Startups: Don’t miss claiming tax relief for pre-trading expenses

Pre-trading expenses are an integral investment to getting a new business off the ground, and there’s no denying that these can add up quickly. Whether you’re starting out as a sole trader or setting up a limited company, upfront costs are likely to be necessary and can make the thought of paying taxes as soon as you generate any profit off-putting. Fortunately, our experts are on hand to guide you through the rules on tax relief for pre-trading expenses allowing you to claim a tax deduction as well as reassure you that your initial capital has been put towards worthwhile long-term business goals. 

What are pre-trading expenses?

Pre-trading expenses are costs incurred before you can start running your business. For most businesses, this expenditure will be unavoidable and can include necessities such as insurance, buying stock or supplies, advertising, or rent for your premises. However, it is crucial to understand that not all expenses that you may pay for before your business is open are allowable as a pre-trading expense, and this article will help you understand how to differentiate between them.

What qualifies as a pre-trading expense?

Most legitimate business expenses are likely to qualify as pre-trading expenses so long as they have been incurred within 7 years from the first day your business starts trading. The expenses must be “wholly and exclusively for the purpose of the trade” which means it cannot have a personal benefit. For example, you’re getting ready to open your own business and you buy a new mobile phone. If you’re using it for personal, non-work-related calls then this is unlikely to qualify (but you may still be able to claim a portion of your phone bill instead). On the other hand, if you buy a separate sim card with a new number that will be used exclusively for business calls, then the cost of the sim card or monthly fee is allowable as a pre-trading expense in its entirety. As a general rule, if the expenditure would be an allowable business expense if the business were to already be in operation, then it’ll likely qualify as a pre-trading expense.

What cannot be claimed as a pre-trading expense?

We can take the opposite approach when it comes to determining what expenses will not qualify as pre-trading expenses. If they would not ordinarily be deductible were the business to be open and trading, then these will likely not qualify. Don’t forget that although many expenses are business related, they may be considered to be capital expenses rather than revenue expenses and therefore only deductible against profits if they qualify for  capital allowances. An example of capital expenses which cannot be claimed as a pre-trading expense is the purchase of land or property for your business. On the other hand, types of assets which do qualify as capital allowance and will therefore also be pre-trading expenses are assets such as plant and machinery.

Other costs which cannot be claimed as pre-trading expenses include:

• The cost of incorporating a new limited company (this cannot be deducted against profits for corporation tax purposes, but you can reimburse yourself as the director if you paid for the incorporation personally).
• Training courses or qualifications where these are new skills and required in order for you to begin trading (for example, you work as a sales manager but take a training course to become an electrician).
• Substantial repairs or improvements to land or property as this is capital expenditure
• Any fines or penalties received whilst conducting your pre-trading activities
• Business entertainment such as hosting a party to launch your business (technically this is an allowable pre-trading business expense, however it is important to understand that this is not tax-deductible).

How does the tax relief work?

So, when you spend money on pre-trading necessities, the expenditure is treated as if these costs occurred on the first day of trading in your business. This will allow you to deduct the expenses from your first year’s profit, thereby effectively reducing the amount of tax you’ll have to pay. For sole traders, this will help you reduce your income tax as well as national insurance (NI) contributions. For limited companies, this will help reduce your corporation tax bill.

Who can claim for pre-trading expenses?

Sole traders and partnerships can claim for their pre-trading expenses through their self-assessment tax return or partnership return. This must be done by the 31^st January after the end of the tax year in which you began trading through your business and the costs incurred must be within 7 years of when you began trading. So, for example, let’s say you purchased some flyers and insurance for your yoga class in March 2025, and you do not start to run your classes until June 2025. You can claim for the cost of the flyers and insurance in your personal tax return for the tax year 2025/26 which is due by 31^st January 2027. Limited companies are also able to claim for pre-trading expenses, but this must be completed through the company’s corporation tax return instead of a self-assessment tax return. The limited company must be incorporated, and the funds should come from the company’s business bank account. Newly incorporated companies often have to file two corporation tax returns (one 12 months from the anniversary of the day you incorporated and the second 12 months after the end of your chosen year-end date). The company is able to claim the pre-trading expenses in either of these corporation tax returns (although, usually in practice, it makes sense to claim in the first corporation tax return) so long as the expenses were incurred no more than 7 years prior to trading.

