Pre-incorporation expenditure

Those expenses incurred by you personally before your company was formed (eg paid from your personal savings).

This situation is trickier because HMRC’s rules indicate that the person (or company) who paid for the expenditure must be the one who claims the tax relief.

Pre-incorporation expenditure - an example:

Leonard is a consultant. He was made redundant in July 2023 and decided to set up his own consultancy business. Before incorporating his new company, he paid £1,500 on travelling to negotiate contracts with potential clients and £3,500 on new equipment specifically to enable him to run his company.

He then formed his own company - McCoy Enterprises Ltd - on 1 January 2024. As Leonard and McCoy Enterprises Ltd are legally different entities, how does Leonard avoid any potential tax issues with HMRC?

Essentially when Leonard paid for this expenditure he ‘loaned’ £5,000 to McCoy Enterprises Ltd. This ‘loan’ to McCoy Enterprises Ltd is placed as a ‘credit’ in his director’s loan account with the company.

It should then be possible to achieve the following results:

McCoy Enterprises Ltd can claim tax relief for this expenditure in its first accounting period ending 31 December 2017.
Leonard can receive a repayment of his £5,000 ‘loan’ tax-free from McCoy Enterprises Ltd as and when funds permit.

However, it is important to kept detailed records (eg receipts) to support any company pre-trading expenditure should this be queried by HMRC.