Are Loan Arrangement Fees Tax Deductible Against Corporation Tax?

Arrangement fees as a financing cost

When your company pays an upfront arrangement fee to secure a loan facility, HMRC generally treats this as a cost of the loan relationship rather than a separate expense. Under the Loan Relationships rules in the Corporation Tax Act 2009, Part 5, such fees are brought into the tax computation in the same way as interest — on an accruals basis, spread over the term of the facility.

In accounting terms, under UK GAAP (FRS 102) and IFRS, arrangement fees are typically deducted from the initial carrying amount of the loan and amortised as part of the effective interest rate over the loan's life. The tax treatment follows this accounting treatment in most cases, meaning you receive the deduction gradually rather than in the year of payment.

When is the deduction taken upfront?

Some smaller companies using simpler accounting methods may expense arrangement fees in full in the year of payment. Where the accounts reflect this treatment and it is consistent with applicable accounting standards, the tax deduction may also be taken in that year. However, HMRC may challenge a large upfront deduction if it considers the accounting treatment to be incorrect.

The safest approach is to follow the accounting treatment that properly reflects the economic substance of the arrangement. Your accountant should confirm how the fee is presented in your statutory accounts before assuming a specific tax outcome.

Fees that may not be deductible

Not every fee labelled as an arrangement fee will be deductible. If the fee relates to a capital transaction — for example, a fee paid to raise equity or to acquire a capital asset — rather than to a debt instrument, it may fall outside the Loan Relationships rules and could instead be a capital cost with no immediate deduction.

Similarly, if a fee is paid in connection with a loan that is used for non-trading purposes or purposes that HMRC considers to have an unallowable tax motive, the deduction could be restricted or denied. Document the business purpose of the facility clearly. Confirm the specific treatment with your accountant, particularly where the fee is material.