Is VAT Charged on a Business Loan in the UK?

Why loan interest is VAT-exempt

Under the Value Added Tax Act 1994, Schedule 9, Group 5, the granting of credit — including the interest charged on a loan — is an exempt supply for VAT purposes. This means the lender does not charge VAT on the interest, and you do not pay VAT on top of your interest payments.

Exemption is different from zero-rating. A zero-rated supply is still a taxable supply at 0%; an exempt supply falls entirely outside the VAT charge. The distinction matters for the supplier's VAT recovery, but from a borrower's perspective the practical outcome is the same: no VAT on the interest invoice.

What about arrangement fees and other charges?

The VAT treatment of fees charged by a lender depends on whether those fees are consideration for the financial service itself or for a separate taxable service. HMRC's general position is that arrangement fees that form part of the overall cost of providing the loan facility are also exempt from VAT.

However, fees for distinct advisory or administration services provided separately — such as a solicitor's legal fee, a valuer's fee, or a broker's advisory fee — are normally standard-rated at 20%. You should check any fee note carefully and query the VAT treatment with the issuing party if it is unclear. Your accountant can confirm whether input tax is recoverable on any particular charge.

How does this affect your VAT recovery?

If your company makes only fully taxable supplies (standard or zero-rated), receiving an exempt loan does not affect your VAT recovery position at all. You simply do not receive a VAT charge on the interest.

However, if your company also makes its own exempt supplies — for example, if you are a holding company, a property investor, or a financial services business — then receiving loan finance may contribute to a partial exemption calculation. This can restrict the amount of input VAT you can recover across your business. The partial exemption rules are complex; your VAT adviser should assess whether the loan creates any restriction in your specific circumstances.

VAT on security and insurance linked to a loan

Where a lender requires you to take out insurance as a condition of the loan, the insurance premium itself is subject to Insurance Premium Tax (IPT), not VAT. IPT is not reclaimable in the same way VAT can be. If the lender arranges the insurance and passes the cost to you, check the documentation to understand exactly what you are paying and why.

Legal fees paid to solicitors in connection with security arrangements (e.g. debentures, charges over property) are normally standard-rated at 20%, and your company may be able to recover the input VAT on these provided they relate to your taxable business activities.