Lisa Lokasto

If you’re launching your business and you’re deep into Google searches trying to figure out VAT, expense claims and startup losses, you’re not alone.

But there are a few traps that come up again and again. I’ve seen them across every sector, and they usually cost founders money they didn’t expect to lose.

These are the top 3 traps, in my opinion.

1. You can’t backdate VAT registration

This is the most common misunderstanding by far.

Let’s say you’ve been spending money for a few months on equipment, software, website and whatnot. You decide to register for VAT in July. You assume you can reclaim VAT on the costs you’ve already incurred.

You can’t.

Once you’re registered, you can only reclaim VAT on costs from the beginning of your first VAT period. So if you’re registered with effect from 1 July, you can only reclaim VAT from that date onwards.

Anything you bought in May or June, even if it’s a legitimate business expense, is outside the scope of reclaim for VAT.

Before you get excited run off to register for VAT, you might also want to read: VAT Registration: When to Register for Your Business

2. You can’t reclaim VAT on pre-trading expenses

There’s a lot of confusion between VAT reclaims and tax deductions.

Revenue allows you to deduct pre trading expenses for income tax or corporation tax purposes; things like equipment, website costs, accountancy fees, etc. These are treated as if they were incurred on the first day of trading.

But VAT is different.

You cannot reclaim VAT on expenses incurred before the date you became VAT registered. Even if the costs were for genuine business setup, and even if you register later, the VAT portion is gone.

So no, you can’t go back 4 years and reclaim VAT on a laptop you bought when you were just planning the business. That’s a tax deduction, not a VAT reclaim.

It’s one of the most expensive misunderstandings I see.

3. You can’t offset pre-trading expenses against OTHER INCOME

This one catches people when they’re trying to make a loss relief claim.

Let’s say you made a €15,000 trading loss and you also had a bit of rental or PAYE income. You want to offset that trading loss against your other income and reduce your overall tax bill.

That’s possible, but not for the full €15,000.

Revenue requires that you adjust out any pre-trading expenses from that loss before you use it to offset other income.

So if €5,000 of the loss came from pre-trading costs, you can only offset €10,000. The other €5,000 is carried forward and can only be used against future profits from the same trade.

It’s a small detail but it makes a big difference if you get pulled up on it.

Final thoughts

If you’re launching your business and Googling your way through this, it’s good that you’re proactive.

But, you know right well what I’m about to say. These are the top 3 traps and there’s plenty more.

Get advice early. Speak to a professional adviser (like myself). Start as you mean to continue: compliant and clear on where you stand.

If you want to talk it through, all consultations go through the office. This post isn’t advice, it’s information, and hopefully it saves you a few mistakes.

-Lisa