Michael Lansdell explains the conditions for tax relief, and talks through the issue that may arise if you’re dealing with a director’s salary.
When you’re involved in a new business start-up, you’ll be investing a great deal of time to ensure that it is a success. If you’re being paid for your hard work and effort, is this pre-trade expense tax deductible?
Start-up costs for new businesses vary, in terms of type and amount. There are rules that allow tax relief for costs and expenditure incurred up to seven years before the company started trading.
Broadly, what conditions must be met?
Tax relief is allowed only if the cost would be deductible if trade had already commenced. Straightforward enough, but if you’re dealing with a director’s salary, there may be issues.
HMRC will want to see that the salary is proportionate to any work done for the new business – if it isn’t justifiable, a tax deduction will not be permitted. But what is considered reasonable? Before trading starts, the director’s job might look very different to the one they have to do after trading has commenced. The director will know how much pre-trading salary is justified and, unless it is extremely high, there shouldn't be any problems. Remember though, that a salary – not dividends – is the only option for a director in the pre-trading period.
The optimum salary will depend on how much income the director has received that tax year. Their salary will be free from NI, only when it doesn’t exceed the annual lower earnings threshold (£8,844 for 2021/22) and this is reduced proportionally if a director has been appointed part-way through the year.
So, if a director needs an income in the pre-trade period, it might be better to limit it to the NI threshold. They can borrow the rest, in the form of a low-tax or tax-free loan, which will not incur NI if it gets repaid once trading has started.
Getting a brand-new company up and running is rewarding in itself of course, but HMRC might allow the business to deduct this cost from its taxable profits. You must meet certain conditions; a chartered account will help businesses and individuals optimise their tax efficiency.
For more information call Figurit (formerly known as Lansdell & Rose) on 020 7376 933.