Formation of new business is a major factor for economic growth. Having said that, start-up cost incurred to be able to start trading, can be substantial. Most start up businesses do not start because of this outlay of money.
In order to claim a deduction for tax purposes, a company must be carrying on a trade. Claiming a deduction of expenditure incurred before starting to trade allows a taxpayer to deduct expenditure which would have qualified if the business was trading. The expenditure is deductible in the year in which trade commences, subject to certain requirements.
There are four key requirements before pre-trade expenses will qualify as a deduction:
- The trade must have commenced. Any pre-trade expenses where a project is abandoned would not be deductible. Also, if the nature of the trade changes, the expenses are not deductible. For example, if Company X starts an airport project and incurs expenditure but the operating licence is declined and it changes the project to a storage business, Company X cannot deduct the pre-trade expenditure in respect of the airport project for the storage business.
- Pre-trade expense must have actually been incurred before commencement, preparing carrying on the trade. For the expenditure to have been actually incurred by a taxpayer, there must be a present obligation.
- For pre-trade expenses to qualify they must meet the “post-trade test”. Had the expenditure been incurred whilst trading, it would be allowed as a tax deductible expense.
- Only once.The pre-trade expense must not have been allowed as a deduction in that year or any previous year.
Expenditure in order to start a business can be substantial but can be claimed too.
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