Tax planning for start-up businesses

If you're just starting a new business it's very important to keep a close eye on the finances. This blog details some tax planning for start-up businesses which will help ease your cash-flow.

Tax planning tips for start-up businesses

Tax planning for start-up businesses - pre-trading expenditure 

You might have spent years fine tuning your business plan or started a hobby which evolves into a business. We've discussed the treatment of company pre-trading expenditure previously and it's worth re-visiting as it's particularly relevant for start-up businesses.

The detailed tax rules on pre-trading expenditure can be found in HMRC's guidanceHowever as a general rule, in order to qualify an expense needs to fall within the following criteria:

  • It must have been incurred within 7 years of the date the business first started trading.
  • Been considered a tax deductible expense had it been incurred on the first day of trading.

There will be some items of expenditure that won't be tax deductible. For example capital expenditure and expenditure incurred in preparation for the business - such as market research.

Tax planning for start-up businesses - trading losses

When you're claiming for pre-trading expenditure this might create or increase an existing trading loss. For a limited company the tax treatment of trading losses is relatively straight-forward. 

Broadly speaking they will either be offset against the company's other income in the same accounting period or carried forward and offset against future profits from the same trade.

When it comes to tax planning for start-up businesses which are sole traders, partnerships or limited liability partnership's, there are more options available. 

Generally speaking trading losses for an established business (which isn't a company) can be relieved against general income in the year of the loss or the previous year. Occasionally they may be offset against capital gains.  

For a start-up business the normal one year carry-back is extended to the three years prior to the loss arising. This extension applies to trading losses incurred in the first four year's trading.

These rules are particularly useful if you had a previous employment. Making a 'sideways loss' claim could result in a tax repayment and a cash injection for your business.

An example of an opening year loss claim

Steve worked for the Government for many years and earned £35,000 per year during the tax years 2015/16, 2016/17 and 2017/2018.  On 6 April 2018 Steve leaves his job to set up business as a freelance defence consultant. He incurs considerable expenditure on specialist equipment and makes a loss of £45,000 in his first year of trading.

He can elect to carry-back this loss and offset it against all his earnings for the 2015/16 tax year and the balance against his earnings for the 2016/17 tax year. 

As a golden rule, when making an opening year loss claim the most effective strategy is usually one that secures tax relief at the highest rates and or at the earliest opportunity.

Tax planning for start-up businesses - VAT matters

You may be considering whether or not to register your business for VAT. If your turnover is in excess of the VAT registration threshold then this is compulsory. However you can register voluntarily for VAT at any time.

It may be worthwhile if you are incurring expenses on a regular basis. For example a garage will have purchased heavy duty equipment, tools, parts and supplies etc. However, you will also have to charge your customers VAT on your sales. This might involve a reviewing of your pricing strategy  where your customers are unable to recover the VAT charged.

Once you've made the decision to register you'll then need to obtain details of the pre-registration VAT to claim.   

Pre-registration VAT can be reclaimed in the following circumstances:

  • On goods acquired within four years of the effective date of VAT registration. However they would still need to be in use at the effective date of registration.
  • On services within six months of the effective date of registration.

The whole topic of pre-registration VAT recovery is a topic which we will cover in more detail at a later date.

For more useful information, check out our Ebooks here.

And if you'd like to know how we can help you with all of this, or with anything else, feel free to give us a call on 01202 048696 or email us at richard@tfaaccountants.co.uk.

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