The commencement of business refers to the specific point at which a person or entity begins trading with the intention of making a profit. It marks the official start of business activities and has important implications for taxation, accounting, and legal compliance. Recognising the exact commencement date is critical, as it determines the beginning of the business’s tax obligations, eligibility for deductions, and financial reporting requirements.
1. Definition of Commencement
- Trading Start: Commencement occurs when the business begins active trading—not merely preparing or setting up.
- Clear Intention to Trade: There must be a deliberate and identifiable decision to carry on a trade, profession, or business.
2. Examples of Commencement
- Retail: Opening day when the shop first makes sales to customers.
- Manufacturing: The date production and sale of goods to customers begins.
- Services: The date the business first provides a billable service to clients.
3. Not Considered as Commencement
- Conducting feasibility studies or market research.
- Securing premises, licenses, or equipment.
- Recruiting staff or attending training.
- Registering the business entity.
4. Tax Implications of Commencement
- Start of Taxable Period: The date of commencement determines the basis period for tax assessments.
- Opening Year Rules: Special rules may apply to assess income in the first few tax years.
- Eligibility for Deductions: Trading losses, capital allowances, and other tax reliefs become available upon commencement.
5. Pre-Trading Expenditure
- Allowable Costs: Expenses incurred up to 7 years prior to commencement may be deductible if they would have been allowable had they occurred during trading.
- Examples: Legal fees, advertising, rent, insurance, and staff training prior to trading start.
6. Record-Keeping and Notification
- Notify Tax Authorities: Businesses are typically required to inform tax agencies (e.g., HMRC) of the commencement within a specified time.
- Maintain Records: Accurate records must be kept from the commencement date for tax and audit purposes.
Why the Commencement of Business Matters
Identifying the true commencement of business is essential for proper tax compliance, financial planning, and access to reliefs and allowances. Errors in determining this date can lead to incorrect tax assessments, missed relief opportunities, or penalties. Clear recognition of the start of trading activities ensures the business is aligned with legal and fiscal obligations from day one.