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The money you spent before day one: pre-trading expenses

By Buzz Accounting · 2026-08-03

Most founders spend real money long before the company earns anything — a laptop, software, travel to meet suppliers, a designer for the brand, an accountant to set the thing up. Much of it is deductible, and some of the VAT is recoverable on your very first return. But the rules split that spending into three different buckets with three different time limits, and putting a cost in the wrong bucket is how founders quietly overclaim or, more often, leave money behind.

The seven-year rule, and what it actually covers

Revenue expenditure incurred up to seven years before trading starts is treated as if it were incurred on the first day of trading. It sits in your first accounting period and reduces that period's taxable profit like any other cost. The rule is in section 61 of the Corporation Tax Act 2009 for companies and section 57 of ITTOIA 2005 for sole traders and partnerships.

Two conditions apply and both matter. The cost must be one that would have been deductible had you already been trading, and it must still pass the wholly-and-exclusively test. Professional fees, market-research travel, domain registration, insurance, software subscriptions, design and branding work all qualify comfortably.

What does not qualify, despite frequently being listed as though it does:

Capital expenditure. Equipment is not a pre-trading revenue expense. It goes down the capital allowances route instead — see below.
Trading stock bought in advance. HMRC's guidance excludes it; stock is relieved through cost of sales when you sell it, not as a pre-trading deduction.
Prepaid expenses, such as rent paid in advance for a period after trading has begun.
Company formation costs. Incorporating is a capital act, not a trading one. The Companies House digital incorporation fee is £100, and it is disallowed in the corporation tax computation — though the company can still reimburse you for it.
Training that gives you a genuinely new skill, as opposed to updating a skill the business already uses.

Equipment: capital allowances, not expenses

Kit bought before you start trading is handled by section 12 of the Capital Allowances Act 2001, which treats pre-trading capital spend as incurred on the first day of trading. The Annual Investment Allowance is £1,000,000, so in practice a startup writes off the full cost of its plant and machinery against profit in year one. Cars are excluded and go into the writing-down allowance pools instead.

Here is the trap almost everyone walks into. You cannot claim the Annual Investment Allowance on something you owned for another purpose before you started using it in the business. The MacBook you bought personally eighteen months ago and now use for the company does not get 100% relief. It is brought in at its market value on the date business use begins and relieved through writing-down allowances at 18% a year in the main pool. Still worth claiming — just not the instant deduction founders assume, and worth photographing a comparable second-hand listing on the day you bring it in, so the market value you used is evidenced.

The VAT window is much shorter — and it is two windows

Once you register for VAT you can recover input tax on some pre-registration spending, but goods and services are treated completely differently:

Goods: four years before the registration date — and they must still be on hand at that date and intended for use in the registered business. The laptop you still use qualifies. The one you sold last year does not.
Services: six months before the registration date. That is it. Accountancy, legal advice, design work, consultancy — all cut off at six months.

That six-month services limit is where the money leaks. Founders routinely pay a designer or a solicitor a year before they register for VAT, then discover the VAT on those invoices is simply gone. The corporation tax deduction survives under the seven-year rule; the VAT does not.

Worked example: what a typical pre-launch spend is worth

Take a founder who incorporates in November 2025, spends through the winter, starts trading on 1 April 2026 and registers for VAT the same day. All figures are illustrative.

Brand and website design, June 2025 — £2,000 + £400 VAT. Ten months before registration, so the VAT is outside the six-month services window and cannot be reclaimed. The £2,000 is still deductible under the seven-year rule.
Laptop and monitor, December 2025 — £1,500 + £300 VAT. Still on hand at registration, so the £300 VAT is recoverable on the first return, and the £1,500 gets the Annual Investment Allowance in full.
Company formation and legal setup, November 2025 — £100 Companies House fee plus £900 + £180 VAT of professional fees. The £100 is capital and disallowed. The £900 is deductible, and the VAT is within six months of registration, so the £180 is recoverable.
Founder's existing iPhone, brought into business use April 2026 — market value £340. No Annual Investment Allowance because it was owned personally first; £340 goes into the main pool at 18%, giving £61 of relief in year one.
Market-research travel and software subscriptions — £600, no VAT recoverable on the older invoices. Fully deductible.

