Reclaiming pre-trade expenses

I have a home-based business idea. I need a computer to write my business plan (to support business post launch). Can I claim this expense back against tax when I eventually set up my limited company?

Yes, expenses incurred pre-start up can be claimed against tax. If you are setting up as a limited company, you might be able to claim ‘relevant’ expenses for up to seven years before the business is officially incorporated.

Typical items where you may be able to claim business expenses should be tax deductible include:

  • Computers and associated software
  • Travel to meet prospective customers
  • Company incorporation fees
  • Professional services (such as accountants or solicitors)
  • Website creation

However, you have to be careful. If you’ve already traded as a sole trader before the limited company is formed you will have to transfer the assets and liabilities across to the limited company after its formation. This is not difficult provided you keep good records of income and expenses and assets and liabilities. Keep all the receipts and invoices in case you are challenged by HMRC. The transaction will be made through your director’s current account, which if in credit, creates a loan between you and the company. This loan can be repaid to you at any time without a tax liability being incurred.

VAT on pre-incorporation or pre-trading expenses

VAT can be reclaimed on items bought in the four years before registration if they are classed as goods – this may include stock, office equipment or vans, for example. VAT can be reclaimed on services supplied in the six months before registration such as accountancy fees, providing they do not directly relate to goods which have been sold prior to registration. This may include rent, advertising or telephone bills. In all cases you must have a valid VAT invoice and the purchase must have been for business purposes.

The following conditions must be met:

  • The individual should be reimbursed in full by the company
  • The individual should not have already claimed the VAT (i.e. as a registered sole trader)

A computer is an asset (as opposed to an expense), which is recorded in the balance sheet of the business and written off (depreciated) over its useful life – normally three years. Computers currently qualify for the Annual Investment Allowance of expenditure – currently up to £1 million in 2019/20. (The annual investment allowance is regularly reviewed.)

“Prospective clients are probably not aware of what’s available,” says Richard Hepburn, operations manager of specialist sole trader accountancy firm Gorilla Accounting. “They’re surprised you can reclaim VAT before you’re VAT registered.”

If you have not already appointed a chartered accountant, you consider talking to one before doing your business plan. They can offer advice on the key points in a plan as well as providing more general advice on starting a business including record keeping and who to advise of your new company.

Also see: What expenses can I claim through my business?

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