Claiming back pre-formation costs from your 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?

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 2009 Corporation Tax Act – such 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 some expenses incurred over seven years up to the date you incorporate your company.

That means once you start trading you will be able to offset these costs against turnover for Corporation Tax in your first year.

If you’ve had to invest in some new equipment such as a desk or computer for your company, you can claim for the VAT element of the purchase going back four years from the day you start trading, provided you are a VAT registered limited company.

HMRC also allows you to claim for the cost of professional services that relate to your business activity within six months of the start date.

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 the cost of services or items that are to be used exclusively for the business and to help you trade from the start date.
• If you are claiming the VAT element for goods bought, the purchase must have been made within the time limit (four years), remain in hand at the date of registration, and be for use in the newly incorporated business.
• The cost of the company formation itself is a one-off capital cost and can’t be claimed against tax. However, your company can reimburse you if you paid for the incorporation cost yourself.
• If you already exist as a registered company and incur costs while setting up another company, you won’t be able to reclaim these costs as the second company is treated as a new and entirely separate entity.
• You can’t claim against tax for the cost of an item bought initially for private use and subsequently brought into the service of the company.

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.

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 won’t 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 and HMRC BIM46355.

Return to our complete guide to limited company expenses.