Tax relief for pre-trading expenses

A lot of preparation is required when setting up a new business and costs, which might be substantial, will incur even in the pre-trading business. Even before starting to trade, new businesses usually have expenditure on the following items:

• acquisition of premises; 
• recruitment; 
• buying stock;
• website, advertising and marketing;
• IT costs;
• travel and subsistence.

Relief for pre-trading expenses

Once a business is set up and running, relief on revenue expenses is provided which are incurred wholly and exclusively for this business. 

For the expenses incurred in setting the business up, relief is available under the pre-trading expenses rules. These rules allow relief for expenses that were incurred in the seven years before the trade started to the extent that the expenses are revenue expenses which are incurred wholly and exclusively for the trade. 

In this way, the pre-trading expenses rules allow relief for expenses which 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 day on the first day of trading, and are deducted in computing the profits for the first period of account.

Example

Fiona opens a shop selling cards and gifts on 1 October 2021. Prior to opening the shop, she incurred expenses as follows in 2021:

• rent – £2,000;
• staff costs – £4,000;
• stock – £20,000;
• travel expenses – £850;
• advertising – £3,000;
• shop fittings – £12,000;
• laptop – £500.

Under the pre-trading rules, the rent, staff costs, travel expenses and advertising costs are treated as if they were incurred on 1 October 2021. They are deducted in calculating her profits for her first accounting period.

Stock

No deduction is provided for costs of stock under the pre-trading rules. Stock purchased before commencement will form opening stock, and relief against profits will be given for stock sold in the first accounting period.

Capital expenditure

A similar rule to the pre-trading expenses rules also applies for capital allowance purposes. Items purchased prior to the start of trade where the expenditure is qualifying expenditure for capital allowance purposes are eligible for capital allowances – the qualifying expenditure is treated as if it were incurred on the first day of trading.