It is not uncommon, for a new business owner to incur costs ahead of trading through their new business including set up costs, professional advice, and even new equipment. It is also very common for business owners to use previously personally owned assets in their business. The question is, do any of these costs qualify for tax relief? 

As a basic principle, expenses may be claimed only against the income they generate but there are provisions to deal with- and to allow – pre-trading expenses. This article will look at the various scenarios when pre-trading expenses may be tax deductible. A key point to note is that tax relief cannot be claimed until the business starts to trade. 

Self-employed – trade, profession or similar 

A deduction for pre-trading expenses will be given where: 

• the expenditure is incurred no more than seven years prior to the commencement of the trade proper. This is a very generous eligible period. 
• it would be an allowable expense if incurred once the trade had commenced, 
• the expense cannot already be deductible against trading income of another business – preventing a double-claim; and 
• the expense must be incurred by the person who ultimately carries on the trade. 

The condition that the pre-trading expense would need to be allowable if claimed in an ongoing trading business blocks the ability to claim private expenditure, entertaining and capital costs as you would expect.  

This condition also seemingly blocks the ability to claim for capital expenditure, but we will return to this later as special rules apply.  

How to claim the relief 

Any allowable pre-trade tax deductible expenses are added together and – for tax purposes only – claimed on the day that trading commences, alongside the normal expenses incurred once the trade starts. Since they are aggregated with post-commencement expenses in the first trading period, they will simply reduce the taxable profits of the first trading period, or perhaps create (or enhance) a loss. 

Property businesses 

A property investment business, where the owner rents out the property, is treated as a business but not normally as a trade. A similar regime applies for property businesses as for trading businesses, and provided the same criteria are met, (swapping ’property business’ for ’trade’ in the above conditions), then pre-trading relief should be secured in the same way. 

Companies – trading or letting 

The rules for companies work in essentially the same way as they do for self-employed individuals: pre-trading expenses (or pre-letting expenses) may be claimed immediately the business properly commences. 

Remember that you are not the same legal person as your company: each is a distinct legal entity. You may well incur substantial personal costs prior to setting up the company that will ultimately run the business. It must be the same person who incurs the expense, who must also claim the tax relief on commencement.  

The simplest approach is for the company to reimburse you for the expenses incurred, and to treat the cost of reimbursement as a deductible expense in the company’s books. But this potentially puts you in a difficult position: you may be taxed personally on the reimbursement as a ‘benefit in kind’ – unless you can convince HMRC that it was a legitimate business expense incurred on the company’s behalf. HMRC usually does allow such claims.  

But if the claim is substantial and you would prefer more certainty you can set up your company before incurring any costs. You can then lend money to the company so that it can pay directly for its own expenses, reclaim them when business starts and repay the loan to you when profitable. 

Capital allowances 

While capital expenditure (pre-trading or otherwise) is generally not tax-deductible, certain capital costs may be claimed under the Capital Allowances route for plant and machinery and similar items, including cars, vans, office equipment and the like. Where the capital expenditure is incurred before the trade or property business starts, it is deemed to have been bought when the ‘qualifying activity’ commences.  

Eligibility for the 100% annual investment allowance is calculated by reference to the date of actual acquisition, not the commencement date. 

If you are taking previously personally owned assets into your Limited company, then you should seek advice on relation to valuing the assets and any further tax implications. 

Reclaiming VAT on pre-trading expenses 

There are provisions to reclaim VAT incurred prior to VAT registration, as follows: 

• Where goods such as stock or fixed assets are purchased in the 4 years prior to the date of registration, and provided the items are still on hand at the date of registration and will be used to make VATable supplies, VAT can be reclaimed. 
• There are special rules for high-value capital items such as property. 
• For services such as professional fees, you can reclaim VAT on any pre-trading expenses incurred up to 6 months prior to registration. 

VAT on pre-incorporation expenses 

Since a company cannot register for VAT until it is incorporated, it is helpful that the VAT rules allow for the above periods to extend back prior to incorporation, on the basis that the expenses were incurred to make VATable supplies.  

Setting up a business can be costly, and you will want to obtain the tax relief that is allowed. Seek professional advice to ensure you maximise your tax relief and stay compliant.  Call on of our team today.