Claiming back pre-formation costs from your limited company

As anyone who has started their own business knows, it can be a costly exercise with a range of expenses to absorb before you’re officially up and running.

The bills can quickly add up, and typically, these have to be paid from your personal funds.

The question is: can you claim any of these expenses back once your limited company has been fully incorporated?

In this article, Michael McCullion, Managing Director of BI Accountancy, explains which business expenses incurred before incorporation may be reclaimed by a limited company and the conditions that apply.

Can you claim tax relief on pre-formation expenses?

Fortunately, the answer is yes, you can, as long as you can show these were legitimate pre-trading expenses.

As far as HMRC is concerned – and as set out in s.61 of the Corporation Tax Act 2009 – qualifying pre-trading expenses are treated as if they were incurred on your first day of trading.

And there’s more good news because you can claim for qualifying expenses incurred up to seven years before your company starts trading.

The expenses must be ones which would have been allowable if they had been incurred after the company started trading. Once your company starts trading, qualifying costs can therefore be deducted when calculating its profits for Corporation Tax.

What about VAT on pre-registration expenses?

The rules for reclaiming VAT are separate from the seven-year Corporation Tax rule.

If your company becomes VAT registered, it may be able to reclaim VAT on qualifying goods purchased up to four years before the VAT registration date. The goods must still be held by the business at the date of registration, or have been used to make other goods which are still held.

VAT on qualifying services can generally be reclaimed for services supplied up to six months before the VAT registration date, provided they relate to the business.

You must also meet the normal conditions for recovering input VAT and have the appropriate VAT records.

Some conditions you should know about

As always with tax matters, several conditions apply. Some key ones to note are as follows:

• You can only claim for costs which would have been allowable business expenses if they had been incurred after the company started trading.
• If you are reclaiming VAT on goods purchased before VAT registration, the goods must meet the pre-registration VAT rules, including the four-year time limit and the requirement for the goods to still be held at registration.
• The cost of company formation itself is a one-off capital cost and can’t be claimed as a trading expense for Corporation Tax purposes. However, your company can reimburse you if you paid the incorporation cost yourself.
• If you already exist as a registered company and incur costs while setting up another company, the first company can’t simply claim the second company’s start-up costs. The two companies are separate legal entities.
• If you bought an item originally for private use, you can’t simply claim its original cost as a pre-trading business expense. However, you may be able to sell or transfer the asset to the company at its current market value, with capital allowances potentially available to the company where the normal conditions are met.

Pre-trading costs you can claim back

Here is a list of some typical expenses you may incur before the official start date of trading:

• Professional services such as accountancy fees and legal advice.
• Domain names.
• Web hosting.
• Equipment such as laptops, PCs, and tablets.
• Travel costs related to your business.
• Business-related phone bills.
• Stationery, postage, printing, etc.

Whether a particular cost qualifies will depend on the normal tax rules for that type of expense.

Keep accurate records

You should keep up-to-date records of expenses and receipts for any business-related items or services purchased in the run-up to registering your company.

Without receipts, you may not be able to claim costs back or prove these were legitimate business expenses.

It’s also important to note that you can’t buy any items or services under your registered company name until it has been incorporated at Companies House.

For further information, see HMRC VIT32000 for pre-registration VAT and HMRC BIM46355 for pre-trading expenditure.

Return to our complete guide to limited company expenses.