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Can You Claim Expenses Incurred Before Your Business Starts Trading?

If you’ve spent money prior to the set-up of your business in order to get it started and running, you may be wondering whether you can reclaim those costs once you start trading. Many business owners personally absorb the start-up costs and don’t take steps to reclaim the funds however there are ways to recoup funds if you need and want to. After all, it can be an expensive process to set up a business and you don’t want to be out of pocket before you even begin trading!

Depending on the set up of your business, whether you register as a sole trader, limited company or partnership, you will probably incur some costs along the way. And there may be expenses needed to be paid even before your first sale comes through.

The business set up costs are known as ‘pre-trade expenses’ and can be substantial and the best way to claim back the money will be to do it by offsetting against your taxes when filing your first year accounts. When recording the expenses, you’ll use the date that the business first started trading as accounts are presented and recorded in accounting time periods.

What typical expenses can incur prior to business trading? 

  • Equipment purchases: computer, office furniture,
  • Insurances
  • Website domain and hosting
  • Advertising
  • Stationery
  • Travel costs and mileage allowance relating to the business
  • Business related phone-calls
  • Professional services, such as accountancy fees / advice

When claiming for expenses, the time period allowed for claiming varies on the setup of your business in the months prior to trading. You will also need to be confident that anything claimed for was purchased solely for business purposes. An example would be if you bought equipment for a hobby which later turned into your business, you cannot claim for this equipment, it must be legitimately purchased solely for the business.

The good news is that if you are set up as a limited company, you can claim for expenses incurred up to seven years prior to the company being incorporated.

If you are VAT registered, you can also claim the VAT back up to four years prior to the date of incorporation as long as the goods are still in use on the trading start date. If you have acquired services relating to the setup, the VAT can be reclaimed up to 6 months prior.

You will not be able to claim for any training expenses prior to your trading date.

The costs incurred in relation to the formation of the company cannot be reclaimed through tax, however if they were paid out of your own pocket, you can reimburse yourself from the company as legitimate expenses.

Remember to always keep good records of everything, including all purchases and mileage incurred. These will all be recorded when submitting the first year accounts. Always ask for a VAT receipt for items bought on behalf of your business.

When it comes to setting up a business, Kara Accountants are here to support and guide wherever possible. Whether you are looking for advice on the correct company structure, need help to set up the books or are requiring budgets or forecasts to present to the bank, we’re here to help! Get in touch for more information.

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