If you have taken out a business loan or are currently considering taking one out to pay for your business expenses, you’ll want to know how it affects your tax reporting and what tax deductions are available to you.
In this article, we’ll answer these questions in-depth to help you prepare for the end of the tax year.
Can business loans be claimed as a business cost?
If you’re trying to be savvier with your accounting, a good first step is being clear on the tax deductions available on loans used for your business, whether you have taken out a business loan or a personal loan.
Are business loan payments tax-deductible?
Business loan repayments aren’t generally tax-deductible however, most interest payments made on business loans are.
Business loan repayments are comprised of interest repayments which accumulate across the duration of the loan, and the repayment of the capital borrowed. To reiterate, the interest generated over time on your loan can be deducted from your tax bill. However, repayments of capital can’t be deducted.
If your loan is used entirely for business purposes, you should be able to claim interest repayments as a tax deduction.
If you use your loan to cover both personal and business expenses, you can only claim a deduction to your tax bill on the business expenses. When using your loan for dual purposes, it becomes increasingly important to keep detailed spending records to inform your tax assessment.
Can I use a business loan to pay my VAT or tax bill?
Should you not have available funds within your business bank accounts to pay certain obligations including VAT and tax bills, there are funding options available to ease your burden.
As a business owner, you are obligated to pay quarterly VAT to HMRC. While you should always manage your finances with foresight, in order to pay what you owe, however, if you haven’t managed to put aside what you need you may want to consider a VAT business loan.
A VAT business loan will help you out of a bind to clear what you owe. Make sure you then budget to meet your repayments and your next VAT commitment.
If you do end up settling late, the interest generated on late tax payments is tax-deductible. This expense can be included in your accounts for the period when the interest was incurred. Learn more about corporation tax interest charges at gov.uk.
Other forms of finance
Interest paid on other forms of finance – business credit cards and commercial mortgage repayments – might also be eligible for tax deductions.
Is a business loan considered taxable income?
A business loan is not usually considered taxable income, as this is money that you have borrowed, not earned through your general business practices.
The exception to this rule is when your lender or creditor, should it be a family or friend, writes off your loan in part or entirely. In this case, the forgiven debt would be treated as income for tax purposes.
Are director’s loans tax-deductible?
A director’s loan involves either withdrawing money from your limited business or loaning your business money from your own personal finances.
In terms of money you take out of your business, a director’s loan is simply any funds which aren’t used for salaries, dividends or repayments – and when you take more money out than you pay in.
Money you’ve previously loaned your company can be transferred out of your business account without being considered a director’s loan.
Money taken out for any other reason than those listed above must be listed in your annual accounts at the end of your tax year. Loans to Directors have very specific tax rules and charges that may need to be applied.
If you loan your company money and decide to charge interest, this is classified as a business expense and personal income - this interest must be reported on your personal self-assessment tax return.
While not being tax-deductible, director’s loans can be extremely complex to keep track of, so companies that do use them for whatever reason should use an accountant to help them determine the correct level of tax they need to pay.
What if you’re self-employed?
If you are a sole trader or your business is in a partnership, you’ll be running your business with a personal account.
You will have the option to use the overdraft facility of your account or credit cards for personal use when you need access to funds quickly. However, due to your sole trader status, and because you’re not using a business bank account, you can’t claim interest payments as a business expense.
Some providers offer sole trader business bank accounts, so it’s worth comparing the features offered by sole trader business accounts, before carrying out your business banking with a personal bank account.
Are arrangement fees tax-deductible?
Arrangement fees are simply an administration fee charged by providers when arranging credit.
Arrangement fees are usually charged when consumers apply for a mortgage, but they can be charged when taking out a business loan, and are sometimes applied to car finance. They are normally justified on the basis that they cover the cost of processing the application.
Adding an arrangement fee to a business loan product allows providers to charge a lower interest rate, which can be an attention-grabbing feature for businesses comparing business loans.
It’s always advisable that businesses take arrangement fees into consideration when evaluating the affordability of a loan, or searching for the best deal. If you look only at the advertised interest rate, you won’t get a clear view of what your overall costs will amount to.
As a business applying for finance, the last thing you want to be saddled with is another cost, particularly an admin fee.
No doubt you’ll be keen to know, are arrangement fees tax-deductible? This depends on when you pay the fee.
If you pay an arrangement fee upfront, you won’t be able to deduct the cost from your tax bill. If, however, the arrangement fee is charged as interest repayments, it may be tax-deductible. Check with a certified accountant before proceeding with your loan, if you are unsure whether your arrangement fee will be tax-deductible.
For landlords, arrangement fees are fully tax-deductible against rental profits.
Finding the right loan for your business
If you’re looking to finance the next stage of growth for your small business, pay creditors or buy a new piece of equipment, you’ll need to evaluate your options.
Whether you decide on a business loan product from a traditional high street bank or are attracted to the features offered by an alternative lender, you’ll want to find the loan which fits your business goals and circumstances.
Find the best loan for your company with our business loans comparison table, which clearly displays the benefits and features of each loan product from a range of top providers; compare providers on minimum turnover criteria, available loan amounts (min-max) and loan length.
If you have any questions about the particulars of business loans, have a read of our business loans FAQs.