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How to claim pre-trading expenses in the UK?

Tax relief claimed by business owners helps to reduce the tax due for payment to the revenue.

In this blog post, we would like to claim two different that could be claimed either by a self-employed or limited company in the UK.

Pre-trading tax relief in the UK

When a business owner incurs expenses that have a revenue nature whilst making preparation for the commencement of their business i.e. before the business start trading, they can claim this relief

There is a specific condition that has to be in place for a business owner to be able to claim this tax relief.

Conditions to claiming Pre-trading expenses.

  1. The business owner would have incurred the expenses seven years before they start trading.
  2. The expense should be of a revenue nature in such a way that it’s an allowable expense under income and corporation tax in the UK.

pre-trading expenses

Application of pre-trading expenses for sole trades in the UK.

This expense is treated as incurred on the first day of trading in the business.

For a sole trader, the deductions of the expenses will reduce the trading income which invariably reduced the tax due.

The tax relief in monetary terms for a sole trader depends on their total income in the year.

If they are basic taxpayers, the tax savings would be 20% of the expenses and if they are higher taxpayers, the tax relief would be at 40% of the expenses claimed.

For example, Yelm paid marketing fees of £1000 before setting up his business, the business started trading 2 years afterwards.

As marketing fees are allowable expense and was made two years before the commencement of the trade, he can claim the expenses which reduce the trading income and therefore reduces the tax due.

Yelm is employed and therefore earns an additional income of £60,000, therefore he is an additional taxpayer, and therefore he pays taxes at 40%.

In that case, the money saved by YEM from claiming the pre-trading expenses is £400.

pre-trading expenses

When claiming pre-trading expenses for a limited company.

When a director sets up a company and pays some of the debt or buys the asset on behalf of the company, the company would be owing the director the cost of such items.

Unlike the sole trader, the individual and limited company are two different people so the expense incurred pre-trading can’t be treated the same way.

As the company has not started trading, this loan will be treated as a non-trading expense.

Non-trading expense debit can only be matched with a non-trading credit, so therefore the expense can’t be applied directly to the income earned by the company.

However, if the company meet certain conditions the company can elect to bring the non-trading debit into the company as a trading debit.

pre-trading expenses

The condition for non-trading expenses for pre-trading expenses

  • The company has to make an election with the revenue within the accounting period in which the debt arises.
  • The company begins to trade within 7 years of that period.
  • The debit would have been treated as a trading debit had it been incurred in the period since trading commenced

When these conditions are met and the companies and companies make an election, they can claim tax relief for the revenue expenditure incurred by the director before the company started trading.

 Claiming these pre-trading expenses will help the business to reduce the tax due to the HMRC.

Conclusion on pre-trading expenses.

We hope that you have enjoyed reading this blog post and it has been helpful.

If you would like our team to support you with your accounting, tax and business advisory in your business, kindly contact us.