In the early days of starting a business, your main focus is finding new clients and delivering the work.
Most other things go out the window, so you can forgive yourself if you’ve submitted your first tax return and realised you forgot to include start-up costs in your self-employed allowable expenses list.
The good news? It’s not too late! We’ll look at what you’re entitled to claim for, how long you can backdate it, and some common things people think you can claim for which you actually can’t.
Let’s get started.
What are pre-trade expenses?
Simply put, anything you spend on the business before you began trading. It may take you longer than a year to get trade-ready, so HMRC allows you to backdate these expenses.
How far back can I claim business expenses?
When it comes to the self-employed allowable expenses list, there are hundreds of potential things you can claim for.
Things like working from home, your car, and clothing, with multiple things within those categories.
For those allowable expenses, you must claim for each tax-deductible item the year you spent the money.
For example, if we look at the April – April 19/20 tax year, if you spent £3.30 on a bus ticket to visit a client on the 5th June 2019, you must claim that cost in the tax return you’d submit before January 2021.
Exceptions to this rule are start-up costs where, if you have a Limited Company, you can backdate up to seven years before you started trading.
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Why do I have to wait until I start trading to claim start-up (pre-trade) costs?
You can only claim tax relief against income earned. For example, you can’t go out and spend £10,000 on machinery, earn a £3000 profit, and then expect the taxman to pay out £7000, can you?
Keeping the taxman happy is important, but the above also makes sense when you think about it. You’ve got to start earning money before you can claim tax back against it as business costs.
What kind of things can you claim for?
This depends entirely on your business. We advise you to speak to your accountant to make sure you’re being as tax efficient as possible.
If you don’t have an accountant because you’re worried they’re too expensive or you don’t need one, we offer basic bookkeeping packages from £25+VAT per hour or one-off training courses to teach you the basics so you can manage your books efficiently by yourself.
Some of the items you may be able to claim for include:
- Computers & tech (laptop, monitor, keyboard & mouse, printer etc)
- Office equipment (desk, chair, bookcase, filing cabinet etc)
- Professional services (legal, accounting, marketing etc)
- Software (accounting software, CRMs, any specialist software etc)
- Travel costs (business miles, air and rail costs, hotel etc)
- Stock purchases (anything you’re selling as part of your trade)
- Phone and broadband (the business use & of this)
What if you paid pre-trading expenses out of your own pocket?
Don’t worry, if you bought any of your pre-trading equipment or expenses by yourself, HMRC still counts this as the company purchasing it.
The business/personal use conflict
There are some items (like tablets, laptops, and headphones) you may use for both personal and business.
As long as you can justify why you need them for business use, you should be fine. Again, it’s always worth checking with your accountant to make sure you keep the tax man happy.
What start-up costs can’t you claim for?
The biggest misconception when it comes to claiming pre-trade expenses with HMRC is that you can claim for courses that teach you the knowledge to start a business, when in fact you cannot.
What do we mean by this?
Here are a few examples:
- Alex is a web developer. He took a course to teach him the fundamentals of the profession before he started trading. Alex can’t claim the cost of this course but can claim the cost of any subsequent courses in something specific, say, WordPress Excellence, as it builds on the initial knowledge he has.
- Charlotte is a life coach. She took a course to teach her how to be a coach before she started trading. She can’t claim the cost of this course but can claim for any further courses she does in something specific like Reading Body Language because it builds on her knowledge.
- Francois is a graphic designer. He took a course in the fundamentals of design before he started trading. Francois can’t claim the cost of this course but he can claim for the course he’s doing next year which teaches him how to use Adobe Illustrator.