Pre trading expenses: summary
You can get a tax deduction for pre trading expenses incurred upto 7 years before your business started trading.
Pre-trading
Under CTA2009 s.61, if a company incurs expenses for the purposes of a trade before (but not more than 7 years before) the date on which the company starts to carry on the trade and a deduction would be allowed for them if they were incurred on the start date, then the expenses are treated as if they were incurred on the start date (and therefore a deduction is allowed for them).
Pre-incorporation
Note that CTA2009 s.61 mentioned above relates to pre trading expenses incurred by the company. If a company doesn’t yet exist, how can it buy goods or services?
There could be a risk that this legislation technically may not apply to pre-incorporation expenditure, as this has been incurred by a person who is intending to incorporate.
However, a pre-incorporation contract could potentially be used which states that the founder/director will be acquiring fixed assets and incurring expenses on behalf of a new company yet to be incorporated, not on behalf of themselves.
This would then need to have been ratified after incorporation, in accordance with Companies Act 2006 s.51 “A contract that purports to be made by or on behalf of a company at a time when the company has not been formed has effect, subject to any agreement to the contrary, as one made with the person purporting to act for the company or as agent for it, and he is personally liable on the contract accordingly.“ (this legislation normally applies to contracts with external parties, but should be relevant to this context).
When does “Trading” start?
Just in case you’re interested in the details behind commencement of trading or tax periods:
Under CTA2009 s.9 (1) an accounting period of a company begins when the company comes within the charge to corporation tax.
S.9(2) also mentions a company is treated as coming within the charge to corporation tax when it starts to carry on business.
Therefore, if a startup has not started to carry on its business by the end of its accounting year, it would not have come within the charge to corporation tax, and therefore there would not be any accounting period for corporation tax purposes.
BIM70505 provides guidance that the House of Lords judgements in Ransom v Higgs [1974] 50TC1 stress the active nature of trading – the need to be providing goods or services, to be trading with someone.
The courts have distinguished between preparing to commence business and actually commencing business. As a general rule a trade cannot commence until the trader:
– is in a position to provide those goods or services which it is, or will be, his or her trade to provide, and
– does so, or offers to do so, by way of trade.
