Q&A: Claiming pre-trading expenses for a new business

Q. Having lost my job during the pandemic I intend to set up an arts and crafts shop. I will be incurring some expenses before I can open including the costs of setting up a website, buying stationery, equipment, stock, and paying two months' rent in advance and insurance. I purchased a computer four years ago and although it is now deemed to be outdated, it still works and I intend to use it in my business as well as at home. Are there any expenses I claim?

A: The tax rules state that expenses incurred before the start of the business (termed 'pre-trading expenditure') can be claimed:

• if incurred within seven years of the start of the trade;
• if they would have been allowed as a deduction had the expenditure been incurred after commencement;
• if they are not otherwise deductible in computing profits

For assets acquired specifically for the new trade, 'pre-trading expenditure' is treated as if incurred on the first day of trading. Assets acquired initially for private use that are also going to be used in the business (such as the computer) are also treated as if purchased on the first day of trading. Please note that the amount that can be claimed is not the cost but the market value on the first day of trading (unless, exceptionally, the market value on the first day of trading is greater than the cost, in which case the cost figure is used). Where assets will be used for both private and business purposes, the claim is restricted to take account of the private use.

If you are also registering for VAT, then you can reclaim the VAT on goods, stock, and assets for up to 3 years before registration; VAT on services can be claimed for up to 6 months prior to registration.

For further information on this topic, the government’s Business Income Manual provides a comprehensive summary.

About the Author

Alison Henshaw

Partner

 Alison joined Torgersens in 1996 and has been a partner with the firm since 2015. With broad experience in general practice, Alison is involved in the audits and accounts management of a range of clients including small and medium sized owner-managed companies, charities and not-for-profit organisations. Most recently, she has worked with a high-profile regional charity to develop its financial systems and reporting structures. Outside of work Alison likes spending time with her family enjoying walks along the North East coast line as well as regular visits to the Lake District, Northumberland and North Scotland.

To get in touch please e-mail alison.henshaw@torgersens.com.