How Do Pre Trading Expenses Work and What Can I Claim

Introduction

When launching a new business, there are often costs incurred before you make your first sale. Whether it is setting up a website, buying equipment, or registering your company, these early outgoings can add up quickly. The good news is that HMRC allows many of these to be claimed as business expenses once you start trading.

Understanding which pre-trading expenses are allowable, how they are treated for tax, and how to record them properly can help you reduce your first tax bill and maintain accurate accounts.

What are pre-trading expenses

Pre-trading expenses are costs you pay before your business officially starts trading. In simple terms, these are the items or services purchased while preparing to launch, such as equipment, legal advice, marketing materials, or initial rent.

HMRC defines the start of trading as the point at which your business begins actively carrying out its core operations. For example, a retailer begins trading when they start selling products, while a consultant begins when they start providing advice or billing clients.

Any legitimate business expenses incurred up to seven years before this date can potentially be claimed as pre-trading expenses, provided they would have been allowable if the business had already been trading.

Who can claim pre-trading expenses

Both sole traders and limited companies can claim pre-trading expenses, though the method differs slightly depending on your structure.

Sole traders and partnerships: These claims are made on your first Self Assessment tax return.

Limited companies: These expenses are recorded in your company’s accounts and deducted when calculating taxable profits for corporation tax.

The key condition is that the expenses must be “wholly and exclusively” for the purpose of the trade. Personal or mixed-use costs are not allowable.

Examples of allowable pre-trading expenses

You can usually claim the same kinds of expenses that would be deductible during normal trading. Common examples include:

Market research, advertising, and branding costs

Travel expenses for business purposes (excluding commuting)

Legal, professional, and consultancy fees related to setting up the business

Rent, utilities, and insurance for business premises

Stationery, office supplies, and printing costs

Website design, hosting, and software subscriptions

Equipment, machinery, and tools

Business bank charges and interest on startup loans

For example, if you spent £2,000 on computer equipment and £800 on a website before opening your business, both could be claimed as pre-trading expenses, provided they were solely for business use.

Capital items versus running costs

It is important to distinguish between capital and revenue expenses when claiming pre-trading costs.

Revenue expenses are the regular running costs of a business, such as rent, marketing, and utilities. These are usually deducted in full from profits.

Capital expenses are one-off purchases of assets that will be used over several years, such as laptops, tools, or machinery. These cannot be deducted in full immediately but may qualify for capital allowances such as the Annual Investment Allowance (AIA).

If an asset bought before trading is still in use when trading begins, you can claim capital allowances on its market value at that point, not necessarily what you paid originally.

How to record pre-trading expenses

Keep clear and detailed records of all pre-trading expenses, including receipts, invoices, and bank statements. Note the date, purpose, and supplier for each transaction.

When your business starts trading, transfer these costs into your accounting records. Most accounting software allows you to enter them as “pre-trading” or “setup” expenses so that they are deducted in your first year’s accounts.

If you were a sole trader before forming a limited company, be careful when transferring assets or expenses. Items purchased personally before incorporation can usually be sold or introduced to the company at market value, with that amount credited to your director’s loan account.

When trading officially starts

Defining the official start date of trading is important because it determines when you can begin claiming expenses. HMRC looks for evidence of active trading such as issuing invoices, completing sales, or promoting goods and services for profit.

Preparation alone does not usually count as trading. For example, registering a domain name, meeting suppliers, or designing marketing materials are preparatory activities. The trading date would start when you begin operating commercially.

In some cases, determining the start date can be subjective. If in doubt, seek professional advice to ensure your timing aligns with HMRC expectations.

Claiming for pre-trading expenses as a sole trader

If you are self-employed, include pre-trading expenses in your first Self Assessment return. HMRC treats them as if they were incurred on the first day of trading. This means they can be deducted from your first year’s profits to reduce your tax bill.

For example, if you spent £3,000 before starting your business and made £20,000 profit in your first year, you would be taxed on £17,000.

If your expenses exceed your first year’s income, the loss can often be carried forward or used to reduce other taxable income, subject to HMRC rules.

Claiming for pre-trading expenses as a limited company

For limited companies, pre-trading expenses are recorded in your company’s accounts and treated as if incurred on the first day of trading.

If you paid for items personally before the company existed, you can usually reimburse yourself once the company is formed. These amounts are credited to your director’s loan account.

For example, if you personally paid £1,500 for computer equipment before the company started trading, the company can record it as a business asset and owe you £1,500. When funds allow, you can withdraw that amount from the company tax-free.

What cannot be claimed

Not every cost you incur before trading qualifies for tax relief. Common disallowed items include:

Personal living costs such as clothing, meals, or rent for your home (unless you use a home office)

Training for new skills unrelated to your existing trade

Fines or penalties

Entertainment or hospitality for clients

Costs with a significant personal element, such as mixed-use travel or phones

In general, if the expense is partly personal or not directly related to generating business income, it will not be deductible.

Tips for managing pre-trading expenses

Keep all receipts and organise them by category from day one.

Separate personal and business spending, ideally using a dedicated business account.

Record the reason for each purchase to prove business intent.

Identify which costs are capital and which are revenue to claim them correctly.

Seek professional advice if you are unsure whether an expense is allowable.

Common pitfalls to avoid

Many business owners miss out on legitimate tax deductions by failing to keep proper records or misclassifying their expenses. Others mistakenly try to claim personal costs as business-related, leading to HMRC challenges.

Avoid backdating receipts or inflating expenses. HMRC can disallow claims that lack evidence or appear excessive for your business type. Keeping everything documented from the start protects you during any review or inspection.

Conclusion

Pre-trading expenses are an important and often overlooked part of starting a business. You can usually claim back many of the costs you incur before trading begins, from marketing and legal fees to equipment and software.

By understanding how these expenses work, recording them properly, and distinguishing between capital and revenue costs, you can make sure you claim everything you are entitled to. Doing so can reduce your first year’s tax bill and give your new business a stronger financial start.