Tax advice of the week: Claim pre-incorporation expenses

If you spend money setting up a business before you have formed a company, the person who runs up the expenses must be the one to claim the tax relief. That's a problem if your company wasn't formed when the expenses were incurred. So what's the solution?

By MoneyWeek

published 6 November 2009

in Features

It's fairly common to run up expenses setting up a business before you have formed a company, says Tax Tips & Advice. However, under the pre-trading expenses rule, the person (or company) who incurred the expenditure must be the one who claims the tax relief. That clearly poses a problem if your company wasn't formed at the time that the expenses were incurred. "So is there a solution?"

Thankfully, yes. Take Jim, an engineer who was made redundant in 2007. After incurring several hundreds of pounds worth of travel expenses, he then set up a company on 1 April 2008. Jim can still claim his pre-incorporation travel expenses from his company, and his company can then claim corporation tax relief in its 2009/2010 accounts.

But where does this leave Jim? The expenses he receives from his company "are taxable unless they relate wholly and exclusively to his employment". But since the firm wasn't even formed at the time he incurred them, "there's no chance that could apply".

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Challenged on this "apparent inequity", the taxman said he "will accept that expenses received by a director in these circumstances are not taxable", even if they date back several years. Just make sure you keep your receipts.