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Probably an easy answer

Hi All

I have a new client who is a consultant working through his own Ltd Company. The company was incorporated in February 2011.

In the process of preparing his first set of accounts for the year ended 29 February 2012.

He has asked to put through pre incorporation expenses totalling £10k which date back to July 2010 so we are talking 7 months before incorporation. I have asked the client to confirm that they were all necessary in forming his Ltd Company and he has said the following which has got me worried:

"All of these above costs were prior to incorporation, but so was the bulk of the work that generated income. I would estimate perhaps 75% was done prior to incorporation and then billed immediately after incorporation."

My question is simple - can he put this income and expenses from before he incorporated through his Ltd Company like this or should it be reported as Self Employed income (he was not registered as self-employed) or even employed income.

To the best of my knowledge there were no contracts in place for the work carried out and if there were then they could not have been between the end client and his Ltd Company as it would not have existed.

Any help and advise (more than "walk away" from the client - which I am contemplating) would really be appreciated.

Archie.

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By pauld
10th May 2012 12:18

Trading begins.....

when income is first received. If income first received after incorporation then I would have thought there is no problem for the pre trading expenses to be claimed by the company.

If income first received prior to incorporation then this is sole trader income and pre trading expenses would be claimed against the sole trade.

I certainly wouldnt walk away as does not look a big issue.

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10th May 2012 13:21

Trading does not begin

pauld wrote:

when income is first received.

 

Not in my view.  Trading begins when you first start to work at the latest, and probably begins when you first hold yourself out as looking for business - the equivalent of a shop opening the doors for trading. 

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10th May 2012 13:33

Be warned...

There are two basic points to remember here:

1. At the very latest, as Cloudcounter says, trading begins when the income starts to be earned.

2. HMRC will not accept that a company can incur expenditure before it is incorporated.

Treating income earned or expenses incurred before the company was incorporated as the company's risks HMRC taking the view that this was a "deliberate and concealed" inaccuracy in your client's 2010/11 income tax Self Assessment, which I think is a "big issue".

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By pauld
10th May 2012 14:18

Grey area

Ok when a trade commences, can be a bit of a grey area.  Re James point 2, I understood that if  expenditure is incurred, prior to incorporation, by an officer of the incorporated company, then the expenses can be reimbursed to that officer following incorporation and are an allowable expense of the company so long as the expenses were incurred wholly and exclusively for the trade.

I also do not believe the 2010/11 income tax return is at risk as no invoices were issued.

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10th May 2012 14:37

.

Be careful. Whilst no invoices have been raised, have any payments been received?

I find it difficult to believe that anyone worth their salt would enter into a consultancy service contract (which is what it is - even without pen to paper - binding by actions) incurring £10k costs without taking any monies on account.

 

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10th May 2012 16:30

UPDATE

Hi everyone,

Thank you for your posts - much appreciated.

So to give a little more information - I have provided a break down below - your thought would be great:

 

Worked for two clients from July 2010

Incorporated his company in February 2011

No payments or invoices were created before incorporation

Issued first invoice for £10k after incorporation for work carried out 75% of which took place before incorporation

Issued second invoice for £26k after incorporation for work carried out 75% of which took place before incorporation

 

First invoice paid in full

Second invoice was not paid by the end client - my client managed to sue and get £4k the remaining £22k written off.

 

I have asked for confirmation of whether there were written contracts in place and if so between who.

 

I think Pauld is correct about the pre-incorporation expenses - this is the view I have always held so I'm not to worried about this - more an issue of how to treat the income.

Thank you again for your thoughts.

 

Archie

 

 

 

 

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10th May 2012 17:39

Be warned again!
I am afraid HMRC do not share your and Pauld's view of expenditure incurred before incorporation - see their Tax Bulletins 5 and 17, and there has been no change of mind since.

If you propose to go with the view that the expenses can be claimed by the company, and that the company was trading when the individual was doing the work and the company was but a twinkle in the eye of a company formation agent, you should at least do so on the basis of full disclosure, given you are, in both cases, going against published (and, if I may say so, generally well-known) HMRC guidance.

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By deepin
01st Jan 2014 19:18

Hi

Thanks for that.

Could you possibly provide a link to tax bulletin 5 as google failed to find for me, sorry

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10th Jun 2015 12:22

Reimbursed expenses before incorporation

I'm picking up this old topic given jamesbailey's and pauld's comments regarding reimbursement of expenses before incorporation. 

I'm helping a new incorporated limited company to put together their first account. The company was formally incorporated in Feb 2014, but in December 2013 a director of the company had already incurred expenses for the qualifying business activity. There also was a contract in place between the supplier and the representative of this company and the name of the to-be-incorporated-company has also been mentioned in this contract (without actually being already in existence).

Can the director claim back his expenses from December 2013 and hence reflect these  expenses in the first company accounts? 

The company is keen to make use of the SEIS (Seed Enterprise Investment Scheme), so ideally wants to have all expenses reflected in the accounts.

Thanks in advance 

 

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