Pre-Trade Expenses

I’ve only just registered my business. Can I claim pre-trade expenses which I’ve paid for personally? And can I claim back old VAT?

The short answer is “it depends”.

The basic principal is that “if you paid for something in the knowledge that you were starting a business, and the prime motive for buying this something was to enhance that business, then it is a business expense” and you can normally claim for it. That applies to both goods and services, and in order to claim the full cost you must satisfy both parts of this test, that (a) there was a business prime motive and (b) the purchase was within the three years preceding day one of the business.

Alternatively, if (for example) you bought your desktop computer and printer four years ago, and you introduced them into the business on day one, then you can claim their “fair market value” on day one as an allowable expense. This applies to goods only. If you cannot claim them under the three year rule mentioned above, then claim them under the fair market value rule, and use eBay or GumTree to work out what a fair market value for your something is. You can also claim for (for example) a CamCorder which you bought for the family two years ago, but then introduced into the business – it may fail the “business prime motive” test at the date of purchase, but it could still qualify under the “fair market value” rule as long as it is now a business asset and is not a family asset!

In either case, you need to submit a claim form to your business and have the precise amount reimbursed from the business account to your personal account. This applies, even if you are the only director/employee/worker. Documentation and adequate evidence are required in support of all claims.

If you’re thinking of introducing your car into your new limited company, you probably shouldn’t. The costs of tax and national insurance, on the benefit in kind of having a company car, usually mean that it’s actually more cost effective to run the car personally and to claim a business mileage allowance from your company.

Before doing the claim form, any VAT registered businesses should consider these additional rules. You can claim for the VAT on goods (and in limited circumstances on services too) provided that they:

• were purchased within the three years preceding the date of your VAT registration
• are still in the possession of the business on the date of your VAT registration
• are actually used in the course of the business; and
• satisfy the business prime motive test

Note that three years preceding the date of your VAT registration is only the same as three years preceding the commencement of the business if you were VAT registered from day one. There’s a subtle difference for businesses which waited a few months (or a few years) before applying for their VAT registration!

There are further guides on this site which may help you:

What is a business expense?
A Pre-Trade Expenses Flowchart
The mechanics of how to claim back expenses (current & pre-trade)