The thing about running your own business is that you almost always need to spend money to make money, investing in the hope of earning more back in the future. If you’re only just starting out and need to spend before even registering the business, then these might count as pre-trade expenses.
Accounting for your pre-trading expenses properly can have a big impact on your ability to make a profit (so it’s usually pretty important!). In this article we’ll go over what pre-trade expenses are, and how to claim them.
What are pre-trade expenses?
Pre-trade expenses are basically the setup costs you need to pay before the business even starts trading. You can’t start trading until you have something to sell after all.
For example, if you plan to sell physical products, you’ll need to purchase some stock first, or at least the materials you need to make some.
Common examples of pre-trade expenses include:
- Equipment
- Stock
- Business premises or an office
- Website, including a domain name and web hosting
- Business insurance
- Marketing and advertising
- Legal fees
- Market research
- Accountancy fees
- Staff recruitment (if you’re at that point already)
- Uniforms, protective work wear, etc.
Pre-trade expenses can also include any assets you owned privately before starting the business, but that you will now use to launch and grow your venture. A common example of this is a laptop or other IT equipment.
Capital expenditure and revenue expenditure
HMRC classes pre-trade expenses into two main categories: Capital expenditure and revenue expenditure.
Capital expenditure covers fixed assets that are used to generate revenue over a sustained period of time. Revenue expenditure means short-term costs related to the day-to-day running and operation of the business.
Do all pre-trading expenses qualify as allowable expenses?
You might be able to claim tax relief on your pre-trading costs, but only if:
- The costs were incurred no more than seven years before you start trading
- They still qualify as allowable expenses if you were to pay for them when the business is up and running
- The goods or services were purchased exclusively for the purpose of the business and its trading
This last point is pretty much the cornerstone of all business expenses, because if there’s even a whiff of private usage, you won’t be able to claim the cost.
Are there any pre-trade costs you can’t claim?
Oh yes – there are always exceptions! Training courses are one of the most common examples, because HMRC don’t allow you to claim expenses for training costs in order to start a new business.
Other pre-trade expenses that cannot be claimed for are:
- Business licences
- Fines or penalties
- Business premises maintenance
- Entertainment
How do I claim pre-trade expenses?
You can claim for any pre-trade expenses which meet the criteria as if they happened on your first day of trading, along with any other allowable business expenses.
In the words of HMRC, a qualifying pre-trade expense, “enters into the calculations of the profit or loss for the first year of assessment in which the trade profession or vocation is first carried on. No separate claim for loss relief is required”. Brace yourself, because clicking that link will take you into the confusing realm of tax manuals.
Basically, get the business up and running and you can claim for any qualifying pre-trade expenses once you submit your tax return.
It’s super important to keep hold of receipts, invoices and any other paperwork (digital or physical) to back up these claims – just in case HMRC wants to check it out.
This is also how you can demonstrate that the costs incurred are “wholly and exclusively for business purposes”, to use HMRC’s own words once again.
Claiming pre-trade expenses for limited companies
The situation is slightly different for limited companies than it is for sole traders because pre-trade expenses could be considered personal transactions of the director. It means limited company owners need to take extra steps so they can prove their costs are both reasonable and necessary on the run up to starting the business.
If you operate as a limited company then you’ll need to make sure that any start-up costs are paid from a personal bank account, not a business bank account – you won’t be able to purchase anything under the company’s name until it’s registered with Companies House either.
Once you do start trading, these costs will be recorded in your director’s loan account, ready to be repaid.
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