When is my start-up officially trading for accounting and tax purposes?

HMRC treats your limited company as “active” and officially trading as soon as it starts carrying on any business activity, buying or selling to make a profit, providing services, earning interest, managing investments or receiving any other income. Crucially, that usually happens well before your first sale, and you have three months from the start of your accounting period to tell HMRC your company is active. Miss that, and you risk penalties before you’ve earned a penny.

When does a company start trading for tax purposes? According to HMRC, your company becomes active for corporation tax the moment it is doing any of the following:

• Carrying on a business activity, such as a trade or professional activity
• Buying and selling goods with a view to making a profit or surplus
• Providing services
• Earning interest
• Managing investments
• Receiving any other income

Notice how broad that is. You don’t need to have issued your first invoice or landed your first customer. If money is coming in, or you’re actively running the business to generate it, HMRC’s view is that you have commenced trading.

There’s a useful distinction here. HMRC does not count purely preparatory work as trading. Writing a business plan, negotiating contracts you haven’t signed, or costing up an idea before you’ve decided to proceed are all pre-trading activities. The clock starts when you actually begin the trade itself.

The opposite of active is “non-trading”, which for most owner-managed companies means the same thing as dormant. This is where a lot of founders get caught out, because Companies House and HMRC define it slightly differently.

For HMRC, your company is dormant (non-trading) for corporation tax if it is:

• A new company that’s not yet trading
• An “off-the-shelf” or shell company held by a formation agent to sell on
• A company formed only to hold an asset, such as land or intellectual property, that will never trade
• An existing company that has traded before but isn’t trading now
• A company that has stopped trading and is about to be struck off the register

For Companies House, the test is simpler: your company is dormant if it has had no “significant accounting transactions” during the financial year (paying the annual filing fee doesn’t count as significant).

The practical upshot is that a company can be dormant for corporation tax yet still have obligations at Companies House. Even a genuinely dormant company must file a confirmation statement and dormant accounts every year. Get the trading status wrong in either direction and you either file returns you didn’t need to, or miss ones you did.

Once your company is trading, the responsibilities kick in quickly. This is the heart of accounting for a trading company, and it’s worth getting the sequence right:

1. Tell HMRC within three months. You must notify HMRC within three months of the start of your accounting period that your company is active and within the charge to corporation tax. You can do this through your business tax account.
2. Register for corporation tax. Being active means you’ll need to file a Company Tax Return and pay any corporation tax due, normally nine months and one day after your accounting period ends.
3. Consider PAYE. If you’re paying yourself or anyone else a salary, you’ll need to register as an employer and run payroll.
4. Watch the VAT threshold. You must register for VAT once your taxable turnover exceeds £90,000 in any rolling 12-month period (the threshold since April 2024), though many growing companies choose to register earlier.
5. Keep proper records from day one. Your first trading date, your accounting period, your last trading date if you ever stop, all of it needs to be recorded accurately, because these dates drive every filing deadline you have.

Because you’re active well before the money really flows, planning matters. Registering late, or assuming you’re still dormant when HMRC considers you active, is one of the most common early mistakes we see scaling businesses make.

Here’s some good news for founders who spent money getting ready to trade. Costs you incurred in the run-up to launch, think software, professional fees, travel or stock-related outlays, can often still be relieved.

Under the pre-trading expenditure rules, qualifying costs incurred up to seven years before you commenced trading are treated as if they were incurred on your first day of trading. That means they can reduce the taxable profit (or increase the loss) of your first trading period. The usual conditions apply: the cost must be “wholly and exclusively” for the business and would have been deductible had you already been trading. Capital purchases and the cost of trading stock are handled differently, so it’s worth checking the treatment of each item.

Keeping clean records of that early spend is exactly the kind of thing that pays off later, and it’s a good reason to get your bookkeeping in order before you think you “need” it.

Working out your trading status, and getting registered on time, is exactly the sort of thing our team handles day in, day out. If you’d like a finance function that scales with you, take a look at our outsourced finance and scaling services, or just call us on 01454 300 999 or email [email protected].