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:
- 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.
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.
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.
New Here? These are my most popular resources:
- The Ultimate Bookkeeping Spreadsheet – Organise your money, track the numbers that matter and stay on top of your cash;
- FREE Guide: 11 Common Small Business Setup and Tax Mistakes – Are you worried your business isn’t set up correctly? Use this guide to identify whether you’re making the 11 most common financial pitfalls I’ve seen when it comes to setting up a business and taxes, as well as finding out how you can put them right;
- Sole Trader or Limited Company? – Download my free calculator to check which business structure would help you to pay less tax;
- FREE Business Expenses Cheatsheet – Check what you can and can’t claim as an expense against your taxes.
- 6 Core Elements of Self-Employment Taxes – Confused by taxes? Worried you’re missing something when it comes to tax allowances and reliefs? These easy to follow 6 mini-guides will have you on top of the tax side of things in no time at all.