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23rd July 2018

Setting up a business – what can and can’t be claimed?

Thinking of setting up a business? Find out what costs can be claimed back

Setting up a business can be expensive. Virtually all businesses incur cost before they start trading. Special rules determine when and if they are tax deductible. For example, could your business get a deduction for paying your salary before it starts to generate income?

Depending on the type of business you are setting up, before you can start trading there might be premises to find, stock and equipment to purchase, plus a number of smaller expenses. For tax purposes none of these is tax deductible unless or until the business starts to trade i.e. open for business.

Similar rules for companies and unincorporated businesses say that pre-trading expenditure is treated as if it were incurred on the first day they trade. The usual rules then apply so that day to day costs, such a travel, telephone and stationery, are deducted from income, while capital allowances are given for equipment such as machinery and vehicles. All expenses must be wholly and exclusively for the purpose of the business.

Your time can be a deductible pre-trading expense

If you spend time finding suppliers, hiring staff etc, it’s only fair for your company to pay you a salary. As long as it’s reasonable for the time you spend in setting up a business and at a fair rate, HMRC won’t object to you including it as deductible pre-trading expense. However, this isn’t relevant if your business is unincorporated, because you’re taxed on profit the business makes and not what you draw from it.
The pre-trading expense rule applies to expenses paid up to seven years before trade commences, which is good if takes a long time to get your business up and running.

Setting up a business - what can and can't be claimed

Some types of pre-trading expense fall outside the special rules e.g. stock or advance rent for a period which falls after trading commences. Even though these are incurred “pre-trading”, the normal tax and accounting rules require that they are attributed to the period to which they relate, and because that’s after trading commences, the deductions are allowed without the need to resort to the pre-trading expenses rule.

If you borrow funds when setting up a business and incur interest or other finance charges before trade begins, these too count as pre-trading costs and are treated in the same way as other expenses, but not where the business is run as company.

Pre-trading interest etc. incurred by companies falls under the loan relationship rules. These say that for corporation tax purposes your company can only deduct interest paid on loans from non-trade credits (income) it receives, e.g. interest on savings. It might be years before it can generate the right type of non-trade credits, if ever, to obtain tax relief for its pre-trade debts.

The good news is that your company can elect for pre-trading loan relationship debits, e.g. interest paid, to be treated in the same way as other expenses. However, there are conditions – a two year time limit for the election plus, like other pre-trading expenses, the debits must meet the wholly and exclusively test.

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