Finance Act ‘97 Introduces Relief for Pre-Trading Expenses

Introdution

Section 29 Finance Act 1997 gives effect to the Budget announcement that certain pre-trading expenses of a trade or profession were to be allowable in calculating the trading income of that trade or profession once it commenced. The relief applies to trades or professions, whether incorporated or not, which commence on or after 22 January 1997.

Under Section 29, a deduction is available in respect of pre-trading expenses which,

• Are incurred in the three years prior to commencement of the trade or profession,
  and
• Apart from Section 29 would not be allowable, but would have been allowable if they had been incurred after the date of commencement of the trade or profession. Accordingly, the provisions of Section 61 Income Tax Act 1967 apply for the purposes of calculating the deduction - for example, only pre-trading expenses which were wholly and exclusively laid out or expended for the purposes of the trade or profession are allowable.

Expenses

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 trade or profession operates.

The relief also applies to charges on income (within the meaning of Section 10 Corporation Tax Act 1976 or Section 434 Income Tax Act 1967) paid prior to commencement of the trade or profession provided that the charges are wholly and exclusively laid out or expended for the purposes of the trade or profession.

No relief is allowable under any other provision in respect of a payment which qualifies for relief under Section 29.

Calculation

For the purposes of allowing the deduction, the allowable amounts are treated as having been incurred at the time the trade or profession commences. Allowable amounts are not available for set-off against income other than income from the trade or profession.

In the case of charges within the meaning of Section 434 Income Tax Act 1967, relief will be by way of carry forward, or carry back in the case of a terminal loss relief claim (Section 316 Income Tax Act 1967).

Where the allowance creates a loss, relief in respect of the part of the loss attributable to the pre-trading expenditure will be by way of carry forward against future profits of the trade or profession. As far as possible, a loss will be attributable to other expenditure.

Example

The loss before Section 29 relief is available for set-off against the taxpayer’s other income (under Section 307 Income Tax Act 1967 or Section 16(2) Corporation Tax Act 1976) and the balance is carried forward for set-off against the future profits of the trade or profession (under Section 309 Income Tax Act 1967 or Section 16(1) Corporation Tax Act 1976, i.e.