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What Tax Relief Can I Claim On Startup Costs?Written on January 9, 2019 by Kirk Rice LLP

What Tax Relief Can I Claim On Startup Costs?
Taxing Times Questions

The Question:

I am planning on setting up a new business but I will need to incur costs before I get going. What is the tax position for the startup costs?

Kirk Rice LLP answers:

Virtually all businesses need money to get off the ground, whether it’s just for some basic office equipment or for more elaborate machinery and a business premises. Either way, you’ll want to ensure you receive the maximum tax relief for these startup costs.

The first point to note is that tax deductions for pre-trading expenditure can only be claimed against trading income. The position is broadly the same whether you intend the business to operate through a company, partnership or as a sole trader. A tax deduction for advance expenditure is only allowed where your business gets off the ground. Because of the way the rules work, pre-trading expenses personally paid by a partner in a business or sole trader count as if they were paid by the business, so a tax deduction will be due.

Where you set up a Limited company and provide it with cash, which it then spends on startup costs, these will be tax deductible as long as they would have been had trading already started. The rules say this type of expense counts as if the company had incurred them on the first day of trading.

The position is more tricky where you incur expenses personally before a company is formed. The rules say that only the person (or company) who incurs the expense can claim a deduction.

Quite clearly a company and an individual are not the same person, even where the person concerned later becomes a director.

Where you personally pay a pre-trading expense you should claim reimbursement of this from your company as soon it’s formed. Even if it can’t pay you immediately your claim will be on your company’s books as a business expense. In effect, your claim for reimbursement changes the expense from a personal cost into a pre-trading one for your company.

For example, in March 2018 Harry decided to set up his own environmental consultancy and go it alone. First, he needed to develop his idea and identify potential customers. He spends several thousand pounds in doing so. In January 2019 he forms Acom Ltd to front his business. Harry can claim reimbursement of his development, etc. costs from Acom. Even if it doesn’t start to trade for up to another seven years, it will be allowed to treat Harry’s expenses claim as deductible pre-trading expenses.

Any reader interested in discussing your businesses startup costs further can telephone Tim Neale in Ascot on 01344 875000, or James Moody in Putney on 020 8789 8588 or email info@kirkrice.co.uk. (Correct on 23/5/218)

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Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made.