Pre Trading Expenditure

Many people think about setting up their own business and often incur costs ahead of beginning to trade. So how does it work in getting relief for those costs?

How to get relief for pre trading expenses

Individuals wishing to set up their own business, should that be a bakery, an accounting firm or wanting to be a self-employed diving instructor may incur different types of expenditure prior to commencing to trade.

As a sole trader, you will be taxed on your trading profits. It may be possible to reduce the overall profit for the first trading period by deducting expenditure which was incurred prior to trading. Please note however that there are certain conditions as to what constitutes an allowable deduction.

What are eligible pre trading expenses?

Eligible pre trading expenses are those which:

  1. Are incurred by an individual for the purpose of the trade prior to the first day of trading. For example, this could be advertising costs, insurance, seeking professional advice, business cards etc. Capital expenditure on equipment for the business is also potentially eligible for deduction through capital allowances; and
  2. Are incurred within 7 years prior to the first day of trade.

Assuming the costs meet the relevant conditions, they should be treated as if they were incurred on the first day of trade and deducted from the sole trader’s income of the first period.

What are non eligible pre trading expenses?

Unfortunately there are certain types of expenditure which can be incurred prior to trading which are NOT eligible for deduction against trading income of the first period. For example, if an individual attends a training course to gain knowledge in a specific area for the purposes of creating a business, the expenditure incurred for the course will not be eligible for deduction against the future income of the trade.

This is because the individual is learning a new skill as opposed to updating their existing knowledge and this is therefore of a capital nature. The legislation states that for expenses to be deductible they must be ‘wholly and exclusively for the purpose of the trade’.  The costs in relation to learning a new skill will therefore not meet this test.

If you are thinking of setting up a new business and have incurred expenses prior to trading and would like some advice as to whether these costs are eligible for deduction, please do not hesitate to contact us.

The information in this article is believed to be factually correct at the time of writing and publication, but is not intended to constitute advice.  No liability is accepted for any loss howsoever arising as a result of the contents of this article. Specific advice should be sought before entering into, or refraining from entering into any transaction.