Severn Accounting
Tax & Accounting

Can one company lend to another tax implications

By Ali Jaw ·

When one company lends money to another, it can feel straightforward on the surface. However, the tax implications can be surprisingly complex, and getting them wrong could land you with unexpected tax bills or penalties. Whether you’re a director considering lending to a connected company or a business receiving funds from another entity, it’s important to understand how HMRC treats inter-company loans.

At Severn Accounting, we regularly advise Worcester-based businesses on these arrangements, so we’ve put together this guide to help you navigate the key considerations.

Interest and Corporation Tax

The most significant tax implication concerns interest payments. If Company A lends money to Company B and charges interest, that interest is:

  • Deductible for the borrowing company (Company B), reducing its taxable profits
  • Taxable income for the lending company (Company A), increasing its taxable profits

Here’s the important bit: HMRC expects the interest rate to be commercial and reasonable. If you’re charging no interest or an artificially low rate between connected companies, HMRC may challenge this under transfer pricing rules. The benchmark is typically what an independent third party would charge in similar circumstances.

For the current tax year (2024/25), Corporation Tax stands at 19% for profits up to £50,000, and 25% for larger companies (those with profits exceeding £250,000). If you’re charging below-market interest rates, you could be leaving tax relief on the table or attracting unwanted HMRC attention.

Loan Documentation and Formality

This is where many businesses slip up. HMRC expects inter-company loans to be properly documented, especially where interest is involved. You should have:

  • A written loan agreement setting out the principal amount
  • The interest rate (with justification if needed)
  • Repayment terms
  • Evidence of board approval (via minutes or resolutions)

Without this documentation, HMRC may argue the transaction isn’t what you claim it to be—perhaps treating it as a gift, a capital contribution, or even a distribution. This could affect Corporation Tax relief and potentially trigger Inheritance Tax issues if the lending company is a close company.

Close Companies and Loan Implications

If your company is a close company (broadly, one controlled by five or fewer shareholders or their associates), inter-company loans carry additional considerations. Whilst there’s no longer a specific “loan to participator” charge in the way there once was, HMRC still scrutinises these arrangements closely.

If money flows from a close company to a shareholder or connected party without proper commercial terms, it could be recharacterised as a distribution or dividend. This would mean the lending company loses Corporation Tax relief and the recipient faces potential Income Tax liabilities.

Personal Tax for Directors

If a director personally borrows from their company, that’s a separate issue entirely. HMRC has specific rules about director loans. If the loan exceeds £10,000 and isn’t repaid within nine months of the company’s year-end, the company may face a Corporation Tax charge on the outstanding balance. Additionally, if interest isn’t charged at a commercial rate, the difference could be treated as a taxable benefit.

Bad Debts and Write-offs

If a loan becomes irrecoverable, the lending company may be able to claim a bad debt relief deduction against Corporation Tax. However, this requires the debt to be genuinely bad and the company to have previously brought the amount into its accounts as income. Simply writing off a loan without proper documentation won’t secure relief.

Cash Flow and Timing

From a practical perspective, inter-company loans can be an efficient way to manage cash flow within a group structure. However, the tax treatment depends on substance. If the arrangement lacks commercial reality—for example, if repayment terms are routinely ignored—HMRC may challenge whether it’s genuinely a loan at all.

Conclusion

Inter-company lending isn’t inherently problematic, but it does require careful planning and documentation. The key principles are: charge commercial interest rates, document everything properly, and ensure the arrangement has genuine commercial purpose and substance.

If you’re considering lending between companies or need to formalise an existing arrangement, the devil is in the detail. Getting it right from the start saves time, stress, and unnecessary tax bills down the line.

For tailored advice, contact Severn Accounting — we’re here to help.