Q. Can I claim tax relief for expenses I have incurred before my business started?
A. Expenses you pay out before you start trading are called pre-trading expenses. As a general rule, trade cannot commence until you are in a position to provide the goods and services that your business will provide and you actually do provide, or offer to provide the goods and services to your customers.
To get to the point of being able to start trading you are likely to have spent money on things necessary for your business such as buying equipment, buying stock, paying for rent for premises, insurance and adverting.
Pre-trading expenses can be categorised into either normal expenses which would be deductible when working out your profit or capital expenditure whereby relief is given through capital allowances.
If the expenses were incurred within seven years of you starting to trade, and the expenses would have been deductible if you had incurred them while you were trading, then you can treat them as if they were incurred on the first day of trading. You will claim these pre-trading expenses in addition to the other business expenses relating to your first period of trading.
If before you start to trade you incur capital expenditure on assets that will be used in your trade they will be treated as having been incurred on your first day of trading. This will also include assets that you owned privately that you will now use in your business. The tax treatment of the capital expenditure will depend on whether you are using the accruals basis or cash accounting to prepare your accounts. If you are using the cash basis then you may be able to claim these as a business expense and if you are using the accruals basis you may be able to claim capital allowances. Assets bought specifically for use in your business will be brought in at their original cost whereas assets which have already been used privately, or for another purpose other than your business will be brought in at their market value on the first day of trading. In the unlikely situation that the market value is more than the cost then the actual cost will be used.
Rennie Welch LLP accept no liability on the basis of this article and detailed advice, taking into account individual circumstances, should always be obtained.
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