Interest paid on business loans or business overdrafts is a deductible expense as long as the loan is made wholly and exclusively for the purpose of the business. The incidental costs of loan finance are also deductible.
Thus, where a business needs additional funds, borrowing those funds can be tax effective as a deduction is available for interest costs and also associated costs, such as any arrangement fee.
PQR Ltd is a family company. The company wishes to expand its range of products and takes out a bank loan of £20,000 to fund the expansion. They are required to pay an arrangement fee of £500 in respect of the loan.
The interest on the loan and the arrangement fee of £500 are deductible as an expense in computing the profits of the business.