Pre incorporation expenses treatment

Introduction 

When you start your own business, can you claim for your pre incorporation expenses / expenditure? Pre trading expenses are usually incurred by most businesses before they are formally set up.

It may be expensive when you set up a new company or new business. Therefore, it is important to make sure that you are aware of pre incorporation expenses treatment and what you can claim and, as a result, your business will receive tax relief on these.

Whether you are a sole trader or you have your own company, prior to the commencement of your trade, you are likely to have spent a fair amount of money to get your new business off the ground. Therefore, even before your first day of trading when you make your first sale or start to provide your services, you are likely to have incurred various costs.

Initial thoughts

When your business first starts up, any set up costs 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 for these as tax deductible business expenses. As a result, these pre trading expenses will be reflected in your company’s overall financial position at its first year-end, when you file your business’s first financial year of accounts.

We have a first timer’s guide to contracting in the UK which gives a full overview of what to consider when you first start out. There are also some key differences to consider when looking at the differences between contracting and freelancing in the UK which are worth looking at.

Please have a read of our article covering tax tips for contractors for good advice that you should be aware of when you have your own business. This includes our latest advice for the best tax planning ideas.

Pre incorporation expenses -what to bear in mind

Pre trading expenses will consist of the costs that you pay out, prior to the commencement of your 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 provide or offer to provide the goods and services to your customers and clients. 

Pre trading expenses -which costs are included? 

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, to see recruiters, to attend interviews, to see the bank etc) 
• Training course costs 
• Accountancy costs 
• Business insurance
• Office rental and use of home as an office 
• Stationery, printing and postage costs 
• Phone bills and broadband charges 
• Domain names and web hosting costs 
• Professional subscriptions 
• Business clothing dependant on what sort of work that you do 
• 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 has started to trade, the pre trading expenditure that relates to the trade profession or vocation, will be treated as a deduction in computing the profits. Therefore, in effect, the expenditure incurred can be treated as incurred on the first day that you began trading. As a result, this will reduce your tax bill therefore if you have your own company, it will save Corporation Tax or, 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 prior to company formation on:

• any goods or products that you bought in the prior four years; and 
• any services that 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 for more details with regards to reclaiming VAT on pre incorporation expenses treatment.

Once the first date of trading has started, you will be able to claim much of the above listed costs, as well as any other new costs that you incur as part of running your new business.

Keeping receipts

As with all business expenditure, you need to keep evidence that the money was spent in the form of a receipt or invoice. Nowadays, with the move to digital, many retailers will ask for your email address so that 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.

Final thoughts 

It is important to know about pre trading expenses when you are 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 that this guide is helpful and it will help you when you are starting your own business.

Finally, if you are setting up our company for the first time, or are indeed a seasoned contractor, contractoradviceuk.net now has a 10% discount on business insurances, courtesy of Qdos.

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