Pre trading expenses / pre-incorporation expenditure

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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. You will incur these before you start your trade. In business, most new start-ups will incur pre-trading expenditure before they are formally set up.

As a UK contractor or small business owner, when you set up a new company, you may incur incorporation costs. Therefore besides considering whether you can you write off expenses before incorporation, 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.

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 have to incur various costs even before your first day of trading 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.

Initial thoughts

When your business starts up, the set-up costs which you incur including any incorporation costs 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.

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 read our article covering tax tips for 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 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 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.

Pre-trading expenses -which costs are included? 

The types of pre-trading expenditure for a small business or contractor that they can treat as deductible for tax purposes can 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 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.

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 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.

Keeping 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 can save tax when they make a claim for these.

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 help you when you start your own business.

Link to Contractor Advice UK group on

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Published On: August 1st, 2022 / Categories: First timer guide, Starting Up Your Own Company /

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