Pre Start Up Costs – What are they & what can I claim?

Starting your own business is a scary step. Whether it’s a profession you’re familiar with or completely new territory the decision to make the move into self-employment is daunting.

Before you start your business one of the things that could be on your mind will be pre start-up costs. What are they? What can I claim for?

Hopefully this blog will help answer some of those questions.

Whether you are starting a limited company or are a sole trader the pre-trading expenditure is treated as if was incurred on the first day of trading.

The first day of trading can vary from business to business but it is usually on or before the first invoice is issued or first payment is received. However, there are some exceptions, for instance, if a trainer delivers a course and then invoices after the course the business start date would be prior to the first invoice date.

But what can you use in your pre-trade expenditure? It is important to remember, and always keep at the forefront of your mind, that is anything that has been purchased wholly and exclusively for the use of the business.

Most of the time these purchases will be made shortly before you begin trading but the purchases can range back up to seven years prior to the commencement of trade.

The most obvious example of pre start-up costs would be stock, advertising and equipment for the business. However, there are some lesser thought of examples of pre-trade expenditure which can include rent, heat, light and mileage. Although this list is not exhaustive it gives an idea of what you can claim for.

What if I want to use my laptop for the business? You can do this. If your laptop has been previously used on a personal basis, this can be transferred across to the business at its current market value. There are a variety of sites where you can get an idea of how much items are currently worth. This method can be applied to other items that you have previously used on a personal basis such as printers.

It is worth bearing in mind that you will not be able to claim the full annual investment allowance (AIA) on profits before tax. Instead you would need to claim a writing down allowance (WDA) For more information on capital allowances, writing down allowances and how to calculate them visit www.gov.uk/work-out-capital-allowances.

It is also worth remembering that capital expenditure is generally not allowed to be included in pre-start-up costs unless you have purchased equipment, this can be included.

As well as being able to see how much you could offset against any profits, by sitting down and calculating your pre-start up costs you will be able to see how much it will cost to start the business that you dream of.  

Although this blog is designed to give an overview of pre start-up costs, many of them will be specific to the trade that you are looking to start a business in.

If you require any more help or support in calculating your pre start-up costs it would be worth speaking to an accounting professional such as a bookkeeper or accountant.

Running a Business – Why do I need to keep good financial records?

There are many reasons that keeping your accounts organised is beneficial, the main one being that you will be compliant.

HMRC can impose penalties on businesses whose accounts are not in good order and up to date. This penalty is generally in the region of between £250 and £500. However, in extreme cases, for instance if records were deliberately destroyed, the penalty could be up to £3000.
There are a variety of timescales that these records need to be kept for. They include business financial accounts which need to be kept for a minimum of six years. P.A.Y.E. records, including C.I.S. returns, which need to be kept for a minimum of 3 years. Also personal (self assessment) tax returns need to be kept for at least five years, starting after the deadline of 31 January of the applicable tax year.

Another reason for keeping business accounts in good order is to assist with the day to day running of your business. Having your accounts recorded and filed will enable you to locate an invoice for payment, or maybe dispute, with ease.

You will also be able to create an income and expenditure report for your business and this will also help you to budget and create a cash flow forecast. If the forecast is not as optimistic as you imagined it gives you the opportunity do something about changing the forecast, whether it be short term lending or creating more sales.

If you do need to approach the bank, or other financial institution, for any type of lending having a cash flow forecast shows you are in control of your business and the potential future.

Running your own business means you have to be responsible for a lot of different areas, not just what you are passionate about, which in the main is the reason you started your business.

However, although you are responsible it does not mean you have to deal with the business accounts. Hiring a bookkeeper is a way to take away the stress of the financial records and it may not be as expense as you think.