Ilyas Patel Accountants in Preston
One of the often-misunderstood aspects for the self-employed is pre-trading expenses — costs incurred before a business officially begins trading.
These costs, if handled correctly, can offer significant tax relief, but getting it wrong could mean missed opportunities for deductions.
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As a general rule, expenses are deductible only when incurred after a business starts trading.
However, there is a special provision for self-employed individuals, allowing them to claim certain expenses incurred in the seven years leading up to their business’s start date.
This is outlined in Section 57 of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005).
To qualify for this relief, the expenses must meet the usual criteria for business deductions, meaning they should be wholly and exclusively for the purpose of the trade.
Additionally, these expenses are treated as having been incurred on the very first day of trading, ensuring they are fully deductible in the first accounting period of the business.
Not all pre-trading expenses are created equal. Below are some categories of expenses that typically qualify for this relief.
Any business insurance taken out prior to trading is likely to qualify.
Similarly, if you spend money on advertising your services or products before launching, this expenditure can also be deducted, as it is directly related to building your business.
The cost of acquiring essential skills or professional qualifications directly related to your trade can also qualify.
For example, a freelance photographer purchasing courses or software licenses before launching their business may be able to deduct these expenses.
Setting up a website, purchasing office supplies, or registering your business domain before you begin trading are other valid deductions.
These costs ensure you’re ready to start trading and are an essential part of launching your business.
There are several categories of expenses that do not qualify for relief under Section 57.
Purchases such as office furniture or equipment do not qualify.
However, you may still be able to claim capital allowances on these items, which offer tax relief over a number of years.
Personal expenses, such as household bills or personal travel costs, are not allowable under the rules.
Similarly, any expense deemed private and not directly related to the trade cannot be claimed.
The cost of any fines, penalties, or specific entertainment expenses is prohibited.
Even if incurred in the course of setting up your business, these costs are not eligible for tax relief under the normal trading rules or Section 57.
When it comes to claiming, you should ensure all qualifying pre-trading expenses are clearly documented.
These expenses will be treated as if they were incurred on the first day of trading and should be included in your first set of accounts.
If unsure, it’s always best to consult a tax professional, such as Ilyas Patel Accountants, to ensure you’re not missing out on valuable relief.
It’s also important to note that some expenses, like purchases of stock or rent paid in advance, may still be deductible under the normal rules even if they don’t fall within the scope of Section 57.
Understanding pre-trading expenses is essential for new sole traders and partnerships aiming to maximise tax efficiency.
By identifying eligible expenses incurred in the seven years leading up to the start of trading, you can reduce your initial tax burden and give your business the best possible start.
Make sure to keep meticulous records of all pre-trading expenses and seek professional advice to avoid missing out on available deductions.
Contact Ilyas Patel Accountants today for expert guidance on all tax matters.
Fill out our form here for any questions, give us a call at 01772 788200, or message us on our WhatsApp for out of office hours.
Kind regards,
Ilyas Patel