Freelancers' Questions: Can I claim expenses before freelancing?
Freelancer’s Question: I am thinking of creating my own cake-making business and am ready to buy the equipment that I need. But the business will not officially start trading until the end of this year or beginning of next year. Will I be able to include any or all my expenditure for the set-up of the business before actually starting, in the first annual tax return?
Expert’s Answer: When starting a business it's common to incur expenses before the business starts trading. For example, you may purchase equipment or items such as domain names and web hosting which you will pay for using your own personal funds. If these items are purchased solely for use within your new business then yes, you may claim for these expenses when your new business starts trading.
There are a few points that you'll need to be mindful of. Firstly, for corporation tax purposes you're officially allowed to reclaim expenses from the last seven years before trading. For VAT purposes however, it's just six months. With all cases regarding expenses it's best to take a pragmatic view.
With this in mind, I would recommend that you only claim for items in the six months preceding the launch of your new business. When claiming these expenses you need to be confident that you've purchased the items specifically and wholly for your new business. For example, you should not claim for equipment you have purchased originally for hobby purposes which you've then later decided use in your business. As always, make sure you keep good records of your expenses, including the receipts.
So in conclusion, yes, you can claim for expenses before your business was formed. Be realistic and honest about what you're claiming and if the claims are large or complex then do have a chat with an accountant.
The expert was
Matt Poyser, partner at inniAccounts,
a tax specialist for freelancers.
24th May 2012