In setting up a trade it is inevitable that expenses will be incurred before the trade actually commences. Expenses may be incurred on acquiring premises and kitting them out, on buying stock, on office supplies, on professional advice, on marketing, on software, on setting up a website, on legal fees and suchlike. These can mount up, so it is important to secure tax relief where possible. Relief for pre-trading expenses is available to both unincorporated business and companies.
Relief is only available to the person (individual or company) who incurred the expenditure and commenced the trade.
Revenue expenses
The general rule is that revenue expenses incurred in the seven years prior to the date on which the trade starts are deductible if they would be so deductible had the expense been incurred once the trade had commenced. The usual rules to determine whether an expense is deductible apply (i.e., whether it is revenue in nature and incurred wholly and exclusively for the purposes of the business). To give effect to the relief, the pre-trading expenses are treated as if they were incurred on the first day of trading and deducted in calculating the profits for the first accounting period.
Capital expenses
Relief for capital expenses depends on whether the accounts are prepared on the cash basis or not. Where the cash basis is used, if the expense is one that would be deductible under the cash basis capital expenditure rules, as with revenue expenses, the expense is treated as incurred on the first day of trading and deducted in calculating the profits for the first accounting period.
However, if relief would be given through the capital allowances system, capital allowances are available for the pre-trading expenditure, the expenditure being treated as if it had been incurred on the first day of trading.
Partner note: ITTOIA 2005, s. 57; CTA 2009, s. 61.
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