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Tax implications of business loans in the UK
Find out what impact business loans have on your tax situation, including if they're tax deductible and whether they count as taxable income.
If you’re considering taking out a loan for your business, it’s important to understand how it might affect your tax reporting. Certain business expenses can be deducted from a business’ trading income before it’s subject to tax, but these expenses must be solely used for business purposes.
Here, we explain if you’ll need to pay tax or even get tax benefits when getting a business loan.
Is a business loan considered taxable income?
No, business loans are not generally considered business income. That’s because a loan is money you borrow and pay back, not money the company has earned.
The exception is if a lender or creditor forgives some or all of your debt. This means the debt is written off. The forgiven amount is then considered income for tax purposes.
Are business loans tax deductible in the UK?
When you repay a loan, each repayment covers a portion of the amount borrowed (the capital) and some interest. While a business loan itself is not tax deductible, you should be able to claim the interest you pay on the loan as a tax deduction, provided the loan is only used for business purposes.
If the loan is used to cover business and personal expenses, you can only claim the interest on the loan amount used for business expenses. This makes it particularly important to keep accurate spending records so you can complete your tax return more easily.
This rule can also apply to other forms of borrowing, such as commercial mortgages and business credit cards. In both cases, the interest you pay might also be tax deductible.
Are business loans arrangement fees tax deductible?
Some business loans charge an arrangement fee, which is simply a fee for processing the loan. You might find that business loans with arrangement fees come with lower interest rates, but it’s important to calculate the total cost of the loan before deciding which option is best for you.
Whether this arrangement fee is tax deductible depends on whether you pay it upfront or add it to your balance. If you pay it upfront, you won’t pay any interest on it, but this means you can’t deduct the cost from your tax bill. On the other hand, if the fee is charged as interest repayments, it could be tax deductible. But you need to check with an accountant to be sure.
Can I get a business loan to pay my VAT or tax bill?
Yes, some lenders offer business finance to help cover your VAT or tax bill if your business does not have the capital available.
VAT needs to be paid to HMRC on a quarterly basis, but if you haven’t put enough money aside to cover your bill, a VAT loan could help. These simple loans are generally fast to arrange and can help you avoid penalties for paying your VAT bill late. Once you’ve applied to a lender, the lender pays the amount borrowed to HMRC, and you then repay the lender in monthly instalments, usually over a term of between 3 and 12 months. It’s important that you repay your loan on time and make sure you’ve budgeted for your next VAT payment.
Note that if you pay Corporation Tax late, you’ll be charged interest. Any late payment interest you pay to HMRC is tax deductible for Corporation Tax purposes, so you can include this expense in your company accounts for the relevant accounting period.
Business loans can be an important source of funds for growing your business, but you should always check with your accountant to confirm the tax implications of taking out a loan.”
How do director’s loans work?
A director’s loan is money taken from your company that isn’t either a salary, dividend or expense repayment or money you’ve previously paid into or lent to the company.
All other withdrawals you make from your company account must be listed in your annual accounts at the end of the tax year. If you charge interest on this loan, it is classed as a business expense and personal income. This means you must report it when you complete your self-assessment tax return.
The company will pay you interest minus income tax at the basic rate of 20%. This income tax must be reported and paid quarterly. No corporation tax will be due on the amount borrowed.
Director’s loans are complex, so it’s best to speak to an accountant first to work out what tax is due.
What about self-employed borrowing?
If you’re a sole trader, you might use your personal bank account for business purposes. If so, you might use an overdraft or credit card when you need to borrow funds. Because these are personal accounts rather than business accounts, you can’t claim interest payments as a business expense.
Bottom line
In most situations, business loans are not considered taxable income, and any interest you pay on the loan can be claimed as a tax deduction. However, before taking out a business loan, it’s always worth talking to an accountant or financial adviser to make sure you’re aware of any potential tax implications.
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