Pre-Trading Expenses and VAT
Following our blog on allowable expenses last month you asked some great questions relating to pre-trading expenses so we thought we would address them in this follow up blog.
The enquiries generally came from startup and early stage business owners and centred on two main areas.
Firstly you wanted to know whether pre-trading expenses are deductible for tax purposes? Yes!
Claiming pre-trading expenses is often overlooked as they are usually incurred from savings and other personal bank accounts which then do not form part of the business records once the business commences.
The Revenue Commissioners take the view that a new business, whether a company or sole trader, can claim for certain pre-trading expenses when calculating its taxable income. A deduction is available for pre-trading expenses which:
- Are incurred in the three years prior to commencement of the trade or profession and,
- Would not normally be allowable.
Examples of pre-trading expenses are:
- Accountancy fees,
- Advertising costs,
- Costs of feasibility studies,
- Costs of preparing business plans,
- Rent paid for the premises from which the business operates.
The allowable amounts are treated as having been incurred at the time the business commences. Allowable amounts cannot be set off against income other than income from that business but can be carried forward and set against future profits of the business.
You must ensure any expenses you reclaim are tax deductible according to the same principles as if you incurred them post commencement. We explored these principles in our last blog which can be read here.
The second area of focus centred on claiming a credit for vat incurred on pre-trading expenses.
There is relief for the opening stock-in-trade of newly VAT registered traders whose business is based on the buying and selling of products.
If you become liable for VAT you may claim a credit, if any, for VAT you have suffered on your initial stock-in-trade (goods for re-sale but not capital items) held at the beginning of the first taxable period for which you are registered.
Where the rates actually charged at the time of purchase of the goods differ from the rates applying at the time the relief is being sought, the local Revenue District should be consulted in relation to the exact amount of VAT which can be reclaimed.
The only VAT that can be reclaimed at the beginning of a new VAT registration is the VAT incurred on opening stock for resale but not on any not equipment or machinery.
Unfortunately there is no relief available in respect of VAT on goods purchased prior to registration by a person supplying service.
Unless your advisor is aware of these valuable startup tax reliefs you could end up paying too much tax when you can least afford to waste money. It is critical for your startup or early stage business to have an advisor who is expert in helping new business owners through the maze of tax and accounting requirements so that you can concentrate on getting your new venture up and running.
Please contact Robert Kelly FCA at email@example.com or on 01-5175211 if you would like any further information on pre-trading expenses or have any tax planning or compliance requirements. BusinessBuddy is a firm of Chartered Accountants in Sandyford, Dublin 18 specialising in helping startups and SME’s with all their tax and accounting needs.