What is the tax treatment of a business loan from Funding Circle?

I run a small limited company and I am considering taking out a loan from Funding Circle or another similar peer-to-peer lender – the loan will be in the region of £50,000 – how will this loan affect tax?

 

Funding Circle Loan Tax Treatment

 

Answer, January 2018

Many small businesses are turning to peer-to-peer lending providers like Funding Circle for small business loans, instead of more traditional options like bank loans.

When it comes to the accounting and tax treatment, assuming the loan has been taken out for businesses purposes, the loan value will sit on your business balance sheet as a liability and when you make repayments these will be split out into capital repayments of the loan which reduce the balance sheet loan liability and interest payments which go to your profit and loss account (income statement).

As the interest payments hit your profit and loss account as a cost, they reduce your taxable profit therefore saving your company corporation tax.

Lets look at an example below which may make things a little clearer.

 

Example of accounting treatment of a business loan

Dan runs a small limited company and successfully applies for a £50,000 loan from a peer-to-peer loan provider.

The loan provider send him the £50,000 less a £1,500 setup charge / completion fee, therefore he received £48,500.

The accounting entries for this initial receipt of cash are:

 

Debit £48,500 Bank account (balance sheet)

Debit £1,500 Bank charges (profit and loss account)

Credit £50,000 Loan account (balance sheet)

 

Lets imagine the monthly repayments of the loan are £1,500 with £250 of this being interest, the accounting entries for these repayments are:

Credit £1,500 Bank account (balance sheet)

Debit £250 Interest charges (profit and loss account)

Debit £1,250 Loan account (balance sheet)

 

So after the first repayment the loan balance on the balance sheet reduces from £50,000 to £48,750.

From a tax perspective the only affect is that the initial setup charge and the interest payments will hit your profit and loss account as a cost, reducing your taxable profits and corporation tax.