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Claim a tax deduction for pre-trading expenses

Setting up a new business is exciting time, but can also be a very costly time. It requires a lot of investment in regards to your time and money before you can start to reap any of the rewards. So it is very important that you are aware of pre-trade expenses and what you are entitled to claim in regards to tax relief.

Rule of thumb

As a general rule, a deduction will be allowed for expenses that are incurred wholly and exclusively for the purpose of your trade.

Put simply, for the deduction to be available, the business must have already started trading.

However, most businesses will incur expenses in setting up the business.

This may include expenditure such as:

• rents and other premises costs,
• marketing and advertising costs;
• the purchase of office supplies and stationery.

These costs will be incurred before the business starts to trade rather than when the business is trading; as you incur these costs to put the business in a position to trade, rather than for the purposes of the trade.

Luckily, help is at hand and the tax legislation specifically allows relief for your pre-trading expenses, as long as certain conditions are met.

Relief is available for both income tax and corporation tax purposes, providing a deduction regardless of whether the trader operates as a sole trader or via a limited company.

The tax relief is available for:

• expenditure which is incurred within a period of seven years prior to the commencement of the trade, profession or vocation; and

• which is not allowable as a deduction, but which would have been allowable had the expenditure been incurred after the trade had commenced.

Applying the ‘wholly and exclusively’ rule

In principle, as would be expected, the ‘wholly and exclusively’ rule means that expenditure is only deductible in calculating business profits if it is incurred solely for business purposes.

How is tax relief given?

Tax relief is given by treating the qualifying expenses incurred in the seven years prior to the commencement of the trade as if they were incurred on the first day of trading.

Consequently, they are deductible in computing the profits of the first accounting period.

Trap

The purchase of trading stock is not deductible as a pre-trading expense; it is deductible in computing profits once the trade as commenced.

Capital v revenue

Where the accruals basis is used, relief is only given for your pre-trading expenses if they are revenue in nature, as is the case where the expenses are incurred once the trade as commenced.

If you have opted to use the cash basis, capital expenses may also be deducted where these would be deductible under the cash basis rules.

How it works in practice…

Rebecca starts trading as a sports therapist on 1 November 2018.

She spends six months setting up the business, acquiring premises and preparing to trade. She incurs £2,000 on rent, and £800 on marketing the business.

Rebecca’s expenses are treated as incurred on 1 November 2018 and are deducted in computing the profits of her first accounting period.

Further queries…

For more information see https://arthurboyd.co.uk/accountancy/ and for any other tax related or money worry queries, contact us today on 028 9032 9255 or by email info@arthurboyd.co.uk.