Can I claim for pre-trading expenditure from my limited company?

To begin to answer the key question of whether you can claim expenses before a company starts, we should remember that as a rule, a small business owner, including a contractor looking to open a limited company, cannot commence trading until they are able to supply their goods or services to a client, writes Helen Christopher, operations director at Orange Genie.

Common pre-trading costs contractors incur

To get to the point of being able to start trading you are likely to have spent money on things necessary for your business such as professional advice, travel to client meetings, paying rent for premises, getting insurance and even advertising. These expenses are likely to be ‘pre-trade’ expenses. Such pre-trade expenses can also include items that you owned privately that you will now use in your business. For example, your laptop and IT equipment.

In most cases, these pre-trade expenses are reclaimable once your company is incorporated and up and running, subject to HMRC expenses rules -- outlined below.

But be aware that where a limited company is being established, and the pre-trading expenses are incurred before the company exists, they are deemed personal transactions of the director. It is therefore important to be able to demonstrate that they are both ‘reasonable’ and ‘necessary.’

As a contractor setting up your limited company, you may also incur costs on capital expenditure, such as it you need to purchase equipment or assets before you trade. This capital expenditure will be treated as having been incurred on your first day of trading and fortunately, relief can be claimed.

Those HMRC expenses rules!

You can legitimately offset any pre-trading expenses against your turnover for Corporation Tax purposes once the business has started trading, as long as such expenses were incurred within SEVEN YEARS of the first day of business. The expenses are then treated as having been incurred on the first day of trading (see HMRC BIM46355 for technical info on the relief).

In additional, consider that if you become a VAT-registered limited company (as most PSC contractors still tend to), you will also be allowed to reclaim the VAT element of any products bought for the previous FOUR YEARS, and any services received up to SIX MONTHS before the date trading commences (similarly see HMRC VIT32000 for the relevant provision and guidance).

For contractors, typical pre-trading expenses that can be claimed are,

• Accountancy costs.
• Office rental.
• Business insurance.
• Domain names and web hosting.
• Travel costs (e.g. travelling to visit recruiters and potential clients).
• Stationery, printing, postage, etc.
• Phone bills.
• Business equipment (e.g. a PC, laptop, peripheral equipment).

Conditions to be met

Be aware contractors, you can only claim for expenses if they were incurred “wholly and exclusively for the purpose of the trade”, e.g. specifically to help you carry on your trade as a contractor, and they would have been allowable had the company been trading,

But remember  you cannot claim the cost of the company formation itself against tax, as this is treated as a one-off capital expense. Of course, if you paid for the formation personally -- as the director, you could reimburse yourself for this one-off expense.

When you can’t claim…

Last but not least, remember there are certain costs that cannot be claimed until you are trading. One of the most significant examples is the cost of training courses. For limited company contractors, training has to update or add to existing skills and knowledge used in your business to be allowed for a claim. Acquiring new skills is considered a ‘capital cost’ by HMRC and they only allow training courses once you have stated to trade. Good luck!