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Claiming TAX and VAT on expenses made before your company is formed

20th July 2012

In the past two weeks we have been asked the same question three times. “I’m thinking of starting a company in a few months but will have costs now. Can I claim the VAT back? And the tax?”

The answers is yes for corporation tax (so long as the costs are within seven years and wholly and exclusively for business purposes). The expenses are treated as occurring on day 1 of the company’s existence.

The answer is also yes for VAT – but only six months before registration of VAT for services and four years for goods. These costs also must be wholly and exclusively for business purposes. And of course, you’d need to VAT register the company.

So what kind of costs would qualify? Marketing, website/domain/hosting, legal, accountants fees, repairs, travel and subsistence, computers and other equipment are the most common.

Other conditions:

  1. Keep all the invoices (if you want the VAT back you need VAT invoices)
  2. You cannot claim expenses in forming the company itself as this is capital in nature. However, the money the owner/director put in towards this can be taken back out of course.
  3. Goods and other items such as petrol must still be in stock to claim the VAT
  4. (for VAT) the VAT that you reclaim must relate to expenditure on VAT-able supplies and not exempt supplies.

Overall, the news is good and the law in this case is fair. You are not going to be unfairly prejudiced.

Sources:

S62 Corporation Taxes Act 2009 http://www.legislation.gov.uk/ukpga/2009/4/section/61

VAT Manual http://www.hmrc.gov.uk/manuals/vitmanual/VIT32000.htm#IDA2TKPG

Exempt supplies http://www.hmrc.gov.uk/vat/managing/reclaiming/partial-exemption.htm