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Claiming for pre-trading expenses from your limited company

by | Nov 18, 2021 | Expenses, Limited Company

Starting a new business may involve some costs. You may need to pay for a number of products and services before your limited company is actually formed. This means that you will need to foot the bill for these expenses personally – at least for the short term.
That said, you might be relieved to discover that you will be able to reimburse yourself for these outlays via your limited company once it has sufficient funds to do so – as long as any business expenses you claim for, meet certain conditions laid down by HMRC.
In this guide, James Leckie – who runs ITContracting.com – looks at some of the typical expenses you will incur prior to company formation, and explores the conditions you need to meet to reclaim such costs.

Typical pre-trading expenses you may incur

It goes without saying that the type of costs you may have to meet personally will vary wildly, depending on the type of business you are planning to set up. However, in most cases, some common costs include:

  • Setting up a website – including domain names, and web hosting.
  • Paying for professional advice, such as legal and accountancy fees.
  • Equipment – specific to your trade, plus laptops and other electrical items.
  • Broadband and telephony costs.
  • Travel.
  • Stationary, printing, postage, etc.

How are pre-trading expenses treated for Corporation Tax and VAT purposes?

Assuming that any reclaimed costs were incurred wholly, exclusively and necessary for the running of your new business, then you should be able to legitimately process these expenses, and offset the costs against your new company’s Corporation Tax and VAT liabilities, as follows:

Corporation Tax

Any expenses which are deemed to have been incurred on the first day of trading and can be repaid to you, with the sum offset against your new company’s Corporation Tax liability. You can claim for costs incurred up to 7 years before the date of incorporation. See the Corporation Tax Act 2009 c.4 for the official text.

VAT

Similarly, once your company is VAT registered, you can reclaim the VAT element of any pre-trading expenses, for up to 4 years before you have commenced trading.

What about the cost of the company formation?

Interestingly, the actual cost of incorporating a company is deemed to be a one-off capital cost. It cannot, therefore, be offset against the company’s first Corporation Tax bill. Given that the cost of forming a company is as little as £12 (direct via Companies House), this has a negligible effect on your bottom line in reality. And, of course, you can still reclaim the cost personally.

Further things to bear in mind when claiming pre-trading expenses

  • Make sure you keep accurate records – including receipts – so that you can prove that your claims are legitimate, in the unlikely event that you are challenged.
  • You can only claim for expenses that are solely for the benefit of the business. Under the ‘Duality of Purpose‘ rules, you cannot claim for costs that have a personal benefit.
  • You must not make any purchases using a proposed company name until it has been formed at Companies House.
  • Always speak to your accountant if you have any questions relating to company expenses.

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