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NewslettersHow to claim pre-trading expenses?
Starting a business is an exciting venture, but it can also be an expensive one. The bills can add up quickly with legal fees, marketing costs, and preparing your business premises. However, can you claim some of these expenses back? Pre-trading expenses are costs incurred by your business before it starts trading, and they can be claimed as tax relief. You can reduce tax liability and improve cash flow by claiming eligible pre-trading expenses. But how do you know which expenses are qualified, and how do you claim them?
What are pre-trading expenses?
Pre-trading expenses are costs that you incur before your business starts trading. These expenses can include the following:
- Legal and professional fees, such as those incurred during the formation of your company.
- Costs associated with preparing your business premises, such as rent, utilities, and renovations
- Advertising and marketing costs, such as website design and advertising campaigns
- Training costs for employees.
- It’s important to note that pre-trading expenses can only be claimed if they are directly related to the business and not personal expenses. For example, if you hire a lawyer to help you set up your business, that cost is a pre-trading expense. However, if you hire a lawyer for a personal matter, that cost is not a pre-trading expense.
How to claim pre-trading expenses?
If you claim pre-trading expenses, you must note it all. This will be essential in ensuring everything is delivered correctly, and you get all the records. As a business in the UK, filing for pre-trading expenses will require you to put out the information accurately with all the necessary documents. Below are the steps you need to follow to claim pre-trading expenses in the UK.
Keep records of all pre-trading expenses
The first step in claiming pre-trading expenses is to keep accurate records of all expenses incurred before your business starts trading. This includes receipts, invoices, and other documentation proving the expenses were related to your business.
It’s essential to keep these records organised and easily accessible, as you will need them when you file your tax return.
Identify which expenses are eligible
Not all pre-trading expenses are eligible for tax relief. To claim pre-trading costs, the expenses must meet the following criteria:
- They must have been incurred within seven years before your business started trading.
- They must be revenue expenses, meaning they are not capital expenses (i.e., expenses related to buying or improving assets).
- They must be wholly and exclusively for your business.
- Claim pre-trading expenses on your tax return.
- Once you have identified which pre-trading expenses are eligible, you can claim them on your tax return. You can do this by completing the "additional information" section.
In this section, you must provide a detailed breakdown of each pre-trading expense you want to claim. This includes the date the expense was incurred, the amount and a description of the expense.
It’s vital to ensure that your records match the information you provide on your tax return, as HM Revenue & Customs (HMRC) may request to see your records as evidence of the expenses.
Carry forward any unclaimed pre-trading expenses
If you have pre-trading expenses you cannot claim in the current tax year, you can carry them forward and claim them in future tax years.
It’s essential to keep accurate records of any unclaimed pre-trading expenses, as you will need to provide this information when you file your tax return for the year in which you claim the expenses.
Seek professional advice
Claiming pre-trading expenses can be a complex process, especially if you are unsure which expenses are eligible for tax relief. If you are still determining how to claim pre-trading expenses or need assistance with your tax return, seeking professional advice is a good idea.
An accountant or tax advisor can guide you on which expenses are eligible for tax relief and help you accurately and efficiently complete your tax return.
Tips for claiming pre-trading expenses
Now that you know the process for claiming the pre-trading expenses, it is also crucial that you understand a few tips for claiming it. These would play an important role in making the right choice, especially in terms of a claim. Some of the prominent tips to follow for claiming the pre-trading expenses are as follows:
- Keep accurate records of all pre-trading expenses.
- Only claim expenses that are directly related to your business.
- Ensure your records match the information you provide on your tax return.
- Seek professional advice.
- Claiming pre-trading expenses is an important aspect of managing your business finances. Claiming eligible expenses can reduce your tax liability and improve your cash flow.
However, it’s important to note that certain expenses cannot be claimed as pre-trading expenses. For example, expenses incurred in anticipation of starting a business, such as market research or feasibility studies, are not eligible for tax relief.
Additionally, it’s crucial to ensure that you are claiming expenses correctly and accurately. Failing to do so can result in penalties and interest charges from HMRC.
Conclusion
Pre-trading expenses can be an important source of tax relief for your business. By keeping accurate records of all expenses incurred before your business starts trading and identifying which expenses are eligible for tax relief, you can reduce your tax liability and improve your cash flow.
If you need help with how to claim pre-trading expenses or need assistance with your tax return, it’s a good idea to seek professional advice. An accountant or tax advisor can guide you on which expenses are eligible for tax relief and help you accurately and efficiently complete your tax return.
Remember to keep your records organised and easily accessible, as you may need to provide evidence of your expenses to HMRC. By following these steps and seeking professional advice when necessary, you can successfully claim pre-trading expenses for your UK business.
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