Claiming back pre-trading expenses from your limited company – the basics

If you’ve spent personal funds setting up a business, what scope is there to reclaim these costs from your limited company after incorporation?

Many company owners, including contractors, absorb some costs personally before their businesses are up and running.

For the average professional contractor, many of these expenses are incurred shortly before company formation. Some costs may need to be paid before your company’s bank account is fully operational.

For example, you may need to travel to attend a client interview, pay for legal advice, or purchase a business insurance policy if stipulated in a contract.

Is your expense claim valid to start with?

To legitimately offset a business expense against tax, the claim must be incurred

wholly and exclusively for the purposes of the trade, profession or vocation

In other words, you paid for a product or service which is used solely to help you carry on your trade.

Pre-trading expenses you can typically claim for

Typical pre-incorporation costs company owners incur include:

• Accountancy and other professional costs.
• Office rental.
• Business insurance (e.g. Professional Indemnity)
• IT, domain names and web hosting.
• Travel costs.
• Stationery, printing, postage, etc.
• Broadband and phone costs.
• Equipment, e.g. laptops, PCs, servers.

Where equipment is capital in nature, the cost is not deducted as an expense but instead relieved through capital allowances once the company starts trading.

Some pre-incorporation costs you cannot claim for

Some pre-incorporation expenses cannot be offset against Corporation Tax, including:

• Company formation – this is treated as a one-off capital expense.
• The cost of stock purchased in advance does not qualify, as it will be deductible from future profits once trading begins.
• Other capital expenses (e.g. plant and machinery) are accounted for via capital allowances.
• HMRC generally treats pre-trading training as capital expenditure because it creates a new skill or capability, rather than maintaining an existing trade. As a result, such costs are not normally allowable until the business is already trading.
• Business entertainment.
• Gifts to business clients.
• Fines and penalties.

HMRC generally treats pre-trading training as capital expenditure because it creates a new skill or capability, rather than maintaining an existing trade. As a result, such costs are not normally allowable until the business is already trading.

When does a company officially start trading?

Trading generally commences on the date when a company is in a position to offer goods and services to customers.

For a limited company, the date of incorporation is often treated as the ‘official’ date of trading commencement.

In practice, HMRC looks at when the company is genuinely in a position to trade, which may be earlier or later than the incorporation date.

For contractors, this is often linked to the date a contract is signed, or services are first offered, rather than to the date of Companies House registration alone.

The rules – Corporation Tax relief

You can offset any allowable pre-startup expenses against profits for Corporation Tax purposes once the business has started trading,

As long as such expenses were incurred within 7 years of the first day of business (as per s.61 of the Corporation Tax Act 2009).

The expenses are then treated as having been incurred on the first day of trading (see HMRC BIM46355).

It therefore enters into the calculations of the profit or loss for the first year of assessment in which the trade profession or vocation is first carried on.

You must be sure that any expenses you reclaim would have been tax-deductible if you incurred them during the current trading.

This relief is available only if you personally paid for the expenses and founded the business.

When pre-incorporation expenses are paid personally by a director, the company typically reimburses them from the director’s loan account once trading begins.

This reimbursement is not treated as salary or a dividend, provided the expense is allowable.

What about VAT?

If you register your limited company for VAT (as most contractors do), you can also reclaim the VAT element of:

• any products bought during the previous 4 years.
• any services received up to 6 months before the date trading commences.

You must still own any goods purchased when you claim for pre-incorporation costs.

VAT can only be reclaimed if the company is VAT-registered and the costs relate to taxable supplies. VAT on exempt or non-business activities cannot be recovered.

See HMRC VIT32000) for further details.

Can an existing business reclaim costs for setting up a second company?

If an existing business incurs costs in setting up a new limited company, those costs cannot be legitimately reclaimed by the new company, as it is a separate legal entity.

Further Information

For obvious reasons, you should keep accurate records relating to your pre-trading expenses. You might need to demonstrate that any purchases have been made exclusively on behalf of the company you subsequently form.

Do not make any purchases in the name of your company before it has been officially incorporated at Companies House.

Talk to your accountant if you have any questions about reclaiming pre-trading costs and expenses. There are many ‘grey’ areas, which cannot be easily explained in a high-level article.