Tax Questions: Tax Relief For Start-up Costs
The normal rules for tax relief on expenses don’t apply if they were incurred before your business started trading. This can affect the timing and the amount of tax deductions you get as a new founder.
It can take a fair bit of time, effort and money before a new business is even ready to start trading, let alone generate enough income to pay director shareholders a decent wage. Depending on the nature of your business, you could have premises, stock and equipment overheads to shell out for. Naturally, you would assume general tax rules, but they don’t apply. Instead, there are special rules for ‘pre-trading expenses’.
Tax and pre-trading expenses
While rules are different for pre-trading, they are similar for companies and unincorporated businesses. Pre-trading expenses are treated as if incurred on the first day of trading. Usual tax rules then apply and only to expenses wholly and exclusively incurred for the purpose of the business to permit a tax deduction.
Day-to-day expenses incurred for business travel and building overheads are directly deductible from income, while expenditure gets capital allowances (HMRC equivalent to depreciation charge) for equipment such as machinery and vehicles. The flipside is, if the business never starts trading, there’s no tax relief for losses incurred from pre-trading expenses.
If you spend time finding suppliers and hiring staff, your company can pay you a salary and provided it’s a reasonable amount of time and effort, it’s a tax deductible pre-trading expense. This doesn’t apply if your business is unincorporated because what you personally take from it doesn’t affect taxable profit. Pre-trading expenses apply to expenses paid up to 7 years before trading starts.
Not a pre-trading expense – stock and materials
Special rules for pre-trading expenses don’t apply to certain expense types. While they might have been incurred before trading, due to their nature they can only relate to a time when the trade exists, say stock and materials. Tax deductions are allowed for them without the need to resort to pre-trading expenses rules.
Cost of finance
If you borrow money to finance your new business and incur interest or other finance charges before trading, these count as pre-trading costs and are treated in the same way as other expenses, but not where the business is run as a company.
Pre-trading interest incurred by companies falls under ‘loan relationship rules’. These rules say that for corporation tax purposes, your company can only deduct interest paid on loans from ‘non-trade credits’ (income) it receives. For example, interest on savings. It might however be years before your company can potentially generate the right type of non-trade credits to obtain tax relief for pre-trade debts.
Your company can elect for pre-trading loan relationship debits, for say interest paid to be treated in the same way as other expenses. There is a 2-year time limit for the election – and like other pre-trading expenses, debits must meet the ‘wholly and exclusively’ test.
For tax purposes, set-up expenses are treated as if you incurred them on the first day of trading. If the business never trades, you won’t get any tax relief. If your business is to be run through a company, a tax deduction under pre-trading expense rules for a reasonable salary is allowed.
For help with tax relief as a start-up business, why not request a chat with our team of tax specialists to learn your unique position and to ensure maximum tax efficiency on your new venture. Let’s Talk.