Limited company pre-trading expenses – what contractors can claim

Limited company pre-trading expenses – what contractors can claim
Choose a Name: The name has to be unique, obviously, and not likely to be confused for someone else’s existing name. The best reference point is the Companies House website – www.companieshouse.gov.uk – which has a simple search facility so you can check your chosen version. Also, try to avoid names that are specifically related to your line of work, just in case you want to change careers later: imagine selling cars though a company called Al’s Bakery.
Decide on Share Ownership: Is this just you, or you and your spouse, or you and two or three other people? This is important, because it defines how to allocate the Ordinary Shares In the company. Dividends are paid in direct proportion to numbers of shares held. A husband and wife typically have 50% each, for example, but if one is already earning money, be aware of the impact of the share income on their tax position. Share allocation can be changed after the event. There are several variations on share management; but for anything other than a simple allocation of ordinary shares, get expert advice.
Register at Companies House: There is an online system you use to set up your company and pay the registration fee. It is fairly simple to use. One question it will ask is who the directors are. For a typical small contractor company you only need one but there’s no reason not to have more. Although not strictly necessary any more, it also helps to nominate a Company Secretary: this could be the same person, but it’s more sensible to have someone else, a partner or relative for example.
Register a Memorandum of Association: Something else to do while you are at Companies House. At its simplest this is a document describing what your company is for and how you wish to run it. You can do it yourself, but the document can have legal implications in a tax investigation so do some online research for a suitable template from sites such as www.simply-docs.co.uk or www.clickdocs.co.uk.
Set up a Bank Account: This has to be a business bank account. Banks are increasingly wary of new business accounts, so you will have to answer some detailed questions and it will help if you have some professional references and a signed contact to demonstrate you actually will have an income.
Register for VAT: You have to do this if your annual income is in excess of a set amount (currently £67,000 pa) but it Is advantageous to register anyway. VAT and the Flat Rate Scheme are discussed in more detail elsewhere.
And that’s it. It sounds complicated but is in fact quite straightforward. You can also take the easy way out; either use a company formation agent, or there are several accountants who specialise in contractors who will set up all if the above for you for a small fee, or even for free, as well as providing expert support. Finally keep track of all your various expenses setting the company up, since you can reclaim these once you start trading.

When you are starting out as a freelancer, or transferring from an umbrella to running your own company, you are going to incur some out-of-pocket costs before your company is fully operational, or even before it actually exists. These costs can be reclaimed from the company.

The usual rule applies; business expenses are any that are wholly and exclusively incurred during the operation of the business. The good thing is that any costs you incur personally while setting up that business qualify under that rule, so can be claimed back once the company if up and running and there’s some money in the bank account.

These expenses include:

  • Costs of company formation. This includes initial accountant’s fees, or the costs if using a company formation agent. If you do it all yourself, this still includes the Companies House fees
  • Travel and subsistence costs for attending interviews to get that initial contract
  • Purchase of necessary equipment such as computers, printers and related consumables
  • Costs of advertising material and business stationery
  • Costs of internet access, domain name registration and website design and build
  • Provision of services to the home office, such as phone line, broadband, fax and similar facilities
  • Purchase of professional and equipment insurances and directly related professional membership fees

You will have to keep receipts for any purchases you make when setting up the company to provide a full audit trail (to be fair, you have to do this anyway, so it’s a good habit to get into). When the company can afford it, you then submit an expense claim for the total amount and the company pays it back to you. This is repaying expenditure out of already-taxed income, so it is not earned income nor a Benefit-in-kind, hence there is no further personal tax to pay, and the cost will eventually be offset against the company’s Corporation Tax liability.

Be careful if transferring from an Umbrella that you don’t double claim expenses though; if, for example you put the costs of attending an interview as an expense claim to the umbrella, you can’t claim it again.

Finally, provided you have the relevant VAT receipts you can reclaim any VAT through the company once it is registered.

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Image: Right on track? by Bohman

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