Freelancer’s Question: What is the best way to recover start-up costs that came out of my own funds before I set up my company? I ask because I forked out more than £5,000 of my own money to create and develop some software. I hope to exploit it by forming a company and then raising money from investors. At this stage though, I simply want to recover the personal funds I’ve put in, how should I do this?
Expert’s Answer: Firstly, you should get credit for your personal expenditure, as this could be used to create a loan account for you in the company. Then you could use this loan account to withdraw money from the company on a tax-free basis. This route is more tax-efficient than drawing a salary, which would attract national insurance and income tax.
Given that you intend to raise equity funding from a third-party, I recommend that you formally transfer a beneficial interest in the company’s intellectual property (IP). Unless you have registered as self-employed for this reason, you will be treated by HM Revenue & Customs as having made a disposal for capital gains tax purposes.
Then bear in mind that, whatever your business plan for the fundraising might say, the market value at this early stage will be lower, as risk factors will reduce the IP’s value before the company’s formation. While it could be debatable that the value of the IP is very low, for early stage development the costs incurred are often regarded to be among the best measures of the current market value. Conveniently, this will mean no gain or loss arises, although HMRC may still challenge the value.
Lastly, depending on the nature of the costs you have personally incurred, there may be a significant chunk of recoverable VAT that could influence your plans. Claims can be made on expenditure going back six months for services and four years for goods, though these are the longest timeframes possible for retrospective claims.
The expert was Jon Sutcliffe, partner at Top 20 chartered accountancy firm Kingston Smith LLP.