When you start a business, you will need to incur costs before you are able to start trading. Did you know that you are able to claim tax relief for these?
Relief is available for unincorporated businesses for income tax purposes and also for companies for corporation tax purposes.
Typically, you may need to incur expenses securing business premises and kitting them out, on buying stock, on recruiting staff, on setting up a website, on IT and on marketing the business.
In the same way that relief is given for business expenses incurred once the business is up and running, relief is also available for those incurred before the business commenced.
The general rule is that relief is available for business expenses that are incurred wholly and exclusively for the purposes of the business. Relief is available for revenue expenses regardless of whether the cash basis or the accruals basis is used. However, the way in which the relief is given for capital expenditure depends on the way in which the accounts are prepared – where the cash basis is used, capital expenditure can be deducted in accordance with the cash basis capital expenditure rules. Otherwise, relief may be available in the form of capital allowances.
The pre-trading relief rules allow relief for expenses that were incurred in the seven years prior to the commencement of the trade to the extent that the expenses 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.
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.
Where the expenditure is capital in nature and qualifies for capital allowances, allowances are given as if the expenditure was incurred on the first day of trading.
Tilly opens a tea shop and starts trading on 1 May 2022. She operates as an unincorporated business.
In the nine months prior to opening the business, she incurs the following expenses:
- rent — £1,000;
- staff costs — £2,000;
- stock — £4,000;
- travel expenses — £850;
- advertising — £3,000
- website — £1,200
- shop fittings — £12,000
- laptop — £500
Under the pre-trading rules, the rent, staff costs, travel expenses, website, and advertising costs are treated as if they were incurred on 1 May 2022. They are deducted in calculating her profits for her first accounting period.
If she prepares her accounts under the cash basis, she can also claim a deduction for the laptop. If the accruals basis is used, she can claim capital allowances (including the annual investment allowance): the expenditure is treated as incurred on 1 May 2022.
Relief for the cost of the stock is given in the first accounting period.
Partner note: ITTOIA 2005, s. 57; CTA 2009, s. 61; CAA 2001, s. 12.