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.
Replies (11)
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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.
Trading does not begin
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.
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".
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.
.
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.
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.
Hi
Thanks for that.
Could you possibly provide a link to tax bulletin 5 as google failed to find for me, sorry
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
Hello
My wife has started selling on line and registered with companies house in February 2017. She sells on eBay and started selling in October 2016. She has received a letter from HMRC to register for corporation tax. It's asked when she started to trade.
Can she put down the sales from October as she starting selling in October 2016.
Thank you.