Section 82 TCA 1997 provides that certain pre-trading expenses of a trade or profession are 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 commenced on or after 22 January 1997. A deduction is only available for pre-trading expenditure in computing income under Cases I and II of Schedule D where it is incurred in the three years prior to commencement of the trade or profession and is wholly and exclusively laid out or expended for the purposes of the trade or profession.
While a deduction for pre-trading expenditure is available under section 82 TCA, the relief is conditional on the expenditure being of a type that would have been allowable in computing income under Case I or II of Schedule D had it been incurred after the commencement of the trade or profession. 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.
Pre-trading expenses related to a trade or profession may not be taken into account in calculating a loss to be set-off against other income. Any losses resulting from pre-trading expenses may only be carried forward for use against future income of the trade or profession.
Arguments can be made in favour of allowing this relief to individuals who incurred pre-trading expenses and who subsequently incorporated as a company. One argument may be that it is unreasonable to deny relief to the company in respect of such expenses in a situation where the bulk of otherwise allowable expenses were properly incurred by an individual prior to the formation of the company. On the other hand, under existing legislation the losses or expenses of a sole trader may not be transferred to a company on incorporation of the business. Moreover, difficulties could arise in devising a suitable legislative framework to enable companies to obtain relief for pre-trading expenses incurred prior to incorporation where there are a number of shareholders. If provision were to be made for this, for example, it might be necessary to put restrictions on the facility so that only expenses incurred by substantial shareholders would be allowed.
Another issue to consider in this context is whether it is appropriate to allow an expense incurred by one person (e.g. an individual) to be offset against the income of another separate person, in this case a company. After all, they are separate legal persons and the implications of proceeding down this road would have to be carefully considered.
I would take the view that the current legislation is not so much reflective of a situation that is anomalous but perhaps more reflective of the difficulties involved in drawing the line under what is reasonable and appropriate. I am not aware of any major difficulties being caused by the existing legislative provisions. I am, however, open to examining the detail of any particular problems in this area that may be put to me with a view to finding a possible resolution to those problems.