Adding it up. Deductible revenue costs are £2,000 + £900 + £600 = £3,500. Capital allowances are £1,500 of Annual Investment Allowance plus £61 of writing-down allowance. Total relief against profit: £5,061. At the 19% small profits rate (profits up to £50,000; the main rate is 25% above £250,000, with marginal relief between) that is £961 of corporation tax saved. Recoverable VAT on the first return is £300 + £180 = £480.

So roughly £1,441 back from spending that had already happened — and £400 of VAT lost purely to the six-month timing rule on that design invoice. Register a few months earlier and that £400 comes back too, which is exactly the timing decision our VAT guide walks through.

Money you paid personally

Spent your own money before the company existed? Entirely normal, and it does not stop the claim. Once trading, the company reimburses you for legitimate business costs, or credits your director's loan account — the direction of that account you actually want, since it means the company owes you rather than the reverse. Keep it clean: genuine receipts, a simple schedule, and reimbursements that match the evidence pound for pound. Round-sum reimbursements with nothing behind them are precisely what an enquiry unpicks.

Do this today

Open a folder — or a FreeAgent receipt inbox — and photograph every receipt you can find. Old bank and card statements are the fastest way to reconstruct what is missing.
List each item: date, supplier, amount, VAT, and what it was for.
Tag each one revenue, capital or formation cost. That single column decides which relief it gets.
Mark which goods you still own — that is your VAT reclaim list — and note anything you owned personally first, with a market value and evidence for it.
Check your intended VAT registration date against the six-month services window before you fix it. This is the one decision that is still yours to change.
Tell HMRC the company is active within three months of starting your accounting period. That deadline runs whether or not you have done any of the above.

Half an hour of archaeology, typically a four-figure return. It is also the moment the habit should start: from here on everything gets captured as it happens, which is why every one of our startup packages includes FreeAgent, where photographing a receipt takes three seconds and the bookkeeping is already done by year-end.

Quick answers

About this post

How far back can a startup claim expenses incurred before it started trading?

Revenue costs incurred up to seven years before trading begins are treated as if incurred on the first day of trading, under section 61 of the Corporation Tax Act 2009 for companies and section 57 of ITTOIA 2005 for sole traders. They reduce your first period's taxable profit. The cost must be one that would have been deductible had you already been trading, and it must still be wholly and exclusively for the business. Advance purchases of trading stock, prepaid expenses and capital expenditure are all excluded from this particular relief.

Can I reclaim VAT on things I bought before registering?

Yes, but goods and services have different limits. VAT on goods can be reclaimed up to four years before your registration date, provided the goods are still on hand at that date and are for use in the registered business. VAT on services is limited to six months before registration. That shorter window is where founders lose money, because design, legal and accountancy invoices are often more than six months old by the time a startup registers. Weigh your registration date against those invoices before you fix it.

Can I claim for a laptop I already owned before the business started?

You can claim relief, but not the Annual Investment Allowance. Items you owned for another purpose before you began using them in the business are specifically excluded from the AIA. Instead the asset is brought in at its market value on the date business use starts and relieved through writing-down allowances at 18% a year in the main pool. On a phone worth £340 that is about £61 of relief in the first year rather than the full amount. Evidence the market value at the time — a comparable second-hand listing, dated and saved, is enough.

Are company formation costs tax deductible?

No. Incorporating a company is a capital act rather than a trading one, so the formation costs are disallowed in the corporation tax computation. The Companies House digital incorporation fee is £100. The company can still reimburse you for it, and it still belongs in your records and your accounts — it simply gets added back when the taxable profit is worked out. Professional fees for genuine setup advice are treated differently and are usually deductible under the seven-year pre-trading rule, so keep those invoices separate from the formation fee itself.

When do I have to tell HMRC the company has started trading?

Within three months of the start of your accounting period, once the company becomes active for corporation tax. Active means carrying on business activity, trading, or receiving income such as interest — preliminary steps like writing a business plan or negotiating contracts before you start do not count on their own. This is separate from registering with Companies House and separate from VAT registration, and the deadline runs regardless of whether you have made any money yet. Missing it is a common and entirely avoidable first-year penalty.

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