If you’ve spent personal funds setting up your contracting business, what scope is there to reclaim these costs from your limited company, once it has been incorporated?
Many small business owners, including contractors, may absorb a number of costs personally before their businesses are up and running.
For the average IT contractor, many of these expenses will be 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.
Typical expenses for small businesses, in general, may include:
- Accountancy costs.
- Office rental.
- Business insurance.
- Domain names and web hosting.
- Travel costs (e.g. travelling to visit recruiters and potential clients).
- Stationery, printing, postage, etc.
- Phone bills.
- Business equipment (e.g. a PC, laptop, peripheral equipment).
Here, we look at how such expenses can be accounted for once the business has been started.
You can legitimately offset any pre-startup expenses against your turnover 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).
You must sure any expenses you reclaim would have been tax deductible if you incurred them during current trading.
If you become a VAT registered limited company (as most contractors do), you will also be allowed to reclaim the VAT element of any products bought for the previous 4 years, and any services received up to 6 months before the date trading commences (see HMRC VIT32000).
Conditions to be met
- You can only claim for expenses incurred “wholly and exclusively for the purpose of the trade”, e.g. specifically to help you carry on your trade as an IT contractor.
- You cannot claim the cost of the company formation itself against tax, as this is treated as a one-off capital expense. Of course, if you paid for it personally as the director, you can reimburse yourself for this one-off expense.
- If an existing business (e.g. a current limited company) incurs costs related to setting up a new company, these costs cannot be legitimately reclaimed by the new company as it is a different entity.
- Some costs cannot be claimed until you have started trading, including – significantly – training courses.
For obvious reasons, you should keep accurate records relating to your pre-trading expenses, particularly so that you can demonstrate that any purchases have been made exclusively on behalf of the company you subsequently form, rather than for personal reasons.
Importantly, you must not make any purchases in the name of your company before it has been officially incorporated with Companies House.
Talk to your accountant if you have any questions about reclaiming pre-trading costs, and expenses in general, as there are many ‘grey’ areas, which cannot be easily explained in a high-level article.