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 small business owners, including contractors, absorb some costs personally before their businesses are up and running.
For the average IT contractor, many of these expenses are incurred shortly before company formation. It may be that certain costs have to be paid for before your company bank account has become fully operational.
For example, you may need to travel to attend a client interview, pay for legal advice, or take out a business insurance policy if it is stipulated as part of a contractual agreement.
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.
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 advanced purchase of stock 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.
- Training expenses – this is also seen as a ‘capital cost’ by HMRC, and are only allowable once trading has begun.
- Business entertainment.
- Gifts to business clients.
- Fines and penalties.
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 used as the ‘official’ date when trading commenced.
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 any expenses you reclaim would have been tax deductible if you incurred them during current trading.
This relief is only available if you are the person who paid for any expenses personally and also founded the business.
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.
See HMRC VIT32000) for further details.
Can an existing business reclaim costs for setting up a second company?
If an existing business incurs costs related to setting up a new limited company, these costs cannot be legitimately reclaimed by the new company as it is a different 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 in general. There are many ‘grey’ areas, which cannot be easily explained in a high-level article.
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