Can I claim for pre-trade expenses?
On this page, we discuss pre-trade expenses and how you go about claiming tax relief for them.
What are pre-trade expenses?
Pre-trade expenses are those that you pay out before you start trading. As a general rule, trade cannot commence until you are:
- in a position to supply the goods and services that your business will provide (for example you have bought some stock); and
- you do provide, or offer to provide, the goods and services to your customers.
However, 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 rent for premises, getting insurance, advertising. These expenses are likely to be pre-trade expenses.
Pre-trade expenses can also include items that you owned privately that you will now use in your business. There is an example showing how you can include equipment that you have pre-owned privately in your accounts and Self Assessment tax return in the Case Study in our Self-employment guide.
Pre-trade expenses, as with other expenses, can either be revenue expenses that are deductible when working out your profit or capital expenditure. You can read about the difference between revenue and capital expenditure on our webpage What business expenses are allowable?.
Can I claim for pre-trade expenses?
If the expenses were incurred within seven years of you starting to trade, and the expenses would have been tax-deductible if you had incurred them while you were trading, then you can treat them as if they were incurred on your first day of trading and so claim them in addition to the other business expenses relating to the first period of trading.
Brian starts trading as an electrician on 1 June 2022. He had 500 leaflets printed to advertise his services in March 2022. The cost of these leaflets will be treated as a separate pre-trade deduction from his profits in the first accounting period. This is because such advertising costs would normally be deducted from his trading profits had he paid for them after he started trading and they were incurred within seven years of trade commencing.
Amelia starts her business running a coffee shop on 1 August 2022. She had to pay legal costs in July 2022 in connection with signing a 99-year lease for the shop. She will not be able to claim the legal costs as pre-trade expenses for income tax purposes because such expenses would not normally be deducted from trading profits as they are capital costs.
Once I deduct pre-trade expenses my results show a loss. What happens to the loss?
You can read about this on our page What if I make a loss?.
I incurred costs before I began trading that were capital costs. Can I get any tax relief?
If you incur capital expenditure, on assets that will be used in your trade, before trading starts, the expenses are treated as being incurred on your first day of trading. The tax treatment of these capital costs will depend if you are using the accruals basis or cash basis 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.
Giovanni buys shelving for his shop on 3 March 2022, but does not start trading as a florist until 1 May 2022. He will be treated as buying the shelving on 1 May 2022 and can claim capital allowances on the cost of the shelving (as long as he has not elected to use the cash basis). If Giovanni has elected to use the cash basis then the cost of the shelving is treated as incurred on 1 May 2022 and Giovanni can claim the cost as a business expense.
Where can I find out more information?
Our guide to self-employment is intended to supplement the material in this section. We wrote this guide to help advisers (non-tax) who advise low-income self-employed individuals and also for self-employed people who want more detailed information in one accessible place. The guide explains the less common tax rules and contains more detailed information including a case study showing how to prepare accounts and what to include on your 2021/22 tax return such as how to treat pre-trade expenses and using the cash basis.