If you’re setting up as a sole trader, you may have already spent money on tools, software, marketing or equipment before you actually started trading.
The good news is that you can still claim many of these costs.
You can normally claim qualifying pre-trading expenses if you incurred them in the seven years before your trade began. The fundamental test is whether the expense would have been allowable if you had incurred it after you started trading.
In this guide, we explain how the seven-year rule works, which costs qualify and how to deal with them in your first Self Assessment return.
HMRC’s stance on pre-trading expenses
HMRC allows certain expenses incurred before a business starts trading to be treated as if they were incurred on the first day of the trade.
The rule applies to expenditure incurred during the seven years before trading begins, provided the cost would have been deductible if incurred after the business started.
You can read the official guidance here: BIM46351 – Pre-trading expenditure
The important point is that the clock runs back from the date you started trading, not the date you registered as self-employed with HMRC.
You can start trading before you register. Read more about what counts as your business start date.
How far back can you claim?
You can claim qualifying revenue expenses if you incurred them in the seven years before the trade began.
Normal tax rules still apply, and typically speaking, the expense must:
- Have been incurred wholly and exclusively for the trade
- Be the sort of expense that would have been allowable after trading began
- Relate to the same trade you eventually started
- Not already have been claimed elsewhere
The treatment of equipment depends on your accounting method. Under cash basis, qualifying purchases such as computers, tools and office furniture are normally deducted as expenses, including qualifying pre-trading costs when the trade starts. Under traditional accounting, they may instead qualify for capital allowances. Cars have separate rules.
If the business you eventually start is substantially different from the one you were preparing for, earlier expenditure may not qualify.
Examples of pre-trading expenses you can claim
| Expense type | Allowable? | Notes |
|---|---|---|
| Laptop or tools bought for the business | Yes | Normally deductible as an expense under cash basis; capital allowances may apply under traditional accounting once the asset is used in the trade. |
| Business-related training taken before trading | Usually no | Training undertaken to acquire the skills needed to start a new trade is not normally deductible. See our guide to training expenses. |
| Website hosting or setup costs | Usually | Hosting and other ongoing costs are normally revenue expenses. Some initial website development costs may need different tax treatment. |
| Software subscriptions | Yes | Normally allowable where they relate to the trade. Any private use should be excluded. |
| Stock purchased before trading | Yes | Usually brought into the business as opening stock. This is not a deduction under the seven-year pre-trading expense rule itself. |
| Travel connected with setting up the trade | Possibly | It needs to relate clearly to the trade you subsequently start. General networking, job hunting or private travel would not qualify simply because a business later resulted. |
| Office furniture or equipment | Yes | Normally deductible as an expense under cash basis; capital allowances may apply under traditional accounting after trading starts. |
Laptop or tools bought for the business
Allowable? Yes
Notes: Normally deductible as an expense under cash basis; capital allowances may apply under traditional accounting once the asset is used in the trade.
Business-related training taken before trading
Allowable? Usually no
Notes: Training undertaken to acquire the skills needed to start a new trade is not normally deductible.
Website hosting or setup costs
Allowable? Usually
Notes: Hosting is normally a revenue cost. Some initial website development costs may need different treatment.
Software subscriptions
Allowable? Yes
Notes: Normally allowable where they relate to the business. Exclude any private use.
Stock purchased before trading
Allowable? Yes
Notes: Usually brought into your first accounts as opening stock rather than claimed under the seven-year rule.
Travel connected with setting up the trade
Allowable? Possibly
Notes: There needs to be a clear connection with the trade you subsequently start.
Office furniture or equipment
Allowable? Yes
Notes: Normally deductible as an expense under cash basis; capital allowances may apply under traditional accounting once the business starts.
How do you claim pre-trading expenses?
Qualifying pre-trading revenue expenses are treated for tax purposes as though they were incurred on your first day of trading.
You then include them when calculating the profits of the business for your first accounting period.
This is important if the expense was actually paid several years earlier. You do not simply enter it in the tax year in which you originally paid it.
Under cash basis, qualifying equipment costs are normally deductible as expenses. Under traditional accounting, capital allowances may apply instead. Cars have separate rules.
Professional costs can also qualify where they meet the normal rules. For example, certain accountancy costs incurred in connection with setting up or running the business may be allowable.
See our guide to accounting fees for sole traders.
Keep records of anything you want to claim
Keep a separate record of expenditure incurred before the business started.
For each item, record:
- The date
- The amount paid
- The receipt or invoice
- What the expense was for
- How it relates to the trade you subsequently started
If you incurred the expenditure several years before you began trading, those records become particularly important.
Can you reclaim VAT on pre-trading expenses?
The VAT rules are separate from the seven-year Income Tax rule.
If you later register for VAT, you may be able to reclaim VAT on qualifying purchases made before registration.
The normal time limits are:
- Goods bought up to four years before VAT registration, provided they are still held by the business or were used to make goods still held at registration
- Services supplied up to six months before VAT registration, provided they relate to the business
You must also meet the normal rules for recovering input VAT and have the necessary VAT records.
Read more here: GOV.UK – reclaiming VAT on purchases before registration
Start date and registration date are not the same thing
This is a very easy point to miss.
The seven-year pre-trading rule works backwards from the date the trade actually began.
Registering with HMRC is an administrative step and may happen later.
For example, if you started taking paying customers in June but registered as self-employed with HMRC in September, June is likely to be the relevant date when considering when the trade commenced.
Find out more about what counts as your business start date?
What if you are starting a limited company?
Limited companies have their own pre-trading expense rules.
A company can also obtain relief for qualifying expenditure incurred before it begins trading, but remember that the company is a separate legal entity.
An expense you paid personally before the company existed does not automatically become a company expense simply because you later incorporate.
Where appropriate, you may need to formally transfer an asset or expense to the company or have it reimbursed, and the tax treatment will depend on what was bought and who incurred the cost.
See our guide to limited company expenses for more details.