Deciding whether to take out a business loan can be a big deal – and understanding how much it will cost and whether you can claim business loan expenses as a tax-deductible expense.
In this guide, our mortgage brokers explains how business loans impact your finances and how to ensure you’re claiming the appropriate deductions on your next self-employed accounts or corporation tax return.
Borrowing Through a Commercial Business Loan
The good news is that when you apply for a business loan, the interest you pay on the borrowed money is an allowable expense.
That means that:
- You record the interest paid on your profit and loss account.
- Interest payments are deducted from your profits before calculating the total against which you’ll need to pay tax.
- All business loan interest is deductible, provided the financing is used solely for business purposes.
Even sole traders can claim back interest paid on an overdraft or credit card, as long as the borrowing was used for the company.
However, suppose that borrowing is also used for personal reasons (for example, you process all payments through one account without differentiating). In that case, you won’t be allowed to claim the interest back before calculating your tax bill.
Therefore, we’d usually recommend taking out a separate business loan directly attributable to the company or using a different bank account for your business transactions.
Bridging loan broker used to pay for costs involving letting out a business premise or part of your premises are tax-allowable, so you can deduct the interest paid.
Understanding Allowable Business Loan Expenses
Many businesses contact Revolution in need of a financial injection, but without knowing which expenses are allowable and whether that affects the type of business loan, we’d recommend.
There are differences in the tax impacts of using a business loan if you file accounts with HMRC on a cash basis – we’ll explain this a little more shortly.
Conditions For a Company to Claim Business Loan Finance Costs
The following rules apply to claiming your business loan expenses on your tax returns:
- You must solely incur the interest for business purposes and at a reasonable interest rate. That means you need an original business loan from a reputable lender and can’t claim excessive interest rates.
- Tax relief is only available on the interest itself – the repayment balance of your business loan is not tax-deductible.
- If part of a loan meets the conditions, then only that proportion is an eligible expense. For example, if you finance a car partly for work and partly for personal use, you need to apportion the costs between the two. If you are an employee using a privately owned car for work, you can’t claim the finance costs and instead need to claim business mileage.
- Business loan interest is not claimable if a director or business owner used the capital to repay personal debts, such as an overdrawn current account, or to repay a private loan.
As well as interest, a business loan carries incidental costs like application charges, fees, and set-up costs.
In most cases, these incidental costs associated with securing a business loan are also claimable. You’ll need to add these to your overall financing costs before submitting your tax return.
Claiming Business Loan Interest For a Cash Basis Company
Some companies can choose to prepare their accounts on a cash basis – you’ll need to be unincorporated, a small business, and eligible for the HMRC scheme.
This rule means that you account for costs in real-time, so you won’t have categories such as accruals or prepayments in your balance sheet.
If you submit accounts on a cash basis and have a business loan, you often won’t claim the interest as an allowable tax expense or can claim a cost only up to £500 per tax year.
Rules here are subject to interpretation to a degree, so although the £500 limit applies to general outgoings, you need to determine whether the loan payments are classified as an expense.
Suppose the purchase you’re made with the loan proceeds is allowable. In that case, it doesn’t constitute cash borrowing – and if the asset is used for personal and business purposes, you can claim the interest but only to the proportion of business usage.
In some cases, it can be worth opting out of cash basis accounting if your annual business loan interest is over £500, and you want to get the full value of the tax-deductible expense allowance.
Professional Business Loan Advice
Today we’ve summarised the general rules for claiming business loan interest – and generally, it is an allowable expense, so it reduces your overall tax bill.
The best way to ensure your business loan is the right fit is to work with an experienced broker. Revolution can negotiate rates, recommend different borrowing products, and tailor your business loan application to meet your needs.
Please get in touch on 0330 304 3040 or email us at firstname.lastname@example.org for more information and tailored advice on the most suitable business loan for your company.