Just about everybody who opens up a new business incurs a few startup costs. They're likely to include things like legal work, logo design, brochures and stationery. So, when it's time to crunch the numbers on your first year's trading, how will you know which start-up costs you can claim on taxes?
Let's kick off with the basics. Like when, exactly, is your business's start date? The HMRC needs to know this for tax purposes. As a rule, this is when you open your doors or send an invoice.
For sole traders, if this happens on, say, September 9th, then your first set of accounts will run from September 1st to the end of the tax year in April. In subsequent years, they'll run from April to April.
If you're a limited company, you'll likely use your company registration date as the date you started trading. Unlike sole traders, you'll have your own financial year. If you began trading on September 9th, your first accounts will run from September 9th to the end of September the following year. In subsequent years, they'll be dated October 1st to September 30th.
So, what happens if you have to splash the cash before you've made any sales? Can you write-off any of that money against tax?
Maybe you need stationery, business cards and persuasive marketing literature. Or perhaps you've racked up some mileage in your car visiting potential clients (get this handy app for logging your business miles here).
Worry not. You can include the majority of these startup costs, which HMRC describes as pre-trading expenditure.
Whether you're a limited company or a sole trader, HMRC treats this pre-trading expenditure as if you'd spent it on your very first day's trading. You can go back as far as seven years before you started your business provided the expenses relate exclusively to the business and would be the kind of things you'd claim after you start trading.
Let's say you're a sole trader and made your first sale on 9th September. But you had bills for advertising, web hosting and phone calls dating back to June. Your accounts would begin on September 9th and your pre-trading bills would be entered for that date.
If you need to buy larger items, such as machinery, they'll be treated as assets in your accounts, so you'll want to know you can include them for tax purposes. The cost of these assets will be spread over a number of years, with depreciation spread through capital allowances.
If you buy assets before trading that will be used wholly within the business, you can claim annual investment allowance (AIA) in the first year - that's 100% of the asset value. Make sure you date your claim for capital allowances on the day you started trading, not the date you bought the item.
So how about if you want to use personal items in your new business? Maybe your personal laptop? This will also be seen as an asset, but it's treated slightly differently.
You'll transfer personal assets at market value. That means if your laptop was £1500 when bought new three years ago, you'll need to adjust to its current value.
In this instance, you won't receive the 100% annual investment allowance (AIA). Instead, you'll be able to claim the Writing Down Allowance (WDA) that applies to plant and machinery.
Note that there are some business startup costs that can't be written off. For example, pub licences and registration, repairs and improvements, and training courses.
In general, then, you can claim business startup costs for items going back seven years, provided they'd be allowed after you started to trade.