It is likely that expenses will be incurred in setting up a business prior to the commencement of that business. The opportunity to claim relief for pre-trading expenditure should not be overlooked.
For income tax purposes, relief is available for pre-trading expenditure if:
• it was incurred within seven years of the start of the actual trade;
• had the expenditure been incurred after the commencement of the trade, it would have been allowed as a deduction; and
• it is not otherwise deductible in computing profits.
The pre-trading expenditure is treated as incurred on the first day of trading. Consequently, it is taken into account in computing the profits of the first accounting period.
Relief is similarly given for corporation tax purposes.
It should be noted that different rules apply to capital expenditure incurred before the start of the trade.
Benny starts trading on 1 June 2012. In preparation for the start of his business he incurs various expenditures that would have been deductible had they been incurred after trading commenced.
The pre-trading expenditure amounts to £2,750. This is treated as incurred on 1 June 2012 (the first day of trade) and deducted in computing his profits for 2012/13.