Pre-Trading Expenses: What a New Limited Company Can Deduct

Most founders spend money long before the company makes its first sale. Domain names, market research, a laptop, professional advice on the right structure, sample stock, insurance and the accountancy fee for incorporation itself all tend to land in the months before trading actually begins. The good news for owner-managers is that these costs are not lost. UK tax law lets a new limited company deduct qualifying pre-trading expenses once it starts to trade, and it treats them as if they had all been incurred on the first day of trade.

The rule that does this for companies is section 61 of the Corporation Tax Act 2009. It allows a deduction for expenses a company pays for the purposes of its trade up to seven years before the start date, provided the cost would have been allowable had the trade already begun. That seven-year window is generous, but the conditions attached to it catch a lot of new companies out, particularly around the split between revenue and capital and the separate treatment of VAT.

The seven-year rule and how the deduction works

The mechanics are straightforward once the timing is clear. Any qualifying revenue expense the company incurs in the seven years before it starts trading is pooled and treated as incurred on day one, so the whole lot lands in the first accounting period. That first period will often run at a loss as a result, and those losses then follow the ordinary corporation tax loss rules, which is where the separate spoke on carrying losses forward or backward becomes relevant for a company that is not yet profitable. The Low Incomes Tax Reform Group explains the same principle in plainer terms in its overview of pre-trading expenses, and the underlying provision is section 61 of the Corporation Tax Act 2009.

Two tests decide whether a cost qualifies. First, it must be revenue rather than capital, which is the distinction dealt with below. Second, it must pass the same wholly and exclusively test that applies to any trading expense, so it has to be incurred for the purposes of the trade rather than for a mixed personal and business purpose. A founder who buys a laptop used partly for the household and partly for the new company cannot claim the full cost, and the same apportionment logic that applies once trading has started applies to pre-trading spending too.

Revenue costs versus capital spending

The seven-year deduction only covers revenue expenditure, the day-to-day running costs of getting ready to trade. Capital spending, meaning assets the business will keep and use rather than consume, is handled through capital allowances instead. The two are not interchangeable, and putting a capital item through as a revenue deduction is one of the more common errors in a first set of accounts.

For capital items the timing works in a similar way to the revenue rule. Under the Capital Allowances Act, capital expenditure incurred before the trade begins is treated as incurred on the day trading starts, so a founder who bought equipment during the set-up phase can bring it into the first-year capital allowances computation. Deciding when incorporation and equipment purchases make sense in the first place is exactly the ground covered on our business startup advice page, where the structure and the timing of spending are planned together rather than reconstructed after the event.

Costs incurred by the founder personally

A recurring complication is that many pre-trading costs are paid by the founder personally, on a personal card or from a personal account, simply because the company and its bank account did not exist yet. This does not stop the company claiming them. The usual treatment is for the founder to be reimbursed by the company once it is up and running, or for the amounts to be credited to the director loan account so the director can draw them back tax-free later. The loan account route interacts with the wider director loan account and Section 455 rules, so a large opening balance built from reimbursed set-up costs needs to be recorded deliberately rather than left to accumulate.

What matters is that the expense was genuinely for the purposes of the company trade and is properly documented as such. HMRC does not require the invoice to have been in the company name from the outset, because the company did not exist when the cost was incurred, but it does expect a clear trail showing the business purpose and the amount.

VAT has its own separate windows

Recovering VAT on pre-registration purchases is a different regime from the corporation tax deduction and runs on much shorter timescales, so the two should never be conflated. Once the company is VAT registered it can reclaim input VAT on goods it still holds that were bought in the four years before registration, and on services received in the six months before registration. The mismatch between the two windows, four years for goods and six months for services, catches out founders who assume the seven-year corporation tax rule applies to VAT as well.

1. Goods still held at registration: VAT recoverable if bought within four years before the registration date.
2. Services: VAT recoverable if received within six months before the registration date.
3. Goods already used up or sold before registration do not qualify for reclaim.
4. The corporation tax deduction and the VAT reclaim are assessed separately, on their own timelines.

Whether to register for VAT voluntarily at start-up is a separate judgement that depends on the customer base and the input costs involved, and the current £90,000 registration threshold means many new companies are not obliged to register at all in year one. It is one more entry on a busy first-year filing calendar that also carries the CT600 and annual accounts deadlines, because the year the company starts trading is the year with the most moving parts.

Records HMRC expects to see

Because pre-trading costs are claimed retrospectively, sometimes years after they were paid, the evidence has to be strong enough to stand up long after the fact. The safest position is to keep the same standard of records for the set-up phase as for normal trading, even before the company formally exists.

• Original receipts and supplier invoices, kept for at least six years after the relevant accounting period.
• Evidence of business intent at the time, such as a business plan, correspondence or supplier quotes.
• A clear split between the revenue costs claimed as a deduction and the capital items put through capital allowances.
• A record of which costs the founder paid personally and how they were reimbursed or credited to the loan account.

None of this is difficult, but it is far easier to assemble as you go than to reconstruct at the first year-end. The whole picture connects back to how the company is taxed once it is trading, from the small profits and main rates through to marginal relief, which is set out in the overview of how corporation tax works for a limited company and in the wider corporation tax and year-end accounts hub.

Frequently asked questions

How far back can a new company claim pre-trading costs?

Up to seven years before the day the company starts to trade, for qualifying revenue expenses. They are treated as incurred on that first day of trade, so they all fall into the first accounting period rather than being spread over the years they were actually paid.

Can I claim the cost of incorporating the company?

The Companies House incorporation fee itself is generally treated as capital and is not deductible against trading profits, though it is usually small. Professional fees for advice on the set-up can be more nuanced, so the treatment of each item is worth checking rather than assuming it all falls one way.

Does the seven-year rule apply to VAT too?

No. VAT on pre-registration purchases runs on separate and much shorter windows, four years for goods still held and six months for services. Treat the corporation tax deduction and the VAT reclaim as two distinct claims with different rules.