What are pre-trading expenses?
When starting a new business, it’s likely that a large amount of expenses will be incurred before your business starts trading. These expenses are usually necessary to get your business in a position to start trading and will often relate to things such as marketing and website costs, training and development costs, acquiring premises, buying stock and seeking professional advice. For tax purposes, these costs are known as “pre-trading expenses”.
The good news is that it is possible to obtain tax relief for these pre-trading expenses once your business starts trading. To obtain tax relief, the pre-trading expenses must be incurred “wholly and exclusively” for the purpose of the trade and therefore would have been allowable for tax purposes if the business had been trading at the time the pre-trading expense was incurred.
Pre-trading expenses are valid for 7 years and, for tax purposes, are treated as having been incurred on the first day of trading and deducted from the business’ profit for its first accounting period.
Steps to claim pre-trading expenses:
1. Keep Detailed Records: Maintain thorough records of all expenses, including invoices, receipts, and payment details. This documentation is crucial when claiming pre-trading expenses.
2. Classify Expenses Correctly: Classify each expense accurately according to HMRC guidelines to ensure precise reporting. Different categories, such as marketing, legal, or office setup, may have specific criteria.
3. Adhere to Time Limits: Be mindful of HMRC’s time limits for submitting claims. Timely submission is crucial, and awareness of deadlines is vital to comply with HMRC regulations.
4. Consult with Tax Professionals: Seeking advice from tax professionals or accountants can help you navigate the complexities of claiming pre-trading expenses. They can provide expert insights into HMRC regulations, ensuring compliance with UK tax laws.
5. Explore Government Incentives: Research and leverage any available government incentives or tax reliefs designed to support businesses in their early stages. HMRC may offer schemes that can ease the financial burden of pre-trading expenses.
An example:
Priti has a full-time job as an administration assistant, but she decides to re-train and become a nutritionist. Priti incurred training costs of £3,000 in December 2019. The COVID-19 pandemic in early 2020 meant that Priti remained in her employed role as she was not able to undertake the final stages of her nutritionist qualification.
After the pandemic, Priti incurred further certification costs of £1,000 in December 2021. Priti qualified as a nutritionist in June 2022. Priti left her job in September 2022 and became a full-time self-employed nutritionist.
It is likely that HMRC would consider that Priti started trading in September 2022, as that is when she started providing nutritionist services. Any pre-trading expenses incurred in the 7 years prior to September 2022, including the £3,000 training costs from December 2019 and the £1,000 certification costs from December 2021, can be treated as allowable business expenses from 1 September 2022. These pre-trading expenses would be deducted from Priti’s business profit in her first year of trading.
Disclaimer: The tax rates and reliefs mentioned in this blog were correct at the time of posting (February 2023) and have not been updated for any future changes in tax law or HMRC practice. The contents of this blog have been produced as a helpful reference point and the information provided should be used as a guide only. You should discuss your specific circumstances directly with us before taking any action based on the information included in this blog.
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