Guide to pre-trade expenses for new business owners.

It can be an expensive time setting up a new business, so it’s important to make sure you know all about pre-trade expenses and what you are entitled to claim.

Whether you’re a sole trader, a partnership or a limited company, you’re likely to have spent a considerable amount of money getting your venture off the ground, even before you make your first sale.

These business set-up costs, known as ‘pre-trade expenses’ can be substantial. However, the good news is that you may be able to claim back many of these costs against tax, when filing your first year accounts.

Many small business owners will be obliged to spend money on a number of costs before they start trading, and even before the business bank account is fully up and running. So what may be classed as pre-trade expenses?

Examples of pre-trade expenses

Typical costs incurred by small businesses before they start trading, may include:

– Rent
– Stock purchases
– Business insurance
– Travel costs
– Phone and broadband
– Advertising
– Stationery, postage, printing, etc.
– Business equipment (such as laptops and PCs)
– Professional costs (such as accountancy and legal fees).

Pre-trade expenses can also include items that you owned privately that you will now use in your business, however, these are treated differently.

The rules for pre-trade expenses

It’s important to note that all costs that you want to claim back must have been “wholly and exclusively” incurred for the business, rather than for personal use. This means that you must keep accurate accounts of your
pre-trade expenses, including all receipts and invoices.

You can claim back pre-trade expenses up to seven years before the start of trading, as long as they are normal
business expenses that would have been tax deductible if you incurred them during current trading.

For sole traders, partnerships and limited companies, the expenses are treated as having been incurred on the first day of trading.

VAT registered

If you register your business for VAT, you may be able to reclaim the VAT on costs incurred before VAT registration, of up to:

– Four years for goods and capital items purchased
– Six months for services received.

There are certain conditions which must be met in order to reclaim VAT, so contact your accountant, or refer to
HMRC guidelines for more information.

Help to reclaim pre-trade expenses

When you’re starting out, every penny counts. That’s why it’s important to understand what you can claim back on money you’ve spent getting your business off the ground.

There are many ‘grey’ areas involved in pre-trade expenses and expenses in general, which can’t be covered in this overview.  Please speak to your accountant or call us on 01299 488860 for help with pre-trade expenses or any other tax issues.

For more tax and accounting updates, check out our regular blogs. The last blog focused on who needs to complete a tax return. Do you? Read our blog to find out.