If you recently set up a limited company, can you reclaim any business-related expenses you incurred before you started trading?
The seven year rule
According to s.61 of The Corporation Tax Act 2009, you can claim back any legitimate pre-trading expenses.
These expenses are treated as if they were incurred on the first day the company went live (i.e. the first day of trade).
In fact, you can reclaim any costs incurred up to seven years before the commencement of trade, provided they were incurred with the genuine intention of starting the business.
These expenses can be offset against your company’s Corporation Tax liability.
As ever, all expenses must have been incurred ‘wholly, exclusively and necessarily’ in the course of setting up your limited company.
For the small print, consult HMRC Business Income Manual BIM46351.
Common expenses you can reclaim
Some of the most commonly reclaimed pre-trading expenses include:
Professional fees (accountancy and legal)
Equipment
Internet costs
Travel expenses incurred for business purposes
Marketing or advertising expenses aimed at launching the business
Domain names and web hosting costs
Business insurance
The cost of renting business premises or office space
Telephony
Expenses you cannot reclaim
The following expenses cannot be reclaimed within the seven-year rule outlined above:
Company formation (this is seen as a capital expense)
Plant and machinery, as well as other capital assets, are not deductible as revenue expenses but may qualify for relief through capital allowances.
Training – usually treated as a capital cost. It is only allowable once trading has commenced and if it updates existing skills.
Entertainment
Business licences
Fines and penalties
What about VAT?
You may also be able to reclaim the VAT paid on goods and services (assuming your company subsequently becomes VAT registered), although the rules are complex.
According to HMRC manual VIT32000, there is:
A 4-year limit to reclaim VAT paid on goods, and
A 6-month limit for VAT paid on services.
Importantly, if you buy goods (such as equipment), make sure:
the goods remain on hand at the date of registration, and
they will be used in the newly registered business.
For obvious reasons, you should always keep accurate records of your expenditure before starting up your company.
Ask for itemised VAT receipts for any items you buy on behalf of your business.
Proper documentation will help prevent disputes with HMRC and simplify the process of reclaiming VAT.
Online accounting software is now a necessity for most companies. It allows you to upload receipts and records of transactions, making expense reconciliation a breeze.
Always ask your accountant if you have any questions about which expenses you can claim against your company’s tax bill.
