Can I claim for pre-trading expenses?

You may be familiar with self-employment, but it might be news that you can claim tax relief on the expenses you incurred personally when starting your business.

These are called your ‘pre-trading’ expenses. While you may have incurred them a year or more before you began trading, they can be claimed as an expense to legitimately reduce your tax liability.

In this article, we explain what qualifies as a pre-trading expense and how you can claim them.

What are pre-trading expenses?

Pre-trading expenses are the costs you incur before you can start ‘trading’ or doing business – from the money you may have spent on company registration or a website build.

And because your pre-trading expenses are offset against your business income, claiming for them can reduce your overall tax liability – an effective and legitimate way to pay less tax.

Your pre-trading expenses are treated as incurred on day one of trading. You can claim for money spent up to seven years before your first day of trading – so, you can claim tax relief on expenses as far back as that. We cover this in more detail below.

What can I claim for?

You can claim pre-trading expenses where the costs have been necessarily, or “wholly and exclusively”, incurred to run your business. You can also claim some of the price of an item that you use for both personal and business purposes.

For different types of businesses, this will mean other things. For example, a high-street retailer might incur pre-trading expenses from buying goods to sell, or a freelance creative might run a website to attract clients.

Both of these sorts of expenditures would be eligible for tax relief. You can also claim pre-trading expenses for things like:

• Business premises costs

• Costs for purchasing stock or materials to sell

• Insurance costs or bank charges on business accounts

You might have incurred other costs when setting up your business that isn’t considered pre-trading expenses. Still, there’s no need to panic or write off the possibility of tax relief altogether. Higher-value items may qualify for capital allowances – another tax relief – if the purchase is considered capital expenditure.

Is training a pre-trading expense?

In short, yes. Training courses are allowable for pre-trading expenses.

However, any training courses you undertake must be relevant to your business; you won’t be able to reclaim the cost of training that you’ve done in a separate discipline. For example, an electrician couldn’t reclaim the price of a carpentry course.

How should I date pre-trading expenses on my tax return?

You can claim pre-trading expenses going back seven years before your first day of trading, and they should also be accounted for in your first year of trading.

If, for example, your first day of trading was 1st May 2022, you could claim legitimate pre-trading expenses as far back as 1st May 2015 – but they would all be counted in your first year of trading, the 2022/23 financial year.

Can I claim VAT on pre-trading expenses?

If you’re registered for VAT, you may even be eligible to claim VAT on pre-trading expenses. However, this is a complex area with tighter time limits involved; four years for goods and six months for services.

You’ll find guidance on gov.uk or a trusted accountant like Caroola can provide more tailored advice.

A quick recap

So, pre-trading expenses are the costs you incur when setting up your business and getting ready to start trading. You have up to seven years to claim any pre-trading expenses from your first trading day.

To find out how Caroola can help with your tax and accounting needs, please request a callback, and one of our friendly experts will be in touch.