This contains a lot of handy tips and sound advice that 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 will consist of the costs you pay out before the commencement of the trade. As a general rule, trade is unable to commence until you are:
- In a position to supply the goods and services that 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.
Pre-trading expenses -which costs are included?
The types of pre-trading expenditure for a small business or contractor that can be treated as deductible for tax purposes could include:
- Travel costs when you travel to attend business training courses, see recruiters, attend interviews, see the bank, etc.
- Stationery, printing, and postage costs.
- Capital expenditure such as business equipment. This may include a PC or laptop and peripheral equipment.
Furthermore, when you claim for these costs, they will need to be wholly and exclusively for the purpose of the trade.
Pre-incorporation expenses treatment
Once the business starts to trade, the pre-trading expenditure related to the trade profession or vocation will be treated as a deduction in computing the profits. Therefore, the expenditure incurred can be treated as incurred 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.
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 contractors do, you can also reclaim the VAT element of your expenses that are incurred before company formation on:
- Any goods or products you bought up to four years before 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 of reclaiming VAT on pre-incorporation expenses treatment.
Once trading has started, you can claim much of the above-listed costs. This will be in addition to any other new costs you incur while running your new business.
As with all business expenditures, you need to keep evidence that the money was spent. This will come in the form of a receipt or invoice. Nowadays, many retailers will ask for your email address with the move to digital. Once you give them this, they can send the receipt to you digitally. Therefore, you will need to store your receipts, both paper and electronic, in an organised format, and then they can be viewed later on if the need arises.
It is essential to know about pre-trading expenses when starting your own business. Both company directors and self-employed people can save tax when they claim for these.
When you run a company, the expenses will be shown as costs in your company’s first set of financial accounts. When you are self-employed, the expenses will be included as costs in the self-employment section on your personal tax return.
We hope this guide will help you when you start your own business.
Link to Contractor Advice UK group on