A business must be trading to qualify for tax relief on expenditure. However, thankfully, special rules exist for start-up costs.
Expense but no tax relief
Rome wasn’t built in a day and businesses don’t start overnight, usually a good deal of planning, not to mention expense, is involved. Depending on the type of business you’re getting into, before you can start trading there might be premises to find, stock and equipment to purchase, plus a stack of smaller expenses. For tax purposes none of these is tax deductible unless or until the business starts to trade, i.e. is open for business.
Similar rules for companies and unincorporated businesses say that start-up costs, which HMRC refers to as pre-trading expenditure, is treated as if it were incurred on the first day they trade. The usual rules then apply so that day-to-day costs, such as travel, telephone and stationery, are deducted from income, while capital allowances are given for equipment such as machinery and vehicles. The golden rule to remember is that all expenses must be wholly and exclusively for the purpose of the business.
If you run around finding suppliers, hiring staff and so on, it’s only fair for your company to pay you a salary. As long as it’s reasonable for the time you spend in setting up the business and at a fair rate, HMRC won’t object to you including it as a deductible pre-trading expense. However, this isn’t relevant if your business is not a limited company, because you’re taxed on profit the business makes and not what you draw from it.
The pre-trading expenses rule applies to expenses paid up to seven years before trade commences. Keep a spreadsheet / list of everything, along with your receipts as proof to substantiate your claim. That’s good news if it takes a long time to get your project up and running.