pre trading expenses

pre trading expenditure for limited company

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Directors of newly incorporated trading company have incurred significant expenditure on goods prior to incorporation in relation to the company's trade - can the company reimburse the directors for this pre-trading expenditure and can the input tax be reclaimed?

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By SXGuy
12th Jul 2021 10:41

How can it be pre-trading expenses if the company didn't exist prior to incorporation?
If the company had incorporated prior to trading, and then you incurred expenses, that would be pre-trading.

So my vote no.

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Replying to SXGuy:
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By lionofludesch
12th Jul 2021 13:12

SXGuy wrote:

How can it be pre-trading expenses if the company didn't exist prior to incorporation?
If the company had incorporated prior to trading, and then you incurred expenses, that would be pre-trading.

So my vote no.

Pre-incorporation is definitely pre-trading.

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Replying to lionofludesch:
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By Tax Dragon
12th Jul 2021 13:51

lionofludesch wrote:

Pre-incorporation is definitely pre-trading.

Unless, of course, the trade pre-dates incorporation.

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Replying to Tax Dragon:
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By lionofludesch
12th Jul 2021 14:49

Tax Dragon wrote:

lionofludesch wrote:

Pre-incorporation is definitely pre-trading.

Unless, of course, the trade pre-dates incorporation.

Imho, that wouldn't be the company's trade.

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Replying to lionofludesch:
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By Tax Dragon
12th Jul 2021 16:00

It could be. More specifically, it was in Hepburn. (That may well be one of those cases that gets used and abused [i.e. it's possibly quite fact-specific and, a bit like Arctic, is taken to be of much wider application than is actually the case], but it does show it can happen.)

Dulls may have other cases in mind too.

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Replying to Tax Dragon:
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By The Dullard
12th Jul 2021 16:41

No. It was Hepburn. If there is a clear contemplation of trading through a corporate vehicle, then pre-trading expenses incurred pre-incorporation would be bona fide pre-trading expenses for the company in my view. Hepburn went further and accepted, on the facts, that monies she had invoiced prior to incorporation were, in fact, company income. Audrey's a wag.

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Replying to The Dullard:
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By Tax Dragon
13th Jul 2021 06:43

Did it take [a lot] more time to set a company up in those days? These days when it can be done in minutes, an obvious question would be why, if you were earnestly contemplating trading through a corporate vehicle, you hadn't set the corporate vehicle up.

The link in the first reply includes discussion of a case where expenses had been incurred years before the company was established. IMHO these were not expenses of a company. They were expenses of an individual who had not yet decided whether to use a company. (Relevance: an individual might be 'contemplating', in your words, but I think it needs to be more than that.)

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Replying to Tax Dragon:
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By The Dullard
13th Jul 2021 11:49

When I used the word "contemplation" I preceded it with the word "clear". Do pay attention.

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Replying to The Dullard:
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By Tax Dragon
13th Jul 2021 12:49

Yes I think I knew what you meant. But I wasn't, I'm not, sure that "contemplation" is the most appropriate word.

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By The Dullard
12th Jul 2021 14:49

This is screaming for a Venn diagram.

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By Leywood
12th Jul 2021 10:54

Question flip flops between pre trading and pre incorp. Is there an element of both?

Presume this is not incorp of a sole trade? Just an idiot who didnt ask for advice first?

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By The Dullard
12th Jul 2021 11:48

Yes. It has even been found at tribunal that you can have pre-incorporation receipts.

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By nick farrow
12th Jul 2021 14:16

thanks all i will get back to you with the answer

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By nick farrow
13th Jul 2021 14:31

I am now happy that
a) the director may legitimately be reimbursed for the business expenses incurred personally in the 4 or 5 months pre-incorporation whilst getting ready to trade
b) input tax may be claimed following Koolmove Ltd - see here :https://www.accountingweb.co.uk/tax/business-tax/vat-pre-incorporation-l...
c) where the expenses reimbursed include plant & machinery there may still be a case for AIA but this remains moot
d) the revenue expenses will be deductible in the normal way that pre-trading expenses are deductible

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Replying to nick farrow:
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By Tax Dragon
13th Jul 2021 15:10

It is worth noting that in both cases mentioned (Hepburn and Koolmove) there were reasons for the delay in establishing the company. Obviously, as Dulls says, in any event there has to have been a clear (and demonstrable) intention to establish the company at the time the expenses were incurred.

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Replying to Tax Dragon:
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By The Dullard
13th Jul 2021 15:37

Why does it need to be demonstrable? Isn't the standard of proof on the balance of probabilities.

If it is my evidence at tribunal that when I formed the intention to start the trade, I always intended to operate it through a limited company, but I started spending money for the purposes of the trade (as agent for the yet to be formed company) before I'd got around to forming the company (a formality that might have proved unnecessary if, for example, event X didn't happen). The facts show that X happened, I formed the company and started to operate the trade through the company. HMRC offers no evidence to contradict mine. Why would the tribunal not accept my evidence to be true?

I can produce a memorandum that I actually wrote down three seconds after first forming the intention to carry on the trade and operate it through a company, which was a full two days before I spent any money for the purposes of the trade, and swear an affidavit before a notary that I produced that memorandum at that time if you'd like!

On the clear intention point, having thought about it, I can see a way of arguing the matter based on agency (well, it's possibly more Iranian trust law) if the intention was woolly, potentially even if it hadn't been considered. Hepburn was based on accounting evidence and substance over form.

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Replying to The Dullard:
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By nick farrow
13th Jul 2021 15:47

thanks Dullard - the now directors of the company have whatsapp messages discussing the venture prior to incorporation which i am sure is good enough for their purposes

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Replying to The Dullard:
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By Tax Dragon
13th Jul 2021 16:37

My error - I should have expressed it as a double negative. (But sometimes I struggle counting to two and incorrectly abbreviated.)

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