Can Your Limited Company Claim Expenses Before It Starts Trading?
Starting a limited company often costs money before the first customer arrives.
You might pay for insurance, advertising, software, professional fees, equipment or premises while getting everything ready.
A common question is:
Can the company still claim these costs if it has not started trading yet?
In many cases, yes.
But there is an important difference between:
pre-trading expenses – costs incurred by the company after incorporation but before trading starts; and
pre-incorporation expenses – costs incurred before the company legally existed.
The tax treatment is not necessarily the same.
Pre-trading expenses: the seven-year rule
Under section 61 Corporation Tax Act 2009, a company can obtain Corporation Tax relief for certain expenses incurred up to seven years before its trade begins.
The qualifying expense is treated for tax purposes as if it had been incurred on the first day of trading.
This means a company does not necessarily lose tax relief simply because it spent money preparing the business before making its first sale.
However, the expense still needs to pass the normal tax rules.
Would the expense have been allowable after trading started?
A useful way to think about the rule is:
If the company had already been trading when it incurred the cost, would the expense normally have been deductible?
If yes, it may qualify as a pre-trading expense.
Typical examples could include:
advertising and marketing;
business insurance;
certain software and subscriptions;
professional costs relating to the trade;
travel undertaken genuinely for the future business;
some premises costs.
The expense must still be incurred wholly and exclusively for the purposes of the company's trade under section 54 CTA 2009.
The pre-trading rules do not turn an otherwise disallowable expense into an allowable one.
For example, business entertaining and fines do not suddenly become deductible simply because they were incurred before trading started.
What about equipment?
Equipment needs to be considered separately.
Suppose the company buys a laptop, machinery or other business equipment before it starts trading.
That is generally capital expenditure, rather than an ordinary day-to-day expense, so section 61 does not provide the deduction.
However, this does not necessarily mean there is no tax relief.
Under section 12 Capital Allowances Act 2001, qualifying pre-trading capital expenditure can generally be treated as incurred when the business starts for capital allowance purposes.
So the tax relief may simply come through a different route.
Stock is different too
Imagine your new online shop buys £10,000 of stock three months before launching.
That stock is not normally claimed under the special pre-trading expense rule.
Instead, it forms part of the company's normal trading stock and feeds into the accounts once the business starts trading.
The same principle can apply to other costs that already receive relief under normal accounting rules, such as rent paid in advance for a period after trading begins.
When does the business actually start trading?
This can be more important than it sounds.
Setting up a company at Companies House does not necessarily mean the company has started trading.
The date trading begins is determined by what the business is actually doing.
There may be a preparation period where the company is:
developing its website;
arranging insurance;
buying equipment;
advertising;
preparing premises;
finding customers.
The trade will generally begin when the business is in a position to provide its goods or services and actually begins, or offers, to do so commercially.
The trading start date matters because qualifying pre-trading expenditure is treated as arising on that date. It can also determine when the company's Corporation Tax accounting period begins.
Simple example
Imagine Bee Creative Ltd is incorporated in January.
Before launching in June, the company spends:
£1,200 on advertising;
£600 on business insurance;
£2,000 on a laptop;
£3,000 on stock.
The advertising and qualifying insurance costs may fall within the pre-trading expense rules and be treated as incurred when trading begins.
The laptop is capital expenditure, so capital allowances would need to be considered instead.
The stock is dealt with through the normal accounting rules once the business starts selling it.
The important point is that all four costs do not necessarily receive tax relief in the same way.
Be careful with expenses paid before the company existed
This is a different issue.
Section 61 applies to expenditure incurred by the company.
If you personally paid an expense before the company was incorporated, the company did not legally exist at that time and therefore could not have incurred that expenditure itself.
Current guidance expressly confirms that section 61 relief belongs to the person who incurred the cost and then starts the trade.
That does not mean every pre-incorporation cost is automatically lost.
Depending on what was purchased and how the later reimbursement is structured, other tax rules may need to be considered.
But it is much less straightforward than expenditure incurred after incorporation.
For that reason, where possible:
incorporate the company before incurring significant business costs and have invoices issued to the company.
If the company does not yet have enough cash, the director can often fund it by putting money into the company or paying a company liability personally and recording the amount through the Director's Loan Account.
What about VAT?
VAT has its own rules, which are separate from Corporation Tax.
A VAT-registered company may be able to recover VAT incurred before its VAT registration date, subject to the normal conditions.
Broadly, the current pre-registration rules allow recovery for:
goods purchased within the previous four years, where the relevant goods are still held or otherwise meet the conditions; and
services received within the previous six months.
There are also specific VAT provisions that can allow a newly incorporated company to recover certain VAT incurred before incorporation where the detailed conditions are satisfied.
So do not assume that the Corporation Tax and VAT treatment will always be the same.
Keep the paperwork from day one
One of the easiest mistakes new businesses make is waiting until they start trading before organising their bookkeeping.
Keep records from the moment the company is incorporated.
Keep:
supplier invoices;
receipts;
bank and card statements;
details of anything paid personally by the director;
the reason for each purchase;
evidence of when the company actually began trading.
Invoices should ideally be addressed to the limited company rather than personally to the director.
This makes both the accounting and tax treatment much easier to support later.
Final thoughts
Starting a business often means spending money before earning anything.
Fortunately, many genuine pre-trading costs can still receive tax relief.
The key questions are:
Did the company incur the cost?
Was it incurred within seven years before trading started?
Would it have been allowable if the company was already trading?
Is it a normal expense, capital expenditure or stock?
Was it incurred before or after incorporation?
The sooner these costs are recorded correctly, the easier your first company accounts and Corporation Tax return will be.
At Busy Bee, we help limited company owners stay compliant, tax efficient and in control of their business finances from the very beginning.
Disclaimer: The content on this page is for general information only and should not be treated as tax, legal or financial advice. Tax planning should always be reviewed against your individual circumstances before action is taken.
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