Pre-Trading Expenditure

I have just started a business selling high value computer equipment and need to register for VAT because of a large order already received. I have purchased assets and stock for use in the business and also incurred expenses for services such as accounting and advertising before I started trading. Can I now claim any tax relief against my business income and also reclaim any of the VAT I have incurred for these expenses?

1st January 2011

It is common to incur business expenditure prior to the commencement of trade. Where this happens, providing that the expenditure is wholly and exclusively for business purposes and incurred within seven years of the commencement of trade, it may be claimed as a deduction in the first year of trading. The expenditure is treated as if it has been incurred on the first day of trading and forms part of the profit or loss for that first period of accounts.

With regard to VAT, you need to be aware that the rules differ for the supplies of goods compared to services. When a business registers for VAT, if it holds any goods at the date of registration that were purchased within the previous 4 years, the VAT suffered on the purchase of those goods can be reclaimed. Where services are concerned though, only those incurred within 6 months of registering for VAT can be claimed. In either case, in order to reclaim the VAT incurred prior to registration you must hold a valid VAT invoice or receipt showing the relevant dates and amounts.

There are many considerations to take into account when a business first registers for VAT, including certain aspects for directors of limited companies. It is therefore advisable to seek professional advice before you register, as there are also special schemes available for certain industry sectors which could be beneficial to you. Your local TaxAssist Accountant will be happy to discuss all aspects of VAT registration and be able to give guidance on special schemes that may be available to you.

By Jo Nockels

Disclaimer: Advice shared in this blog is intended to inform rather than advise. Taxpayer's circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this forum, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.

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