TXF6 UK
Syllabus B. Income Tax And Nic Liabilities B3. Income from self-employment

B3e/E2b. Relief for pre-trading expenditure 5 / 11

Syllabus B3e/E2b)

Recognise the relief which can be obtained for pre-trading expenditure.

When does trading commence?

Trading commences on the first day on which a trader makes a sale.

However, the trader would have incurred expenditure before this date, for example, advertising expenditure and/or rent paid in advance.

  • This expenditure incurred before trading has commenced is known as “pre-trading expenditure”.

    Pre-trading expenditure will get tax relief by being treated as though it was incurred on the first day that a sale is made, if the following conditions are satisfied.

Conditions for pre-trading expenditure to be allowable

  • 1) It is incurred within 7 years of the commencement of the trade.

  • 2) It is an allowable expense.

  • For example, if goods were purchased for sale for the business 4 years before the business had its first sale; this purchase price will be deducted from the first profits also.

Illustration:

Manny made his first sale in his packaging business on 04/05/2020.

Before this he incurred the material expenses of £3,000 on 31/12/2019.

  • Will this expenditure be deducted from the sales revenue to arrive at tax adjusted trading profit?

Solution:

Yes, this expenditure will be deducted from his sales revenue to arrive at the tax adjusted trading profit. 

It will be treated as though the expenditure was incurred on 04/05/2020.

This is because money spent on materials used in the business are an allowable expense and it was incurred within 5 months of the trade starting.