Can start up costs be capitalised

No, not as start up costs. FRS 102 paragraph 18.8C(b) requires start up costs, including the legal and secretarial costs of setting up a company and pre opening and pre operating costs, to be expensed, and company law bars preliminary expenses from the balance sheet. What can be carried forward is spending that creates a separate asset in its own right, such as equipment, stock, qualifying development costs or a prepayment.

What does FRS 102 say about start up costs?

Paragraph 18.8C deals with expenditure that cannot be recognised as an intangible asset, either because no asset meeting the recognition criteria exists or because the costs cannot be separated from the cost of developing the business as a whole. It lists items that must be recognised as an expense and never capitalised:

1. internally generated brands, logos, publishing titles, customer lists and similar items;
2. start up activities, which the standard says include establishment costs such as legal and secretarial costs of establishing a legal entity, expenditure to open a new facility or business (pre opening costs) and expenditure for starting new operations or launching new products or processes (pre operating costs);
3. training activities;
4. advertising and promotional activities, unless the items meet the definition of inventories held for distribution at no or nominal consideration;
5. relocating or reorganising part or all of an entity;
6. internally generated goodwill.

The reasoning is that these costs build the business generally rather than a resource the company controls and could identify separately. The fact that the spending will help the company earn profits later is not enough. For the wider recognition rules see FRS 102 Section 18: intangible assets.

Does company law allow them on the balance sheet?

No. Paragraph 3(2) of Schedule 1 to the Small and Medium sized Companies and Groups (Accounts and Directors’ Report) Regulations 2008 says that none of the following may be treated as assets in any balance sheet:

• preliminary expenses;
• expenses of, and commission on, any issue of shares or debentures;
• costs of research.

So even a company that thought the accounting standard was unclear could not show formation costs as an asset. Costs of issuing shares are not lost, however. FRS 102 paragraph 22.9 requires the transaction costs of an equity transaction to be deducted from equity rather than charged to profit or loss.

What can be capitalised while a business is starting up?

The date of spending does not decide the treatment; the nature of the spending does. During a start up period the following are capitalised under their own sections of FRS 102:

• Property, plant and equipment. Paragraph 17.10 includes the purchase price and costs directly attributable to bringing the asset to the location and condition needed for it to operate as intended, such as site preparation, delivery, installation and testing. See property, plant and equipment under FRS 102.
• Borrowing costs. Paragraph 25.2 allows, as a policy choice applied consistently to a class of qualifying assets, interest directly attributable to constructing a qualifying asset to be added to its cost.
• Development costs. Paragraph 18.8H allows capitalisation only when all six conditions are shown, including technical feasibility, intention and ability to complete and use or sell, probable future economic benefits, adequate resources and reliable measurement. Research must always be expensed (paragraph 18.8E).
• Inventories. Stock bought ahead of opening is an asset under Section 13.
• Prepayments. Paragraph 18.8D confirms that paying in advance for goods or services not yet received can still be recognised as a prepayment.

Which costs are most often wrongly capitalised?

Paragraph 17.11 lists costs that are not part of the cost of property, plant and equipment and must be expensed when incurred:

• costs of opening a new facility;
• costs of introducing a new product or service, including advertising and promotion;
• costs of conducting business in a new location or with a new class of customer, including staff training;
• administration and other general overheads.

Paragraph 17.12 adds that income and expenses from incidental operations during construction, which are not necessary to get the asset ready, go to profit or loss. In practice the items that slip onto balance sheets are launch marketing, staff wages during set up, recruitment fees, opening events and consultancy on the business plan. None of these produces an asset the company controls.

How does this work for a new business?

Illustration only. A new company opens a café. Before opening it spends the following amounts:

Cost	£	Treatment
Company formation and solicitor’s fees for the articles	800	Expense (18.8C(b); Schedule 1 paragraph 3(2))
Coffee machine and kitchen equipment	30,000	Property, plant and equipment (17.10)
Installation and electrical work for the equipment	2,500	Added to equipment cost (17.10(b))
Staff training before opening	3,000	Expense (17.11(c); 18.8C(c))
Opening launch advertising	4,000	Expense (17.11(b); 18.8C(d))
Opening stock of food and drink	1,500	Inventory (Section 13)
Twelve months’ software subscription paid in advance	1,200	Prepayment, released over the year (18.8D)

Of £43,000 spent, £7,800 goes straight to the first profit and loss account and £35,200 is carried as assets. The first period will usually show a loss. That is the correct result and should not be smoothed by capitalising set up costs.

Does the accounting treatment affect tax relief?

The accounts are the starting point, because section 46 of the Corporation Tax Act 2009 requires trading profits to be calculated in accordance with generally accepted accounting practice, subject to adjustments required or authorised by law. Expensing start up costs in the accounts does not lose relief. Section 61 of that Act treats expenses incurred for the purposes of a trade up to 7 years before trading starts as incurred on the first day of trading, provided they would have been deductible if incurred on that day. Section 61(3) excludes amounts dealt with under the loan relationship rules, which have their own pre trading provision in section 330.

Section 61 only helps with costs that would be deductible anyway. Section 53 still denies a deduction for items of a capital nature, so equipment bought before opening gets capital allowances rather than a deduction. The tax side is explained more fully in pre trading expenses, and the VAT side in reclaiming VAT on costs before registration.

What about costs paid before the company existed?

Founders often pay for advice, branding or equipment personally before incorporation. The accounting question is the same once the company takes on the cost: equipment becomes an asset and set up spending is an expense. The legal question of whether the company is bound by contracts made on its behalf before it was formed is separate and is covered in pre incorporation contracts. Any amount the company agrees to repay the founder is a liability of the company, not an asset.

What mistakes come up most often?

• Capitalising losses. Carrying “start up costs” or “formation expenses” as an intangible asset breaches both FRS 102 and Schedule 1.
• Calling marketing a brand asset. Internally generated brands and logos are expensed under paragraph 18.8C(a), however much was spent building them.
• Capitalising development too early. Until every condition in paragraph 18.8H is met, development spending is an expense, and paragraph 18.17 prevents it being reinstated as an asset later.
• Charging share issue costs to profit. They are deducted from equity under paragraph 22.9.
• Forgetting the tax relief. An expense in the accounts before trading starts is not automatically deductible in that period; it is deferred to the first day of trading under section 61.

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Related Accountapedia entries

• Accounting for website and software development costs
• Can I capitalise staff time on fixed assets
• Capitalising development costs under FRS 102
• FRS 102 Section 25: borrowing costs
• Setting a capitalisation threshold
• Which property purchase costs are capitalised

Sources

• Financial Reporting Council: FRS 102 September 2024 tmKYWO6
• legislation.gov.uk: Act 2009 c. 4, section 53
• legislation.gov.uk: SI 2008/409, schedule 1
• legislation.gov.uk: Act 2009 c. 4, section 46
• legislation.gov.uk: Act 2009 c. 4, section 61

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.