A business must be trading to qualify for tax relief on its costs. However, special rules exist for start-up costs. How do these apply for salaries paid to directors and other workers before a business begins to generate income?

Expense but no tax relief

Rome wasn’t built in a day and businesses don’t start overnight, usually a good deal of planning, not to mention expense, is involved. Depending on the type of business you’re getting into, before you can start trading there might be premises to find, stock and equipment to purchase, plus a stack of smaller expenses. For tax purposes none of these is tax deductible unless or until the business starts to trade, i.e. is open for business.

Pre-trading costs

Similar rules for companies and unincorporated businesses say that start-up costs , which HMRC refers to as pre-trading expenditure, is treated as if it were incurred on the first day they trade. The usual rules then apply so that day-to-day costs, such as travel, telephone and stationery, are deducted from income, while capital allowances (HMRC’s equivalent to a depreciation charge) are given for equipment such as machinery and vehicles. All expenses must be wholly and exclusively for the purpose of the business.

Tip 1. If you run around finding suppliers, hiring staff and so on, it’s only fair for your company to pay you a salary. As long as it’s reasonable for the time you spend in setting up the business and at a fair rate, HMRC won’t object to you including it as a deductible pre-trading expense. However, this isn’t relevant if your business is unincorporated, because you’re taxed on profit the business makes and not what you draw from it.

Tip 2. The pre-trading expenses rule applies to expenses paid up to seven years before trade commences. That’s good news if it takes a long time to get your project up and running.


Some types of pre-trading expense fall outside the special rules, for example, stock or advance rent for a period which falls after trading commences. Even though these are incurred “pre-trading”, the normal tax and accounting rules require that they are attributed to the period to which they relate, and because that’s after trading commences, the deductions are allowed without the need to resort to the pre-trading expenses rules.

The cost of finance

If you borrow to finance your new business and incur interest or other finance charges before trade begins, these too count as pre-trading costs and are treated in the same way as other expenses, but not where the business is run as a company.

Trap. Pre-trading interest etc. incurred by companies falls under the loan relationship rules. These say that for corporation tax purposes your company can only deduct interest paid on loans from non-trade credits (income) it receives, e.g. interest on savings. It might be years before it can generate the right type of non-trade credits, if ever, to obtain tax relief for its pre-trade debts.

Tip. The good news is that your company can elect for pre-trading loan relationship debits, e.g. interest paid, to be treated in the same way as other expenses. Naturally, there are conditions; a two-year time limit for the election plus, like other start-up costs , the debits must meet the wholly and exclusively test.

This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.