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How to Claim Pre-Trading Expenses

I’ve updated this on 15 July 2020

Setting up a new business has costs. And long before you launched your business and started making sales, you will possibly have invested money paying for pre-trading expenses.

Handling your pre-trade expenses correctly means:

  • You can claim cash back from your business if you paid for these yourself;
  • You’ll get tax relief, whether you paid for them personally or not.

The way you claim for pre-trading expenses depends on your business structure – in other words whether you are self-employed, a sole trader or own a Limited Company.

I’ll show you how to handle expensing your pre-trading costs depending on your business structure.

What Counts as Pre Trading Expenditure?

Pre-trading expenses are the costs that were paid for to set up a business to get ready to make sales.

That’s things like:

  • Equipment;
  • Insurance;
  • Stock;
  • Computers;
  • Travel;
  • Business cards;
  • Accountants fees;
  • Websites design and domains.

Claiming Money Back for Pre Trading Expenses

HMRC allows self employed and Limited Company business owners to claim back pre trading expenses going back 7 years, as long as there are receipts and paperwork to support the claim.

Often, as an accountant, I saw business owners bare the costs of pre-trading expenses themselves – an investment to get their business off the ground.

Claiming back money from their businesses for these costs is tax-free because it is an expense claim, not a salary/dividend payment.

It’s a good idea to keep track of what you have spent so that you can get some money back, when your business has the money to do so.

You can do that by keeping all your receipts safely, like in google drive and putting together a list on a spreadsheet.

The way you claim for pre-trading expenses depends on whether you are self-employed or a Limited Company, let’s look at each.

If You Are Self Employed or a Sole Trader

You can claim for your pre trading expenses on your self assessment tax return.

The expenses are deemed to have been paid for in the tax year you are claiming them. So you’ll need to include the costs in the relevant boxes as though you paid for the costs in that tax year.

Depending on what you paid for, you may need to claim tax relief using capital allowances or annual investment allowance if your pre-trade expenses are fixed assets.

If you have a separate business bank account, you can then refund yourself for the expenses you have paid for.

If You Have a Limited Company

The expenses will be deemed as being paid for during the financial year you put them through your business.

You’ll then get corporation tax relief in the tax return submitted with those financial accounts.

Depending on what you paid for, you may need to claim tax relief using capital allowances or annual investment allowance if your pre-trade expenses are fixed assets.

You can repay yourself for the pre trading expenses you paid for, just like you would for any other expense claim.

Alternatively, you can log them in your Directors Loan Account and repay yourself when the time is right.

Are Formation Costs Tax Allowable?

Company Formation costs are not tax allowable, even though they are pre-trading expenses, but you can claim the money back as a business expense.

Claiming Back VAT

Depending on when you registered for VAT you may be able to claim back VAT on pre trade expenses.

HMRC lets you claim back VAT from your registration date:

  • 4 years for goods you still have, or that were used to make other goods you still have;
  • 6 months for services.

I’ve put together this guide on claiming back historic VAT, along with examples to help you check what you can and can’t claim.

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Anita Forrest
About Anita Forrest

Anita Forrest is a Chartered Accountant, spreadsheet geek, money nerd and creator of www.goselfemployed.co - a UK small business finance blog where she shares help and advice with the self-employed community to make topics like registering a business, bookkeeping and taxes easy to understand.