Are Business Loans in the UK Tax Deductible?

If you currently took out a business loan or are considering one to pay for your business expenses, you would want to know the tax deductions. Facilities like business loans in the UK premises encompass two main components: the gradual repayment of the borrowed capital and interest accumulation throughout the loan’s duration.

If you are trying to be savvier with your accounting, you must know the deductions available on the loan. The blog talks about the tax deductions on business loans and their feasibility.

Is it possible to claim deductions on a business loan?

While capital deductions do not qualify for tax deductions, interest deductions do. This is because interest is a legitimate business expense. Thus, you can claim it as a tax benefit.

To qualify, you must use the loan for business only. One filling for taxes can qualify for tax deductions quickly.

Alternatively, if your loan serves multiple purposes covering both personal and business expenses, the tax deductions apply to the business-related expenses.

Can one use a business loan to pay for a VAT or a tax bill?

As a business owner, you must ensure timely HMRC payments. A business owner must prepare for the same by saving the required amount. It is because if you are a start-up with initial investments, you may encounter a cash need anytime. Thus, you should timely pay your HMRC bills. This is especially the case with women entrepreneurs.

 They struggle to find funding for their business and manage the expenses easily. Yes, you can use a business loan to finance the amount. However, you must prioritise saving.

If you find a shortage of business funds, you do not need to tap what you have saved for HMRC. Instead, check online small business loans for women entrepreneurs. You can use the facility to finance your immediate and short-term business requirements.

As these loans are exclusively for women entrepreneurs, you may get better interest rates and have chances to qualify for these quickly in comparison to usual business loans. You can get up to £25000- £2m for your requirements. You must share the affordability to clear it timely.

What you should know before claiming business loan tax deductions? 

Before applying for tax deductions on business loans, you must know the following aspects:

• Claim interest against tax

Interest that businesses pay on loans is deducted from the final profit-and-loss statement. The loan interest is deducted from the profit if one uses the loan for business only. Underneath, interest on overdrafts and credit cards are tax-deductible expenses for calculating the tax profit. You cannot claim the interest on credit cards or overdrafts you tap for personal use.

• Qualifying criteria for tax deductions

You can claim an income tax rebate for the interest paid on a qualifying business loan that meets the HMRC criteria. Qualifying loans are those loans that one uses:

• To buy shares in or lend money to a business in which your equity share is 5% or more of the total shares.
• To buy shares in your full-time limited company
• To buy shares in or lend money for business partnership purposes
• The business must be a closed company- with 5 or fewer managing directors and shareholders
• The company must be a trading company without the primary job of owning the investments.
• The business must own more than 5% shares of the work or management part.

Thus, choosing the right business loan that provides the facility for tax deductions is critical. Additionally, even if you get one, how would you know the amount you qualify for tax deduction is right? Here, experts like a business finance broker may help. They may help you get the best finance lenders for your business that meet your business and taxation rebate goals.

• You can only claim interest costs

Before considering the taxation rebate, know that only the business loan interest qualifies for tax rebate. You cannot claim a taxation rebate on the whole repayment amount. Thus, to claim the loan interest payments, request your lender to provide the total interest amount officially. You can attach this document with the business loan rebate application and send it to HMRC.

• Shareholders must use the rebate cautiously

There are some special rules that the shareholders and company directors must know before claiming the tax rebate. If you draw the money and continue to use the interest rebate for personal use, you could face serious legal allegations.

For example, Philips, director and shareholder of a firm named Allison Private Limited, borrows £60000 from direct lenders. Later, he provides the funds to the firm for working capital needs. He claims tax benefits on the total interest he pays on the loan. After 2 years, Allison Private Limited repays £10000 to Philips. He uses it for personal purposes like- car repair. Thus, since Allison repaid Philips £10000, he would not be eligible for the next tax relief on the proportionate interest rates. 

• Beware of working capital repayment issues 

The above example reveals that using the amount for something other than business purposes may disqualify you from an interest payment rebate on the amount you borrow next. Thus, to prevent this, convert the loan you took for the company into shares capital. However, if you sell or transfer the shares, you will lose the tax relief here.

Can a self-employed qualify for business loan tax relief? 

If you operate as a sole trader or proprietorship, chances are you operate your business with a personal account.

Here, you have the facility to use the overdraft facility or credit cards for personal use in an emergency only. Alternatively, if you do not use a business bank account, you cannot claim interest payments on business expenses.

However, getting a loan as a self-employed for needs like- working capital could be challenging on a personal account. With limited capital, getting urgent needs gets challenging. You can check business growth capital loans near you in this case. However, explore lenders providing or dealing with sole trader business bank accounts. Compare the features and the interest costs on the loans before carrying out a loan with a personal account.

Bottom line

When gearing up your finances for your next business phase, like expansion, understand your options. Address outstanding debts, assets, and the best modes to finance your needs. Usually, business loans come with tax deductions. Identify your eligibility and the documents required to claim the rebate. Additionally, use the business loans exclusively for businesses to claim the relief.