How to claim pre-trading expenses as a sole trader

The most crucial first step to being able to claim for pre-trading expenses as a sole trader is to register for self-employment with HMRC. You should do this as early as possible once you have decided that you will be running your own business and predict it will generate more than £1,000 per year. However, the deadline to do so is by the 5^th October after the end of the tax year in which you began trading.

Then you’ll need to collect all your receipts and bank statements as evidence of your expenditure and double check that these are all within the previous seven years. Whilst you don’t need to submit these with your actual self-assessment tax return, you should still retain all your documents for at least 5 years after the 31^st January submission deadline for the relevant tax year should HMRC decide to investigate into your tax affairs.

Where your annual earnings exceed £90,000, you’ll have to fill in the full self-employment pages (known as SA103F) and this will require you to categorise your expenditure (see boxes 17 – 30), then input a total figure (box 31). If you earn under this threshold, you’re able to use the short self-employment for pages (known as SA103S) and here you can just put the total allowable expenses figure that you are claiming for. Be aware that you may still have to complete the full self-employment pages if you have more than one self-employment business, other streams of income, or are claiming other capital allowance which are not supported on the short form.

Be sure not to claim other allowances that may invalidate your pre-trading expenses claim such as the trading allowance. The trading allowance is generally more suitable for those with miscellaneous or small earnings such as from a hobby or a side or hustle, but by claiming this, you won’t be able to deduct your actual expenses from your profits as well.

How to claim pre-trading expenses as a limited company

Directors need to determine the date of when the company first began actively trading as this will determine your accounting period for your corporation tax return. Be sure to have documentation or other evidence to support this as otherwise it is often assumed that your first day of trading is the date in which you incorporated your company which may not necessarily be the case.

Collect your invoices, receipts, bank statements and other supporting documents of your pre-trading expenditure and double check that these have all been incurred within the past seven years. You won’t need to submit these with your corporation tax return, but you are required to keep these records for a minimum of 6 years from the end of the accounting period to which they relate.

Categorise your expenses, ensuring you have separated the revenue expenses from capital expenses. If you’re unsure of what an expense comes under do ask an accountant as it is important that these are accounted for correctly or you could be at risk of an HMRC investigation.

Once you have totalled the figures up you can enter them onto your CT600. You can treat these expenses as having been incurred on the first day of trading. If any expenses were paid for personally by you as the director, then you can also record these in the director’s loan account. Once your company has generated sufficient income, you can reimburse yourself tax-free but be sure to also keep records of this.

When am I seen to be trading?

Understanding the point in which you are considered to be trading in the eyes of HMRC is an important aspect of being able to claim for your pre-trading expenses, as you won’t be able to do so until you are officially trading. Whilst sole traders have few formal marks of an official trading date, HMRC will look for signs of business trading activity such as advertising your goods or services, selling goods or services, and carrying out work functions such as hiring employees, chasing debt, or attending work events. As a general rule of thumb, HMRC will see the commencement date of your business as the first day that you were actively operating (providing goods or services to customers) as opposed to the first day you began preparing to trade. For limited companies, it is automatically assumed that the day of incorporation is the day you begin trading because Companies House will alert HMRC, and they in turn will send you a letter asking you to register for corporation tax. If you do not complete this letter, HMRC will assume that you are dormant, but you may still receive a letter with a notice to deliver a company tax return. At this point, you should inform them that you have still not begun trading and are still dormant. Once you do begin trading, you must register for corporation tax within 3 months. 

Claiming VAT on pre-trading expenses

Did you know that you are also able to reclaim any VAT on pre-trading expenses? To do so, you must be VAT registered though. For many business owners who are just starting, it may well be unlikely that you anticipate reaching the VAT threshold, but it could still be beneficial for you to consider voluntary VAT registration.

Once VAT-registered, you’re able to reclaim VAT on pre-trading expenses through your VAT return. However, be aware that there are slightly different time limits to do so. When it comes to VAT, you’ll only be able to backdate a claim 4 years if it’s for goods (and those goods must still be in use solely and exclusively for the purpose of your business) and 6 months for services from the day you became VAT-registered. For this reason, it could be advisable to voluntarily register early if your pre-trading costs are significant.

Get help with claiming your pre-trading expenses

Whether you’re a sole trader or limited company director, our experts are on hand to help. We understand how important it is to retain as much profit as possible to further invest in your business. Get in touch for a bespoke quote tailored to your needs. From helping you claim tax relief on your pre-trading expenditure on your self assessment tax return to making sure we’ve also helped you claim capital allowances, you can be sure our services are comprehensive and never leave you short.