Guide to pre-trading expenditure

Posted 15 May 16

Forming your own business might require you to make investments before you start trading. These expenses might cover the goods and services that your trade will provide, for example stock; the organisation of trading premises, insurance and advertising.

Pre-trade expenses can also include items that you owned before you decided to start a business, but now decided to use for these purposes.

Pre-trade expenses can be either normal expenses that are deductible from your profit or capital expenditure that is given relief through capital allowances.

Can I claim pre-trade expenses?

The general rule for claiming your pre-trade expenses includes expenses which incurred within seven years of you starting to trade.

Typical expenses for small businesses, include:

Accountancy costs

Office rental

Business insurance

Domain names and web hosting

Travel costs (e.g. travelling to visit potential employees, investors and clients)

Stationery, printing, postage, etc. Phone bills

Business equipment (e.g. a PC, laptop, peripheral equipment)

These expenses, when claimed, will be treated as if made on the first day of trading. If you register your limited company for VAT, you will be allowed to reclaim the VAT element of any product bought for the previous 4 years, and any services received up to 6 months before the first trading date.

Conditions of claiming your pre-trade expenses

In order to claim your pre-trade expenses, you will need to meet the following conditions:

You can only claim the expenses incurred “wholly and exclusively for the purpose of the trade”.

You cannot claim the cost of the company formation itself against tax, as it is treated as a one-off capital expense. However, if you paid for it personally as the company’s director, you can reimburse yourself for this expense.

If you already own a business, but wish to start another one, the costs related to setting it up cannot be legitimately reclaimed by the new company as it is a different entity.

Some costs cannot be claimed until you have start trading, for example training courses.

Certain expenses can often be confusing to define as either business or personal, especially if you decide to run your business from home. In order to avoid any penalty fines from HMRC, discuss them with your accountant.

You should always keep accurate records relating to your expenses, in order to demonstrate that any purchase you have made has been for business purposes only. You cannot make any purchases in the name of your company before it has been officially incorporated with Companies House.

If you would like to find more about claiming with your pre-trade expenditure, contact our experts at Tawanda Accountants and we will answer all the questions for you and guide you through the process.

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