You may have incurred company pre-trading expenditure relating to your new business before your company was formed.
As all these receipts are in your personal name can your new company claim a tax deduction for any of this company pre-trading expenditure?
Types of company pre-trading expenditure
There are really only two types of company pre-trading expenditure:
- Those incurred by your company after it was formed but before it started to trade. You can see some typical examples of company expenditure in our earlier blog here.
The tax position in this case is fairly straightforward. If this expenditure would have been allowable if the company was actually trading at the time, then the company can claim a tax deduction for it in its first accounting period. You can see how this set out in the tax rules here.
- Those incurred by you personally before your company was formed (eg paid from your personal savings).
This situation is trickier because HMRC’s rules indicate that the person (or company) who paid for the expenditure must be the one who claims the tax relief (see below).
Company pre-trading expenditure - an example
Leonard is a consultant. He was made redundant in July 2016 and decided to set up his own consultancy business. Before incorporating his new company, he paid £1,500 on travelling to negotiate contracts with potential clients and £3,500 on new equipment specifically to enable him to run his company.
He then formed his own company - McCoy Enterprises Ltd - on 1 January 2017. As Leonard and McCoy Enterprises Ltd are legally different entities, how does Leonard avoid any potential tax issues with HMRC?
Essentially when Leonard paid for this expenditure he ‘loaned’ £5,000 to McCoy Enterprises Ltd. This ‘loan’ to McCoy Enterprises Ltd is placed as a ‘credit’ in his director’s loan account with the company.
It should then be possible to achieve the following results:
- McCoy Enterprises Ltd can claim tax relief for this expenditure in its first accounting period ending 31 December 2017.
- Leonard can receive a repayment of his £5,000 ‘loan’ tax-free from McCoy Enterprises Ltd as and when funds permit.
However, it is important to kept detailed records (eg receipts) to support any company pre-trading expenditure should this be queried by HMRC.
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