Relief for pre-trading expenses

15 August 2022

Did you know that you can claim tax relief for your business pre-trading costs such as premises, recruitment, website, IT, and marketing?

advice : Tax

Even before your pre-trading days, your business will incur some costs. 

Usually, those costs include securing business premises, buying stock, recruitment, website, IT, and marketing of your newly established business.

The good news is that you can claim tax relief for those costs before the pre-trading days. The relief is designed for unincorporated businesses for income tax purposes and also for companies for corporation tax purposes.

The relief & pre-trading rules

The relief is available for business expenses that are incurred wholly for the purpose of that business, regardless of whether the cash basis or the accruals basis is used. 

However, the relief is given for capital expenditure depends on how the accounts are prepared – where the cash basis is used, capital expenditure can be deducted in accordance with the cash basis capital expenditure rules. Otherwise, relief may be available in the form of capital allowances.

The pre-trading rules allow the relief for expenses that were incurred in the seven years before the commencement of the trade if the expenses would have been deductible had the expenditure been incurred once the business was up and running. Pre-trading expenses are treated as if they were incurred on the first day of trading and are deducted in computing the profits for the first period of the account.

No deduction is available for the cost of stock under the pre-trading expenses rules. Stock, purchased prior to the commencement of the business, will form opening stock, and the relief against profits will be given for stock sold in the first accounting period.

Where the expenditure is capital in nature and qualifies for capital allowances, allowances are given as if the expenditure was incurred on the first day of trading.

Example

Sarah opens a small shop and starts trading on 1 May 2022. She operates as an unincorporated business.

In the nine months before opening the business, Sarah incurred the following expenses:

  • rent;
  • staff costs;
  • stock;
  • travel expenses;
  • advertising;
  • website;
  • shop decorations;
  • laptop.

According to the pre-trading rules, the rent, staff costs, travel expenses, website, and advertising costs are treated as if they were incurred on 1 May 2022 and will be deducted in calculating her profits for her first accounting period.

If Sarah prepares her accounts on a cash basis, she can also claim a deduction for the laptop. If under the accrual’s basis, she can claim capital allowances (including the annual investment allowance) and the expenditure is treated as incurred on 1 May 2022.

Relief for the cost of the stock is given in the first accounting period.

For more information please visit the official government website.

Nothing on this page is intended to be or should be construed or taken as accountancy, investment, tax or any other kind of advice. We recommend individuals and companies seek professional advice on their circumstances and matters.