Tax Treatment of a Working Capital Loan for a UK Limited Company

What is a working capital loan?

A working capital loan — sometimes called a cashflow facility or a revolving credit facility — provides funds to cover short-term operational costs: stock purchases, payroll, supplier invoices, or bridging slow-paying debtor cycles. Unlike an equipment loan, the proceeds are not typically used to acquire a long-term asset but to smooth the timing mismatch between cash outflows and inflows in the trading cycle.

Tax treatment of the loan proceeds

Receiving the loan is not a taxable event. The cash arrives, the liability appears on the balance sheet, and the two cancel each other out: there is no profit or gain to tax. When the loan is repaid, there is again no tax consequence — principal repayment reduces the liability but is not an expense in the P&L.

The expenditure funded by the loan (wages, materials, rent, utilities) is separately deductible as a trading expense under the normal rules, assuming it is incurred wholly and exclusively for business purposes. The loan does not change the deductibility of those underlying costs — it simply provides the cash to pay them.

Interest on the working capital facility

The interest charged on a working capital loan is deductible under the Loan Relationships rules, consistent with any other business borrowing. For a revolving credit facility, interest typically accrues only on the drawn balance, so the deductible cost fluctuates with utilisation. Your accounts should reflect interest accrued in each accounting period.

Where a facility charges a commitment fee on undrawn amounts, that fee may also be within the Loan Relationships framework and deductible. Confirm the treatment of specific fees with your accountant, as not every fee charged by a lender falls automatically within Loan Relationships.

Using a working capital loan to pay tax

Some companies draw on a working capital facility to pay their corporation tax or VAT liability on time, then repay as debtor collections come in. This is a legitimate use of borrowing. The interest on such a facility is generally deductible, even though the proceeds are used to discharge a tax liability. However, HMRC has specific rules about late payment interest on tax debts (which is not deductible); the loan interest itself is a separate commercial cost and is deductible provided the normal conditions are met.

Confirm this treatment with your accountant if the primary purpose of the facility is funding tax payments.