Can I reclaim expenses from before I formed my limited company?

Pre formation Expenses

If you recently set up a limited company, can you reclaim any business-related expenses you incurred before incorporation?

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.

In fact, you can reclaim any costs incurred up to seven years before the incorporation date.

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.

Additionally, the expenses should have been incurred with the company’s intention to start its trade.

For the small print, consult HMRC Business Income Manual BIM46351

Common expenses you can reclaim

Some of the most commonly reclaimed pre-incorporation 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
  • Advertising and marketing 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 and other capital expenses are dealt with via capital allowances.
  • Training – interestingly, this is also a capital cost. It is only allowable once trading has commenced.
  • 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 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 make reclaiming VAT simpler.

Online accounting software is a must for most companies these days. It allows you to upload receipts and records of transactions, making reconciling your expenses a breeze.

Always ask your accountant if you have any questions about which expenses you can claim against your company’s tax bill.

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