Tax relief for pre-trading expenses

There is a lot of preparation involved in setting up a business, and costs will be incurred, which may be substantial. Before it is able to start trading, a business may incur expenditure on items such as:

  • acquiring premises;
  • recruiting staff;
  • buying stock;
  • setting up website;
  • IT costs;
  • advertising and marketing; and
  • travel and subsistence.

These costs relate to a business, albeit one which has yet to start.

Relief for expenses

Once a business is up and running, relief is given for revenue expenses which are incurred wholly and exclusively for the purposes of the business.

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

Lucy 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 given for the cost of stock under the pre-trading expenses rules. Stock purchased prior to 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 applies for capital allowance purposes. Items purchased prior to the commencement 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.

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