Loan relationships: how companies are taxed on loans

Q: What does a worked example look like?

Illustration only. A manufacturing company with a 31 December year end has three loans during the year: LoanAmount in accountsTreatment Bank loan to buy machinery, interest and arrangement fee£12,000 debitTrading debit, deducted from trading profits Loan funding a let warehouse, interest£5,000 debitNon trading debit Surplus cash on deposit, interest received£3,000 creditNon trading credit The non trading figures net to a deficit of £2,000. The company can claim to set it against its total profits of the year, including its trading profits, or carry it back against non trading loan relationship profits of the previous 12 months, or surrender it to a group company. The arrangement fee is an expense incurred directly in bringing the loan into existence, so it falls within section 306A and is relieved in line with how the accounts recognise it.

Q: What are the common mistakes?

Treating trade debts as loans, or the reverse. A long outstanding trade debt is still a trade debt; a fresh advance to clear it creates a loan. Disallowing interest because the loan bought a capital asset. Section 297(4) overrides the capital rule for trading debits. Missing claim deadlines. Current year, carry back and carry forward claims for deficits all have two year time limits. Deducting unpaid interest owed to a director shareholder without checking the late interest rule; see charging interest on a loan to your company. Forgetting the accounts basis. Because the rules follow the accounts, a change in accounting treatment changes the tax figures. Where a company does not prepare accounts that comply with generally accepted accounting practice, CFM33070 explains that the rules operate as if compliant accounts had been prepared. If HMRC opens a check into your return, tax investigation insurance pays your accountant's fees. Solar Protect cover pays up to £100,000 with no excess; it never pays tax, interest or penalties. Read how our cover works or get a quote.

A company is taxed on its loans, whether it borrows or lends, under the loan relationships rules in Part 5 of the Corporation Tax Act 2009. Interest, fees and other profits and losses on money debts are taxed as income, generally following the amounts in the company’s accounts. Loans held for a trade feed into trading profits; everything else is pooled into a non trading profit or deficit with its own relief rules.

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What is a loan relationship?

Section 302 of the Corporation Tax Act 2009 (CTA 2009) says a company has a loan relationship if it stands in the position of creditor or debtor as respects a money debt, and that debt arises from a transaction for the lending of money. Both elements are needed. HMRC’s Corporate Finance Manual at CFM31010 stresses that the relationship is personal to each company: the lender has a creditor relationship and the borrower a debtor relationship in the same debt, and each is taxed on its own side.

A money debt, under section 303, is one that falls to be settled by paying money, by transferring another money debt, or by issuing or transferring shares. Where an instrument is issued to represent security for the debt or the creditor’s rights, the debt is treated as arising from lending even if no money was advanced. Rights that come from holding shares are excluded.

What is not a loan relationship?

HMRC lists examples at CFM31040 of money debts that do not arise from lending money:

trade debts for goods and services, however long they have been outstanding;
finance leases and hire purchase agreements;
unpaid consideration for the purchase of an asset;
directors’ loan accounts consisting only of undrawn or overdrawn remuneration;
overpaid or underpaid Corporation Tax quarterly instalments.

Some of these still come partly within the rules as relevant non lending relationships: interest, exchange gains and losses and impairment losses on such debts can be brought into account under Chapter 2 of Part 6 of CTA 2009. Intercompany balances need care: a balance that represents money one group company has borrowed from another is a loan relationship, while a balance for unpaid goods or services is a trade debt.

What amounts are taxed under the rules?

Section 306A sets out what is brought into account:

profits and losses arising from loan relationships and related transactions (such as disposals and acquisitions of rights), other than interest and expenses;
interest under the relationships;
expenses incurred directly in bringing a loan into existence, entering into or giving effect to related transactions, making payments under the loan, or taking steps to ensure that payments are received.

Section 307 then provides the general rule that the amounts are those recognised in determining the company’s profit or loss for the period under generally accepted accounting practice. HMRC describes this at CFM33070 as following the accounts. Interest is therefore deducted or taxed as it accrues in the accounts, not when it is paid, unless a specific rule says otherwise. If the accounting period does not match the period of account, amounts are apportioned on a time basis under section 307(2B) unless that would be unjust or unreasonable.

