How should expenses from pre-trading be carried into first accounting period? - The Book-keepers Forum (UK)

Alpine man · Veteran Member

How should expenses from pre-trading be carried into first accounting period?

RobH · Expert

Hi David, these are pre-trading expenses and are perfectly legitimate. If you were a manufactureer instead of a grower of illicit plants, oops I mean alpine plants!! and you spent £200,000 on building your factory etc then you would want to claim the allowable expenses despite the fact that you had not traded yet. Same thing applies for your business. As a sole trader just itemise what you have bought and some of these will be expenses to debit against the P&L and cr capital introduced, others may be dr balance sheet items. If you had done a certain amount of trading prior to this then it may be that you have made a loss in which case under S63 (I Think) you could claim against this and previous years income from any source...actually think that has been extended to 3 years ago on aFIFO basis but as I am at home and have had a glass or two don't hold me to it!!) or under S 84 (?) carry forward indefinitely against the same trade. I'll check the section numbers for you tomorrow if you are interested in them.

Alpine man · Veteran Member

Hi Rob I haven't actually traded at all other than a few simple test transactions which are only personal items as I did not have any business intent at that point. I trade on Ebay so it was a decision as to whether I felt I wanted to trade at all by testing this out. After this along with the expenses in my cash book I then made a final decision that business was right for me.

I have the accounts set out by month itemised as you say. I will sign up for a business start date of 6th april. My expenses so happen to be from last April. Despite not being a business at this point would I still have to do a year end summary because the 12 months have passed or can I do one after 24 months instead. Thus it becomes a 24 month year effectively(obviously not quite right) but still can it be done this way?

I think I may not of explained myself very well last time. My guess from above is you are saying finalise a 12 month summary with the profit and loss including any adjustments and do a balance sheet ideally.

Thanks again Rob.

Best regards David.

RobH · Expert

Hi david,

If you haven't traded yet then you can start on 6th April and bring legitimate pre-trading expenses in to play. You would do your accounts from 06.04.10 to 05.04.11. If you are saying you have traded a bit prior to this, then the most sensible thing to do is to work out any profit/loss up to 5th April 2010(no need to worry about doing a complete 12 months period) and submit tax return on this basis. I get all new self employed startups to work to 5th April/31st March no matter when they started to trade as it makes life simpler as the second year of trading may mean they have 'overlap' profits, ie get taxed on the same profit twice. This way it avoids it. Don't worry about the overlap profit thing, just trade to 5th April!

Rhianrach · Expert

RobH wrote:

Hi david,

If you haven't traded yet then you can start on 6th April and bring legitimate pre-trading expenses in to play. You would do your accounts from 06.04.10 to 05.04.11. If you are saying you have traded a bit prior to this, then the most sensible thing to do is to work out any profit/loss up to 5th April 2010(no need to worry about doing a complete 12 months period) and submit tax return on this basis. I get all new self employed startups to work to 5th April/31st March no matter when they started to trade as it makes life simpler as the second year of trading may mean they have 'overlap' profits, ie get taxed on the same profit twice. This way it avoids it. Don't worry about the overlap profit thing, just trade to 5th April!

I'm interested in this, do they avoid overlap tax because they haven't officially started trading until april and any profit previous to that is included in the year that you have officially traded in?

Steve

RobH · Expert

Hi Steve,

Overlap profit is when the same profit, ie from the same period gets taxed twice over two tax years. However it is a given that you will only ever get taxed once on all your profit, so you get relief from this if you cease your business. Lets say you start a business in October. You could of course do a full 12 months trading and do your accounts and calculate the profit from oct to September. In the first year you will then calculate your tax from October to 5th April, ie you would apportion the profit to the ratio of aprox 6/12 being 6 months from Oct to end of march. The following year you are likely to have to calculate tax on the first 12 months trading, which obviously includes the bit from oct to march that you have already been taxed on. This is the overlap profit. To avoid this situation you could still start in October but do accounts to 5th April. Your second set of accounts would then run from 6th April to following 5th. And you will be taxed on this actual year basis. Hope that makes sense Steve. It would be worth looking up opening years basis. There is a thread on here from last week I think where Shaun and I struggled to make it incredibly clear because it lends itself to a flow chart and we couldn't put one together!
Rob

Alpine man · Veteran Member

Rather than draw up a list of expenses I have followed the balance of my bank account like proper bookkeeping. As I have not yet started in business you are saying this can be 'taken into the accounts'. Being new to accounting/bookkeeping I wonder how this is done. Do I continue on following the bank account with any expenses and new income from 6th april not worrying about the 12 month period that has elapsed with expenses. This means I no longer call it a 24 month period and treat it as one tax year effectively. So I think we are agreeing as this was my implication above. Just to confirm have I understood you correctly now?

