How to treat business costs incurred before you start trading

Before a business gets off the ground there are often a few start up costs incurred.

Wholly and Exclusively

Such costs can be recorded in the business accounts and claimed against tax assuming that they have been “wholly and exclusively” incurred for the business; that’s the accounting term used for business costs and the test that HMRC will apply to check if the cost can be offset against income in the accounts for tax purposes.

Recording them in the books

The rule of thumb is that pre-trading costs spent on the business should be treated as incurred on the first day that the business started to trade.

In the build up to launching your business, you should keep the receipts and invoices for any outlays that you’ve made to get the business up and running.

Start up costs may be paid out of the business owner’s personal funds; once recorded in the business accounts the owner can be reimbursed for the outlay. The best way to do this is via recording the amounts on an expenses claim form, attaching the receipts to the form, keeping this in the accounting records file for the business and transferring the total of the costs incurred per the expenses claim form from the business bank account to the owner’s personal bank account.

You can prepare a paper form or use an Expenses App to claim any pre trading costs incurred.

Claiming for VAT on items purchased prior to registration

If you register your business for VAT you can look back over your purchases and outlays and, in some circumstances, reclaim VAT on the costs.

The rules for reclaiming the VAT back on the costs incurred prior to registering for VAT are different for goods and services:

• for goods: you can reclaim VAT up to four years before you registered for VAT
• for services: you can reclaim VAT up to six months before you registered for VAT

There are certain conditions which must be met; in particular and worth noting is that the VAT on goods bought or imported no more than four years before the business becomes VAT registered can be claimed back only if the goods:

• were bought by you as the ‘person’ who is now registered for VAT
• are for your VATable business purposes, e.g. they do not relate to any exempt items that you sell
• are still held by you or they have been used to make other goods you still hold

VAT on goods completely used up before the business becomes registered cannot be claimed e.g. petrol, electricity or gas.

Similarly VAT cannot be claimed back on items which have been sold onto customers before the VAT registration date.