Are business loans taxable?

Are business loans taxable?

Short answer: No, business loans are usually not taxable, except for in a few very unique circumstances, for example, when the loan is forgiven. 

Now, here’s the long answer.

What is a business loan?

Anytime you borrow money from a lender, you’re taking out a business loan. Business loans come in all shapes and sizes. Some popular business loans you may have heard of include:

• Secured business loans: Secured loans are backed by an asset.

• Unsecured business loans: Unsecured loans do not require you to put up any assets as collateral.

• Asset finance: Not to be confused with asset refinance which involves borrowing against an asset you already own, asset finance is a way to purchase new assets by spreading the cost of the asset over a set period.

• Working capital finance: Working capital finance is usually used to fund short-term projects and can be calculated by subtracting your current liabilities (any owed debts, expenses, or taxes) from your current assets (cash, inventory, any invoices due to be paid to you).

• Property finance: Bridging loans, auction finance, buy-to-let mortgages, semi-residential mortgages and more all come under property finance, which is a form of funding available to businesses looking to purchase property.

In 2022, UK lending to small businesses rose to £35.5 billion, so you’re likely not the only person wondering about the tax implications surrounding business loans. 

Do you have to pay tax on a business loan?

No, as a general rule, you do not pay tax on a business loan. People often mistake business loans as income, but because you repay the loan and because the money is not earned it does not count as taxable income, it is simply borrowed money.

Are business loans subject to VAT?

Repayment of the business loan itself is not subject to VAT, however, some surrounding expenses like legal fees may be subject to VAT. The loan repayment is considered a transaction, rather than the purchasing of goods and services. On the other hand, legal fees that may arise as a result of a loan are considered services and therefore subject to VAT. 

Are business loan repayments tax-deductible?

Yes, the interest paid on a business loan is usually tax-deductible, meaning you can claim the interest as an expense, potentially lowering your taxable income and therefore reducing your self-employment tax bill or corporation tax bill.

When might you have to pay tax on a business loan? 

Sometimes, when your circumstances change or if you’re unable to pay a loan back, lenders can write off the debt. In these instances, because you will not be returning the money, you may be liable to pay tax on the loan.

Can I pay my tax bill with a business loan?

Yes, some lenders offer tax and VAT bill specific business loans. These loans can be used to pay off your corporation tax bill, self-employment tax bill, or VAT bill. If you’re struggling to pay your tax bill, do try contacting HMRC, as the government sometimes allows you to pay your bill in instalments over a specific period. For instance, you may be able to spread your self-employment tax bill over 12 months, depending on your personal circumstances and the amount owed. 

Find a business loan with Funding Options by Tide

At Funding Options by Tide, we match businesses to suitable lenders from our network of over 120 funding providers. Click the link below to find out how much you can borrow.

Click here to find a suitable business loan.

Please note that the information above is not intended to be financial advice. You should seek independent financial advice before making any decisions about your financial future.

It’s important to remember that all loans and credit agreements come with risks. These risks include non-payment and late-payment of the agreed repayment plan, which could affect your business credit score and impact your ability to find future funding. Always read the terms and conditions of every loan or credit agreement before you proceed. Contact us for support if you ever face difficulties making your repayments.

Funding Options, now part of Tide, helps UK firms access business finance, working directly with businesses and their trusted advisors. Funding Options are a credit broker and do not provide loans directly. All finance and quotes are subject to status and income. Applicants must be aged 18 and over and terms and conditions apply. Guarantees and Indemnities may be required. Funding Options can introduce applicants to a number of providers based on the applicants' circumstances and creditworthiness. Funding Options will receive a commission or finder’s fee for effecting such finance introductions.