ACCA TX ^UK Syllabus B. Income Tax And Nic Liabilities - Relief for pre-trading expenditure - Self-employed - Notes ^{5 / 8}

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 Ltd. made its first sale in their packaging business on 04/05/2024.

Before this they incurred the material expenses of £3,000 on 31/12/2023.

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

Solution:

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

It will be treated as though the expenditure was incurred on 04/05/2024.

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.