How to claim pre-trading expenses when you’re a sole trader

Keeping your costs to a minimum is advised when starting a business, because it means you can pay off your start-up costs sooner and then start to make a profit. You also risk losing less money if the business doesn’t get off the ground.

Some sole trader businesses can be launched with little or no money, but in many other cases, starting a new business means having to buy many products and services, and those costs can soon mount up.

Whether it costs a lot or relatively little to start your sole trader business, thankfully, you can claim tax relief for “pre-trading” expenses (AKA “pre-trade” expenses), which can lower your tax bill significantly. Read on to find out:

• What pre-trading expenses are.
• Which pre-trading expenses you can claim.
• How to claim pre-trading expenses.

What are pre-trading expenses?

As the name suggests, pre-trading expenses are costs that result from buying products and services to get your sole trader business ready to start trading. Sole traders usually cover these expenses out of their own pocket when starting their business and it can be easy to forget some of them, so keep a detailed record of all your start-up purchases and expenses, so you can claim them all back.

As long as things are bought “wholly and exclusively” for “the purposes of a trade, profession or vocation” before you start your business then HMRC would class them as “allowable” (ie a legitimate business expense that is subject to tax relief) had your business started trading, you can claim them as if they were an expense incurred on your first day of trading.

Need to know! Tax relief for pre-trading expenses is only available to the person who bought the products or services and who starts the sole trader business.

Which pre-trading expenses can be claimed?

Sole traders can claim a wide range of allowable expenses, including stock/raw materials, rent, mortgage interest repayments, rates, utilities, business insurance, phone and broadband costs, printing, stationery/office costs, bank, loans and credit card charges. Other allowable expenses include advertising, marketing, accountancy/professional fees, vehicle, travel and accommodation costs, as well as safety wear and business-branded clothing.

You may well have needed to pay some of these before registering as self-employed and/or starting your sole trader business, creating pre-trading/trade expenses in the process. For example, you might have bought raw materials to create products to show to potential customers, or you may have had leaflets, brochures or business cards designed and printed. You could have made many phone calls.

Maybe you paid a designer to create a logo for you or you needed to buy a website domain or website subscription. You may have needed to make business-related journeys, using your own vehicle or by public transport, to visit potential customers or suppliers. Potentially, these and many others could be claimed as pre-trading/trade expenses.

Need to know! Visit government website GOV.uk for more information about allowable expenses when running a sole trader business.

When should you claim costs as capital allowances?

• If you use “traditional accounting” methods (ie where you record income and expenses by the date you invoiced or were billed), you claim capital allowances when you buy assets you keep to use in your business, such as equipment, machinery, tools and business vehicles (cars, vans, and lorries).

• If you use “cash basis accounting” methods (ie you only record income or expenses in your accounts after you receive money or pay a bill) and buy a car for your business, you claim this as a capital allowance, but all other assets you buy and keep in your business should be claimed as an allowable expense.

Top tip! If you’re registered for VAT, you may be able to claim back the VAT you’ve paid on pre-trade products and services you’ve bought.

How to claim pre-trade/trading expenses

As with allowable expenses when running a business, you must have proof to support your claim for pre-trading expenses. This usually means an invoice or detailed sales receipt showing what you’ve bought, when and how much you’ve paid. You don’t have to submit these with your Self Assessment tax return, but HMRC can later request evidence of any expense you claim. Fraudulent claims can lead to serious penalties.

Detailing all of your start-up purchases and costs in accounting software or even a simple spreadsheet will make later claiming pre-trading costs much simpler and quicker. 

Basically, you claim Income Tax relief for your pre-trade/trading expenses as if they were allowable expenses in your Self Assessment tax return for your first year of trading.

These are deducted, together with any tax allowances to which you’re entitled, before your tax bill for your first year in business is calculated. HMRC will contact you to tell you how much tax you owe.

Need to know! If you complete and file your first Self Assessment tax return when required, but later remember a pre-trade expense that you failed to claim for, you have up to 12 months to amend your tax return.

This article was brought to you by GoSimpleTax

Record Income, Expenses and tax submission all in one.

It is the solution for non-residency returns, the self-employed, sole traders, freelancers and anyone with income outside of PAYE.

The software will provide you with hints and tips that could save you money on allowances and expenses you may have missed.

Get started with GoSimpleTax today.