Expenses

Personally paying for expenses

You may have incurred expenses in getting your business up and running before setting up your company but the receipts for these will be in your name. Can the company now claim a tax deduction for these, and will this affect your tax?

In the beginning

Before you set up a company you wanted to be sure that you had a viable business. So, you personally paid for travel and other costs to carry out market research etc. before forming the company through which your business would run. But can tax relief be claimed for these costs and who should claim it?

Two types

This so-called pre-trading expenditure for companies can be incurred in two ways:

• by an individual before the company was formed

• by the company after it was formed but before it started to trade.

The company paid

In the latter case the rule is fairly straightforward. If the expenditure would have been allowable for tax had the company been trading at the time it was incurred, then a tax deduction can be claimed for it in the company’s first accounts. s.61 of the Corporation Taxes Act 2009 says that the expense is to be treated as if the company had incurred the cost on its very first day of trading. But the position is more tricky if a would-be director or employee paid the expense before the company was formed.

The director paid

You would think that if the expense was incurred by a director-to-be for a legitimate business purpose, it should qualify for tax relief under the pre-trading expenses rule. The problem is that the Taxman’s rules say that the person (or company) who incurred the expenditure must be the one who claims the tax relief. No matter how you look at it, the company and the individual are clearly not the same person. So is there a solution?

Expenses claim

Example. Jim was an engineer who after being made redundant in 2007 decided to set up his own workshop. In the process of getting the business going he paid several hundred pounds on travel to negotiate with potential customers etc. Jim went ahead with the business, and on advice from his accountant he formed a company Jimeng Ltd on April 1 2008. Even at this stage in October 2009 Jim can claim the pre-incorporation travel expenses from his company. And as this is a current cost, the company can claim CT tax relief for this in its 2009/10 accounts. But where does that leave Jim?

Expenses of employment?

The expenses Jim receives from his company are taxable unless they relate wholly and exclusively to his employment. But the company wasn’t even formed at the time he incurred them, so there’s no chance that could apply. We decided to challenge the Taxman on this apparent inequity. After consideration the official line is that the Taxman will accept that expenses received by a director in these circumstances are not taxable. That’s good news for common sense!

Tip. If you paid out business expenses on behalf of your company before it was formed you can reclaim them tax-free from your company even if they date back several years. But make sure you have receipts etc. to support your claim