How To Claim Back Pre-Incorporation Expenses: A Guide for UK Freelancers & Contractors

Unlock Hidden Tax Savings from Your Early Business Expenses

Written by 
James Morgenstern
Updated on
April 30, 2024

As a freelancer or contractor in the UK, it’s natural to incur costs before officially setting up your limited company. You're not alone if you've been actively wondering, "Can I reclaim these pre-incorporation expenses?"

The short answer is yes, you can, and understanding how can lead to significant tax savings, keeping more money in your pocket.

Pre-incorporation Expenses: The Basics

Before diving into how you can reclaim your expenses, let’s clarify what qualifies as a pre-incorporation (often called pre-trading) expenses. Pre-incorporation expenses are costs you had to pay out of your own pocket before your limited company was legally formed.

Common examples include equipment (such as your laptop), travel expenses, domain names, website hosting or anything else necessary to establish your business.

Why should I claim pre-trading expenses?

Pre-trading expenses are considered to have been incurred on the first day of trading, so by claiming these costs through your business, you're reducing your company's profit, which in turn, lowers your corporation tax.

The current rate of Corporation Tax is charged at between 19% to 25% (depending on how much profit you make). This means for every £100 of allowable expenses claimed, you'll save between £19 to £25 in tax. Depending on your expenses, this can really add up!

For example: As a freelance designer, you purchased a new laptop and  tablet for £2,000 before setting up your limited company. If these items were solely for your business, you can claim them as expenses, saving you between £380 to £500 on your tax bill!

What's the catch?

That's a common question from contractors and freelancers when we inform them about deducting pre-trading expenses. Our response is straightforward: provided the expenses are valid business costs and they occurred no more than seven years prior to the date of incorporation, there are no hidden drawbacks.

The HMRC Rules on Reclaiming Costs

Here's the good news: HMRC recognises that businesses incur costs before they formally exist. According to tax rules, you can claim back expenses incurred for up to seven years before your company was incorporated.

Allowable Expenses: What Qualifies?

As with all business expenses, to be tax deductible, they must be ‘wholly and exclusively for the purpose of business’.

That means you can’t buy a new tablet for yourself, then later start using it for business and claim back the cost. However if the laptop is wholly and exclusively for business use it would tax allowable to claim.

Another way to think about this is that any expenses you claim must be intended for the company’s use only, and not bought initially for private use.

Examples of allowable expenses

  • Computing costs: Expenses on items like computers, laptops, and printers can be deductible.
  • Software Expenses: Essential business software, including applications like Microsoft Office, can be claimed as business expenses.
  • Web Hosting and Domain Costs: Expenses related to establishing and maintaining an online presence, including websites are deductible from Corporation Tax.
  • Travel Expenditures: Any travel costs to meet potential clients or suppliers incurred before your company's incorporation start can be counted as pre-incorporation deductible expenses.
  • Office Space Costs: Expenses related to office space rental or the use of a home office for business purposes can be reimbursed.
  • Office Supplies: Expenditures for stationery, postage, and printing that are essential for business operations can also be deducted.
  • Professional Service Fees: Expenses for services such as accounting, legal advice, and architectural consultations are deductible.
  • Business Insurance Costs: Costs for necessary insurance coverage like professional indemnity and product liability are claimable.
  • Professional Membership Fees: Annual fees for maintaining professional credentials or memberships with industry organisations are deductible as business expenses.

Non-Claimable Pre-Incorporation Expenses

Although many pre-incorporation costs are allowable, certain expenses are not eligible to claim against corporation tax as pre-incorporation expenses.  

These include:

  • Companies House fees for company incorporation*
  • Client entertainment expenses, such as meals
  • Fines and penalties

*The cost of the company formation is considered a one-off capital expense. However, you can reimburse yourself if you personally paid for the Companies House registration fee.

Reclaiming VAT

If you choose to register your business for VAT, you may also be able to reclaim VAT you were charged on purchased goods and services for even further tax savings. HMRC guidelines state that you can reclaim VAT on goods up to four years after purchase, and on services up to six months after purchase.

Unsure if you should register for VAT? Check out our article on 'Should I voluntarily register for VAT'.

How to Claim Pre-Incorporation Expenses

Once your business is incorporated, you can add these expenses to your business's accounting software so that they reduce your corporation tax bill. Essentially, you'll include them in your company's first set of accounts and will be able to pay yourself back for these out of pocket costs.

However, the rules can be intricate, and that's where a platform like Mighty becomes invaluable. With Mighty, you easily can add and upload these expenses in a click, with experts on hand if you have any questions.

Claiming pre-incorporation expenses in Mighty

  1. Find the receipt/invoice for any valid pre-incorporation expense
  2. Go to 'Personal Expenses' in Mighty and click 'Create Personal Expense'
  3. Click 'Upload Receipt' and Mighty will automatically scan and input the key details from your invoice. Check it's correct, and hit save.
  4. Alternatively, you can simply enter the expenses' details manually and hit save.

And that's it your personal pre-incorporation expenses are now saved in Mighty and your accounts - reducing your tax bill and ready to be repaid to you.

Claiming Pre-Incorporation Expenses In Mighty

Documentation Is Key

Regardless of whether you use Mighty, or any other bookkeeping software, to successfully claim these expenses, you must keep records of each expense. HMRC may ask for evidence, like receipts or invoices, to support your claims. Without proper documentation, you might find your claim being questioned or denied.

Moving Forward with Confidence

While the process might seem straightforward, accounting for pre-incorporation expenses can be complex, and mistakes can be costly. With Mighty, the sophisticated software not only respects the complexities of tax law but simplifies them for you. It's the ideal solution for freelancers and contractors who want to ensure they claim all expenses they're entitled to without diving into the deep end of tax law.

Explore how Mighty can transform your whole accounting process and aid you in claiming back your pre-incorporation expenses. Visit Mighty at https://www.mightyaccounting.com/ — where accounting is made fast, easy, and affordable, giving you peace of mind and more time to focus on your work.

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