There are statutory overrides. Connected companies must use an amortised cost basis (section 349), credits and debits relating to amounts that are distributions are excluded (section 465), and late paid interest owed to some connected lenders is relieved only when paid (section 373).

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Is the loan trading or non trading?

The split decides where the figures go. Under section 297, where a company is a party to a loan relationship for the purposes of a trade it carries on, the credits are trading receipts and the debits are trading expenses. Section 297(4) makes the debits deductible despite the normal bars on capital expenditure and expenses not wholly and exclusively for the trade, so interest on a loan used to buy a trading asset is deductible even though the asset itself is capital.

Credits and debits not brought into the trade are non trading credits and debits (section 301). They are netted. If credits exceed debits the company has non trading profits from its loan relationships, charged to Corporation Tax under section 299. If debits exceed credits it has a non trading deficit. A loan used to fund a property letting business is a common source of non trading debits, because a property business is not a trade.

What about costs before trading starts?

Section 330 allows a company to elect, within two years of the end of the accounting period, for a non trading debit to be treated as a trading debit of the period in which it starts to trade, provided the trade begins within seven years after the end of the period in which the debit arose.

How is a non trading deficit relieved?

For accounting periods beginning on or after 1 April 2017, Chapter 16A of Part 5 (sections 463A to 463I) applies. The company may claim, under section 463B, to:

set the deficit against its total profits of any description for the deficit period; or
carry it back against non trading loan relationship profits of accounting periods ending in the 12 months before the deficit period (sections 463E and 463F), later periods first.

These claims must be made within two years after the end of the deficit period, or longer if HMRC allows (section 463C). The deficit can also be surrendered as group relief under Part 5 of the Corporation Tax Act 2010 (see group relief). Anything left is carried forward under section 463G, and the company may claim to set it against total profits of the next period, again within two years after the end of that period. Carried forward deficits can also be surrendered under Part 5A, and large amounts are subject to the corporate loss restriction.

What does a worked example look like?

Illustration only. A manufacturing company with a 31 December year end has three loans during the year:

Loan	Amount in accounts	Treatment
Bank loan to buy machinery, interest and arrangement fee	£12,000 debit	Trading debit, deducted from trading profits
Loan funding a let warehouse, interest	£5,000 debit	Non trading debit
Surplus cash on deposit, interest received	£3,000 credit	Non trading credit

The non trading figures net to a deficit of £2,000. The company can claim to set it against its total profits of the year, including its trading profits, or carry it back against non trading loan relationship profits of the previous 12 months, or surrender it to a group company. The arrangement fee is an expense incurred directly in bringing the loan into existence, so it falls within section 306A and is relieved in line with how the accounts recognise it.

What special rules apply to connected parties and avoidance?

CFM35010 explains that special rules aim to give consistent treatment where connected parties lend to each other. Under section 466, two companies are connected for an accounting period if at any time in it one controls the other or both are controlled by the same person. For such loans the amortised cost basis is compulsory, impairment and release debits are generally denied to the lender and release credits are generally not taxed on the borrower. These rules are covered in intercompany loans, and the timing rule for unpaid interest in late paid interest.

Two wider restrictions can also cut a deduction. The unallowable purpose rule in sections 441 and 442 disallows, on a just and reasonable apportionment, debits attributable to a purpose that is not among the company’s business or other commercial purposes, which includes a main purpose of securing a tax advantage. And groups with more than £2 million a year of net interest expense must consider the corporate interest restriction.

What are the common mistakes?

Treating trade debts as loans, or the reverse. A long outstanding trade debt is still a trade debt; a fresh advance to clear it creates a loan.
Disallowing interest because the loan bought a capital asset. Section 297(4) overrides the capital rule for trading debits.
Missing claim deadlines. Current year, carry back and carry forward claims for deficits all have two year time limits.
Deducting unpaid interest owed to a director shareholder without checking the late interest rule; see charging interest on a loan to your company.
Forgetting the accounts basis. Because the rules follow the accounts, a change in accounting treatment changes the tax figures. Where a company does not prepare accounts that comply with generally accepted accounting practice, CFM33070 explains that the rules operate as if compliant accounts had been prepared.

If HMRC opens a check into your return, tax investigation insurance pays your accountant’s fees. Solar Protect cover pays up to £100,000 with no excess; it never pays tax, interest or penalties. Read how our cover works or get a quote.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.