Starting a business requires extensive preparation and may incur expenses that may prove to be significant. There will be charges associated with this process. Prior to being ready to begin trading, a business may incur expenses for items such as: acquiring premises, hiring employees, purchasing inventory, setting up a website, paying for information technology, advertising, and marketing, as well as travel and sustenance.
These expenses are related to a business, albeit one that has not yet begun operations.
Relief from financial obligations
Once a business is up and running, it is possible to claim tax deductions for revenue expenses that are incurred entirely and exclusively for the purposes of the enterprise.
In the case of expenses incurred in the course of setting up a business, reimbursement is available under the pre-trading expenses regulations. Costs incurred in the seven years prior to the commencement of the trade are eligible for tax deductions to the extent that they are revenue expenses incurred entirely and exclusively for the purposes of the trade are excluded. It is in this way that the pre-trading expenses regulations provide tax relief for expenditures that would have qualified for deductions had they been incurred once the business was up and operating. When calculating profits for the first period of account, pre-trading expenses are handled as if they were incurred on the day of the first day of trading and are deducted from the profits for the first period of account.
Example
On the first of October in the year 2021, Lucy will establish a shop selling greeting cards and gifts. Prior to starting the shop, she incurred the following expenses in the year 2021:
In accordance with the pre-trading guidelines, rent, personnel expenditures, travel expenses, and advertising costs are all regarded as if they were incurred on the first day of trading on October 1, 2021. Those expenses are deducted when determining her profits for the first accounting quarter.
Stock
In accordance with the pre-trading expenses guidelines, no deduction is allowed for the cost of shares. Stock purchased prior to the start of the accounting period will be used as opening stock, and stock sold in the first accounting period will be eligible for a profit-sharing deduction.
Investing in the future
For the purpose of calculating capital allowances, a rule that is comparable to the pre-trading expense guidelines is applied. Item(s) purchased prior to the start of trading in which the expenditure is qualifying expenditure for capital allowance purposes are eligible for capital allowances; the qualifying expenditure is treated as if it had been expended on the first day of trading for the purposes of capital allowances.
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