When starting a new business, it is often assumed that normal tax rules apply when looking at tax-relief on expenses. However, this is not always the case as there are unique rules that apply to expenses that occur before the business begins trading (pre-trading expenses). These expenses can be significant and could be anything from stock and equipment to the premises in which the business will operate. Relief for pre-trading expenses can be claimed for up to 7 years before the business begins trading.

When looking at the situation of pre-trading expenses from a tax perspective, pre-trading expenses are considered as expenses that occur on the businesses first day of trading. After any pre-trading expenses have been included, normal tax rules apply. An important point is that this relief only applies to expenses that are solely used for the purposes of the business.

Costs included such as business travel and premises costs are deductible from income on the profit & loss, however, more significant expenditure included on balance sheet such as machinery, equipment and vehicles may be subject to capital allowances for certain aspects. If the business is not incorporated, then it may also be possible to claim tax deductions on time spent hiring staff and finding product suppliers. A further consideration is that if the business never starts trading, then any losses arising from pre-trading expenditure are unable to be subject to tax relief.

It is also worth noting that certain aspects of pre-trading expenditure are not applicable, such as materials and stock intended for trading. This is because, according to HMRC, “its cost will be deductible in arriving at profits when trading begins”. Another aspect of pre-trading expenses that are not applicable are advance payments for the business premises, as these costs will be deductible for the applicable period that they have been paid in advance for.

If you have any questions on pre-trading expenses or starting your own business then do not hesitate to contact us.