Starting a business is exciting, but it also means spending money before you even make money. At Hamollison's Bookkeeping Services, we understand the financial strains pre-trading expenses can put on both entrepreneurs and established companies alike. That's why we want to help you understand how you can get some of that money back through tax relief on what we call 'pre-trading expenses.
Understanding Pre-Trading Expenses
Pre-trading expenses are the costs you incur during the period of setting up your trade or business. These can range from the price of acquiring and furnishing premises, to the costs associated with purchasing stock, procuring office supplies, seeking professional advice, marketing, buying software, setting up a website, and legal fees. Given that these expenses can quickly add up, securing tax relief on them can substantially ease your financial burden.
Who is Eligible for Relief?
It’s important to note that relief for pre-trading expenses is specifically tailored to the individual or company who incurs the expenditure and takes the step to commence the trade. Whether you are an unincorporated business or a company, understanding and accessing this relief is critical for your financial health.
Revenue Expenses: The Seven-Year Rule
The tax system offers a generous provision for businesses when it comes to revenue expenses. Costs incurred up to seven years before your business actually starts trading can be deductible. The key condition here is that these expenses must be the type that would be deductible if they were incurred after the business had commenced operations. Essentially, these pre-trading expenses are treated as if they were incurred on the first day of trading and are deducted when calculating the profits for your first accounting period.
What Qualifies as Deductible?
An expense is generally deductible if it meets two main criteria: it must be revenue in nature (as opposed to capital) and incurred wholly and exclusively for the purposes of your business. This fundamental tax principle ensures that the expenses directly contribute to the operation of your business.
Capital Expenses: Cash Basis vs. Capital Allowances
When it comes to capital expenses, the method of accounting you choose—cash basis or traditional accounting—affects how relief is provided:
Cash Basis: If you’re using the cash basis method and the expense is allowable under the cash basis capital expenditure rules, similar to revenue expenses, it is treated as incurred on the first day of trading and deducted from the profits of the first accounting period.
Capital Allowances: For those not using the cash basis, capital allowances come into play. Pre-trading capital expenditure is treated as incurred on the first day of trading, allowing you to claim capital allowances as if these expenses were incurred during the normal course of business.
The main point we want you to take away is that spending money to start your business doesn't always mean it's gone for good. You can often get tax relief for those early expenses, which can help ease the financial pressure as you're starting out.
At Hamollison's Bookkeeping Services, we're here to make sure you're making the most of these opportunities. We can look at what you've spent and tell you what can help you save on taxes.
Professional Assistance is Just a Click Away
Starting a business can be overwhelming, but you don't have to figure it all out alone. Get in touch with us for clear, friendly advice on handling your pre-trading expenses.