Thanks Rob much appreciated.

Shamus · Forum Moderator & Expert

I process pre trading expenses as though they had occurred on, or close after the date that the trade starts.

I would not make reference to the period before the trade starts as that is not material.

Relating this to fundamental accounting principles as laid down in FRS18, accounting policies, FRS5, reporting on the substance of transactions, and FRS3, reporting financial performance. Income and expenditure should be matched to the period to which it relates.

You purchased items prior to trading but they are not used until trade begins so that is when the expenditure should start to be recognised.

AIA means that anything for your business (I'm assuming that you haven't spent more than £50,000) can be written off for tax purposes in the first year regardless of the period over which the items are depreciated.

Robs advice on the accounting period is sound. Start trading on April the 6th and and all you need to worry about is a single period wit no risk of overlap profits.

By the way, congratulations on getting the venture off the ground. I'll keep my fingers crossed for you that it flies. Don't forget to keep us all informed will you.

Shaun.

Alpine man · Veteran Member

I have recorded it already in the cash book now as the date it went out from my bank. There is about 80 transactions or more. Rather than making a list with no dates can I just leave it as it is as I have made clear on my first page of the cash book that they are pre-trading expenses up until 5th april. I am assuming this is okay. Sorry to keep asking it just seems you guys can set me on the right path

-and thanks!

RobH · Expert

That will be fine, but when you do your final accounts you will group the expenses by type to 5th April (2011?). You will then work out a profit per the accounts and then for the tax comp you may or may not have some adjustments to make.

Rob

Rhianrach · Expert

RobH wrote:

Hi Steve,

Overlap profit is when the same profit, ie from the same period gets taxed twice over two tax years. However it is a given that you will only ever get taxed once on all your profit, so you get relief from this if you cease your business. Lets say you start a business in October. You could of course do a full 12 months trading and do your accounts and calculate the profit from oct to September. In the first year you will then calculate your tax from October to 5th April, ie you would apportion the profit to the ratio of aprox 6/12 being 6 months from Oct to end of march. The following year you are likely to have to calculate tax on the first 12 months trading, which obviously includes the bit from oct to march that you have already been taxed on. This is the overlap profit. To avoid this situation you could still start in October but do accounts to 5th April. Your second set of accounts would then run from 6th April to following 5th. And you will be taxed on this actual year basis. Hope that makes sense Steve. It would be worth looking up opening years basis. There is a thread on here from last week I think where Shaun and I struggled to make it incredibly clear because it lends itself to a flow chart and we couldn't put one together!
Rob

I'm sorry alpine man to of hijacked your thread a bit but this is the same situation that I have ( though not advising on ).

I think my questions arise from a disgruntled accountant ( that surprisingly is on holiday at this time of the financial year) who has stated that all my exempt vat transactions should be T9 (which has caused me no end of problems that thankfully i'm now sorting thanks to excel ), who has set up sage (before I got involved) and the finacial year starts in april 09 and ends at the end of this march,(even though they have only been trading since the start of december), so I'm now wondering why this has been done. Will it mean that a year end done at the end of March won't mean that there is any overlap of profits, ( and whilst i'm at it does the overlap come from postong profits on a short year as profit and loss rather than capital introduced or drawings?).

Sorry again for the serious hijacking (and this isn't advice that i'm offering to my friend, I have told them to talk to their accountant) but it's good stuff for future reference.

Lots of nice things

Steve

-- Edited by Rhianrach on Sunday 28th of March 2010 05:53:33 PM

-- Edited by Rhianrach on Sunday 28th of March 2010 05:54:00 PM

RobH · Expert

Hi Steve, the fact that the trade started in december and is running to just March31st is almost certainly to avoid problems with overlap profit. As stated before overlap profit occurs when the same profits are taxed twice, so in this case had the trader done a 12 month period to 31.12.10 and for example made a taxable profit of £24k. Since the year ended is 31.12.10, this is in tax year 10/11, however they need to pay tax for the tax year 09/10. So in this case they would need to apportion profits from 01.12.09 (start of accounting period) to 5th April. So the taxable profit becomes 4/12 * £24k (ie 4 months december to march being looked at for tax year 09/10), so profit to be taxed will be £8k. The following year, the trader will be taxed on the year ended 31.12.10 and the tax will be on £24k profits. As you will see he has been taxed on £8k of it twice and this is trhe overlap profit. The next year his accounts run to 31.12.11, and now we are on track as the third tax year is 2011/12 and he will be taxed on these profits.

Having your year end on 5th April (by concession 31st March) overcomes all this and makes life a whole lot simpler!

