A frequently asked question by company directors is which pre-company formation costs can be claimed back once the company has been incorporated?
According to Section 61 of the Corporation Tax Act 2009 (CTA 2009), assuming any pre-trading expenses are legitimate, “the expenses are treated as if they were incurred on the start date (and therefore a deduction is allowed for them).”
Expenses can be claimed for up to 7 years before a company starts up in business.
Therefore any expenses incurred wholly and exclusively in the course of setting up the business for which the company was later formed can be reclaimed.
Typical pre-formation expenses include: internet and domain name fees, computer equipment and software, accountancy and other professional fees, and travel costs.
Reclaiming VAT on pre-incorporation expenses
A limited company can reclaim VAT it has paid for goods and services before a company has been formed, if they relate directly to the business of the incorporated company. According to HMRC manual VIT3200, there is a six month limit to reclaim the VAT paid for services, and a four year limit for goods.
As you might expect, there are complex rules governing the reclamation of VAT for expenses incurred pre-registration, including how personal and business amounts are apportioned, and the records you must keep. Read this HMRC guide for further information.
Things to bear in mind
- You must ensure that you keep accurate records of any pre-formation expenditure, in order to reclaim these costs from the company once it has sufficient funds in place to repay the expenses.
- Assuming you intend to be VAT registered once you form your company, make sure you always ask for VAT receipts for all your business expenditure, so this can also be reclaimed in the future.
- The actual fee for forming the limited company itself is treated as a one-off capital cost, so it cannot be reclaimed by the company against Corporation Tax. This cost can, of course, be reimbursed to the director who paid for it personally.
- You cannot reclaim other capital expenses from before the company was formed, e.g. interest paid on loans.
- Ask your accountant if you are unsure about the validity of any expenses you have personally incurred prior to incorporation.