Pre-Trading Expenses: What a New Company Can Claim

A new company can claim Corporation Tax relief for many of the costs it ran up before it made its first sale. Qualifying costs from the 7 years before trading began are treated as if they were incurred on the first day of trading, so they reduce the first period's profit. This guide explains which costs qualify, which do not, how to deal with costs a director paid personally, and how the VAT rules differ.

Key takeaways

• The look-back period is 7 years before the trade starts.
• Only day-to-day (revenue) costs that would be allowable after trading began qualify.
• Equipment is dealt with through capital allowances, and the company formation fee is not deductible.
• Costs paid personally by a director can be reimbursed or credited to the director's loan account, with receipts.
• VAT has its own, shorter time limits.

What are pre-trading expenses?

Pre-trading expenses are business costs incurred before a trade has started. Without a special rule they would fall outside the first accounts, because there was no trade yet to set them against. HMRC's Business Income Manual explains the rule at BIM46351. Relief extends to expenditure which is incurred within seven years before the trade begins and which "would have been allowable if incurred after the trade had commenced".

Two conditions follow from that. The cost must be wholly and exclusively for the trade, and it must be a revenue cost, not a capital one. The manual is clear that no relief under this rule is given for capital expenditure.

What usually qualifies

Typical examples, where the cost was genuinely for the new trade:

• market research and testing whether there is demand;
• website hosting, domain names and similar running costs;
• professional fees for business advice;
• business insurance;
• rent on premises before opening;
• travel to meet suppliers or view premises;
• stationery, printing and small consumables.

The test is the same as for any other cost. Our guide to allowable expenses for a limited company sets it out in full. HMRC also notes that stock bought in advance, and costs such as rent paid in advance that relate to a period after trading starts, do not need this rule because they are deducted in the normal way once the company is trading.

What does not qualify

• The cost of forming the company. This is a capital cost of setting up the structure, not a cost of running the trade.
• Equipment and other capital items. Computers, tools, vehicles and machinery are not deducted as expenses, but may qualify for capital allowances.
• Entertaining. Taking prospective customers or suppliers out is not allowable before trading, just as it is not afterwards.
• Personal costs. Anything for you and not the business stays out, however close to the launch it was bought.

How the three types of cost are treated

For equipment, HMRC's Capital Allowances Manual at CA23020 confirms the first-day treatment. Our guide to capital allowances and the Annual Investment Allowance explains how the relief is then claimed.

Costs the director paid personally

New companies rarely have a bank account on day one, so directors often pay early costs from their own pocket. That is fine. The company can reimburse the director once it has funds, or record the amount as owed to the director on the director's loan account. Either way, the company needs the receipt or invoice and a note of what the cost was for.

Costs from before the company was incorporated need more care, because the company did not yet exist to incur them. HMRC's guidance says the relief is only available to the person who incurred the expenditure and starts the trade. Keep evidence that the cost was for the trade the company now carries on and that the company has taken it on, and take advice on anything significant.

VAT on purchases before registration

VAT follows separate rules with shorter limits. GOV.UK's guidance on reclaiming VAT on business expenses says a newly registered business can reclaim VAT on goods bought within 4 years before registration, if it still has them, and on services bought within 6 months. The purchases must be for the business now registered and relate to its taxable supplies, and you need valid VAT invoices. Different rules apply under the Flat Rate Scheme.

Step by step: claiming pre-trading costs

1. Fix the date trading started. Everything else is measured from it.
2. List every cost before that date, with the date, supplier, amount and who paid.
3. Gather the receipts and invoices, in the company's name where possible.
4. Sort each cost into revenue, capital, formation or personal.
5. Remove anything outside the 7 years or not wholly for the trade.
6. Reimburse the director, or credit the director's loan account.
7. Enter the revenue costs in the first accounts as expenses of the first period, and claim capital allowances on equipment.
8. Check the VAT position separately if the company has registered.
9. Tell HMRC the company is active. GOV.UK says you must do this within 3 months of starting your accounting period, once the company is active for Corporation Tax. See our guide to Corporation Tax registration for a new company.

Worked example (illustrative)

"Marlow Coffee Carts Ltd", an illustrative example, is incorporated on 1 June 2026 and serves its first customer on 1 September 2026. Its director pays the following from her own account:

• June: company formation fee, £50.
• June: website hosting and domain, £600.
• July: advice on pricing and licences, £500.
• July: travel to suppliers, £200.
• August: market research at local events, £300.
• August: a coffee machine, £3,000.

The total is £4,650. The company records all of it as owed to the director on her loan account and repays her as cash allows.

In the first accounts, the £1,600 of revenue costs (£600, £500, £200 and £300) is treated as incurred on 1 September 2026 and deducted from the first period's profit. The £3,000 machine is a fixed asset. It is not an expense, but the company claims capital allowances as if it had been bought on 1 September 2026. The £50 formation fee is recorded but gives no Corporation Tax deduction.

The company and figures are invented for illustration and are not a real client.

Common mistakes

• Leaving early costs out altogether because they were paid before the company bank account opened.
• Claiming the formation fee as an expense.
• Expensing equipment when it belongs in capital allowances.
• No receipts. A bank statement line alone does not show what was bought or why.
• Including personal or mixed costs without a clear business reason.
• Applying the 7-year rule to VAT. The VAT limits are 4 years for goods and 6 months for services.
• Forgetting to tell HMRC that the company has become active.

How we can help

We review a new company's early spending, separate revenue from capital, set up the director's loan account correctly and prepare the first Corporation Tax computation and return. Corporation Tax services start from £250 per year on a fixed fee. See our Corporation Tax service, view our pricing, or contact us before your first accounts are prepared.