Can you deduct your business loan repayments from your tax return?

When you file a tax return, it's important to know exactly what you can and can't submit as a business expense. If you get it wrong, you may face a fine from HMRC. And if you don't include items that are considered legitimate expenses, your business could end up paying more tax than necessary.

So, are business loan repayments tax deductible? Are loan repayments considered a business expense? And can you use a business loan to pay taxes? Let’s get started.

What is a business loan?

A business loan is a broad term applied to different types of loans available to businesses. The list includes secured and unsecured loans, loans to pay for assets (also known as asset finance) and government-backed Start Up Loans. 

Getting a business loan usually involves an application process where you share information about your operation with a potential lender so they can decide whether to lend to your business. 

All types of business loans work in broadly the same way: you receive a sum of money to use within your business that you pay back with interest over a set period of time. Read more: Find out how business loans work

Do you have to pay tax on a business loan?

The short answer to this question is no, not usually. A business loan isn’t a type of income as you haven’t earned the money through selling goods or services. It’s borrowed money that you need to pay back to the lender. HMRC won’t expect you to pay business tax on borrowed money.

The only potential exception to this is if your business is unable to pay back the loan. In this case, the lender may write off the loan, which means you no longer need to repay it. If this happens, you may find you need to pay tax on the unpaid portion of the outstanding loan. 

Are business loans liable for VAT?

Broadly speaking, no. Business VAT is typically added to the purchase of goods and services, whereas a business loan is a financial product. Therefore, a business loan shouldn’t be subject to VAT. Of course, any goods or services that you buy with the business loan are subject to VAT in the usual way. 

If any legal fees arise in connection with the business loan, they may be considered a service and, therefore, subject to VAT. If you think this might apply to your business, it may be worth speaking to a financial adviser about your specific circumstances.

Can business loans be claimed as a business expense?

A business loan itself is not an expense. It’s a lump sum that your business must pay back, usually by way of monthly loan repayments. Therefore, you cannot claim the borrowed capital – the loan itself – as a business expense.

Are business loan repayments tax deductible?

Business loan repayments by themselves are not tax deductible because they aren’t considered a business expense. They’re repayments of money your business has borrowed. 

However, you can claim the loan's interest as a tax-deductible business expense.

Each loan repayment is usually made up of two sums: the repayment of the loan itself and a payment toward the interest the lender charges for providing the loan. When it comes to filing your tax return, you should refer to the business loan agreement to see how much you’re paying in interest so you can claim the right amount as an expense. 

You can also claim any fees associated with the loan as a business expense  – 

this could be for any set-up or arrangement fees you had to pay. 

Can I pay my tax bill with a business loan?

Yes, there’s no reason why you can’t pay your business’s tax bill with a business loan. But you might not need to take on debt to pay your tax obligations. 

Depending on the specific circumstances of your business, HMRC may offer different payment options, such as paying a set amount over a 12-month period. It’s worth contacting HMRC as early as possible when preparing for the end of the tax year if you think you might struggle to pay your business’s tax bill in one go.