Hope this makes sense!
Rob

Alpine man · Veteran Member

In the monthly summary at year end 2011 can I write it into the accounts as:

Pre-
Trading expenses
brought
into 5th Apr.
accounts(first April
entry in summary)
April 200       350    190          600 340
April                       150         204     76           246 234
May                        130    210      85           199 230
june                       125         340    97

Something like this maybe? Other figures are for the context only.

-- Edited by Alpine man on Sunday 28th of March 2010 07:09:45 PM

Rhianrach · Expert

RobH wrote:

Hi Steve, the fact that the trade started in december and is running to just March31st is almost certainly to avoid problems with overlap profit. As stated before overlap profit occurs when the same profits are taxed twice, so in this case had the trader done a 12 month period to 31.12.10 and for example made a taxable profit of £24k. Since the year ended is 31.12.10, this is in tax year 10/11, however they need to pay tax for the tax year 09/10. So in this case they would need to apportion profits from 01.12.09 (start of accounting period) to 5th April. So the taxable profit becomes 4/12 * £24k (ie 4 months december to march being looked at for tax year 09/10), so profit to be taxed will be £8k. The following year, the trader will be taxed on the year ended 31.12.10 and the tax will be on £24k profits. As you will see he has been taxed on £8k of it twice and this is trhe overlap profit. The next year his accounts run to 31.12.11, and now we are on track as the third tax year is 2011/12 and he will be taxed on these profits.

Having your year end on 5th April (by concession 31st March) overcomes all this and makes life a whole lot simpler!

Hope this makes sense!
Rob

Indeed it does my friend, you're a good man, it goes all the way to explaining the accountants decision,............. I will look forward to doing (under her guidance) my first year end procedure. smile

Sorry again for the hijack,

Steve.

RobH · Expert

No problems Steve pleased to be able to help.

Rob

RobH · Expert

David,

why so many expenses over such a long period for what you have suggested is a small business? Not really a problem but playing devil's advocate, the Revenue may suggest that you have traded prior to this, however if all the expenses are of a capital nature then no problems. But I seem to recall you saying that you sold some plants on Ebay without there being a profit motive and just as a hobby. Hobbies tend to cost money and not make money, however you are at liberty to sell your personal goods on Ebay without any tax implications if they are goods you no longer want. I would suggest growing plants and selling on Ebay constituted a trade but given the amounts were probably very low and if it was just once or twice then possibly no real problem. But if you are considering the expenses you have made in generating the hobby from which you have sold plants prior then (outside of capital items) you will not be able to put thme through. With just a bunch of numbers and no categorisation it is difficult to say whether they are likely to be included as pre-trade or not (e.g. telephone charges, plant feed, hlp, motoring might be considered as the expenses towards your hobby, whereas a propogator, heat lamp or such things I would consider as pre-trading) Others may well hold a different view though.

Rob

Alpine man · Veteran Member

The numbers are made up numbers as I mentioned. MY ACTUAL expenses were a greenhouse and items that you have suggested like propagators, seed, trays, pots, string, compost= £1,200 total which are I think legitimate start up items. The transactions were about 4 of them £4 average each, easier to forget about, and to just stick to pre-trading expense issue. I assume if asked I would say they were trial transactions to see if I wanted to start a business or not. Thanks for asking though. I have thought of a way of including these expenses in my the coming April tax year. I can pay £1200 into my personal account(were I bought items from) from my business account and then in the details refer the tax man back to the itemised months I recorded. This way it attributes the costs to this current April concerned for the expenses. I would label them in the Payment out column- Pre-trading expenses(see previous cash book records). It is probably what you intended me to do but I had not figured it. I was trying to include both my personal and business account in the same month in my 'mock' table above, which may have been fine but does not run the books from one bank account. My Business account is another personal account set up for business purposes. Not that many transactions will happen from the business account as my trade would be mainly with in paypal account which runs with Ebay. Eventually when enough is in the paypal account its paid into the business account.

Sorry to keep this thread going on a little to much but I am thinking of Making my business start date(accounting start date) March 31st for easy bookkeeping. I figure because my bank statement comes through on the April 2nd I can then catch all transactions right till 31st. Where as if done to April 5th I'd have to make more adjustments. The 31st is deemed the same as the 5th I hear for tax purposes-with out to much explanation. As soon as you confirm this is okay I will set up the start date.

I am assuming everything is pretty much okay with my expenses now in first paragraph?

Thanks Rob for your time its very giving of you. Also Shamus too. You both are really helpful.
Hoping to declare business on line today or tomorrow before 31st obviously.

Appreciated David.

RobH · Expert

Hi David,

31st March is fine for your year end date not start date. So start date will be 1st April.

Rob

Alpine man · Veteran Member

thanks.