What costs can be claimed before a Limited Company is formed?

Question:

“I am going to be starting contracting in the next couple of months as an IT consultant, through my own limited company. The company won’t be formed for about two months but I want to buy some equipment and software before then – will I be able to claim the costs back through my company even though it isn’t formed yet? Is there any effect on corporation tax?”

shutterstock_222709051

Answer:

A prospective company will frequently need to make purchases before any trade has taken place in order to be in a position to generate income. This, coupled with the fact that nothing can be purchased in the name of a limited company until it exists, make this scenario a fairly common occurrence.

The good news is that the accounting treatment and treatment for corporation tax purposes is pretty reasonable. HMRC allow pre-start-up expenses (incurred within 7 years of the day you start trading) to be claimed in your first accounting period.

There are a number of conditions that must be met:

  • You can only claim for expenses incurred ‘wholly and exclusively for the purpose of the trade’ e.g. specific costs to help you carry on your trade as an IT contractor.
  • You cannot get corporation tax relief for the cost of setting up the company, as this is treated as a dis-allowable capital expense.
  • If an existing company incurs costs related to setting up a new company, these costs cannot be claimed by the new company as it is a separate entity.
  • Certain costs cannot be claimed until you have started trading, the most common of these being training courses.

In this case there would be no issues with claiming equipment and software against the first years trading profits providing the equipment and the software is wholly and exclusively for the purposes of the IT contracts the company is going to engage in. The equipment would be covered by the Annual Investment Allowance.

It is recommended to keep robust records of all items purchased and some detail as to what they were purchased for as to evidence that they were not of a personal nature.