Tax Relief for pre-trading expenses

By the time you actually start trading, you may have spent thousands of pounds on research and setting up the business.

Provided you have formally notified HM Revenue and Customs that you have started up a business, most of these costs are usually allowable as business expenses in the first year (some may not be - see below for the most common of these exceptions).

Income Tax (Trading and Other Income) Act 2005

Pre-trading expenses

Relief under ICTA88/S401 for pre-trading expenditure is only available to the person who incurred the expenditure and commences the trade. 

From the moment you decide to go into business, start keeping a record (with matching receipts, invoices and bank statements) of all your business expenditure. Best of all set up a separate bank account to make this easier. 

Expenses and costs incurred by small businesses and companies before they  begin business can be offset against their sales in the first accounting year if they can prove the pre-trading expense was incurred within seven years from their first day of trading and would have been deductible as a business expense if it had been incurred after the business started trading.

Such pre-trading expenditure may commonly include:

• advertising costs, 
• wages, 
• rent, 
• rates, 
• insurance, 
• bank charges and interest, 
• lease rentals on plant and machinery, computers equipment, office furniture and accountancy fees.

Where business assets are bought before commencement of trade, they are introduced into the business at their current market value and treated as if  purchased on the first day of business. The business is also entitled to claim capital allowance on the tangible asset.

• Some costs are not allowable.
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• For example, training courses are only an allowable expense once you have officially commenced trading.
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• If you form a limited company, the formation costs incurred are not allowable.

VAT Paid Before VAT Registration

You can reclaim any VAT you are charged on goods or services that you use to set up your business.

Normally, this will include:


• VAT on goods you bought for your business within the last 4 years and which you have not yet sold.
• VAT on services, which you received not more than 6 months before your date of registration.

You should include this VAT on your first VAT return. 

To able to make this claim, the following conditions have to be met:- •the goods were bought by you as the entity (for example, the individual, business or organisation) that is now registered for VAT •the goods are for your VAT taxable business purposes, which means they must relate to VAT taxable goods or services that you supply •the goods are still held by you or they have been used to make other goods you still hold For example, prior to registering for VAT the business purchased 10,000 widgets and sold 3,000 of these products. The business can, therefore, claim back VAT on the remaining 7,000 items in stock at time of registering for VAT.  Deregistration and Reregistration  On deregistration a trader must account for output tax in respect of assets on hand if the liability exceeds £1,000. If the trader later reregisters for VAT and the assets in question (or some of them) are again to be used in the business, the output tax previously charged on deregistration (or the respective part of it) is potentially deductible input tax of the newly reregistered business. However, the trader will not have a valid tax invoice, having merely accounted for output tax on deregistration. HMRC used to allow deduction of this input tax only by concession but now accepts that if the trader can demonstrate having accounted for output tax in respect of the assets in question on previous deregistration, that is adequate alternative evidence of having incurred the input tax. A tax invoice is not, therefore, strictly necessary and the concession is, accordingly, not necessary either and has been withdrawn. The effective position thus remains unchanged but HMRC's rationale for allowing the claim has been updated.