Merchant cash advance tax implications for UK businesses
By Helm, Business Funding Specialists
- A merchant cash advance is not classified as a loan for regulatory purposes, but the cost may be treated as a business expense
- The fee element (the difference between the advance and the total repayment) is typically an allowable deduction
- You should keep clear records of the advance, repayments, and total cost for your accountant
- Always consult a qualified accountant for advice specific to your business
When you take out a merchant cash advance, it is natural to ask how it affects your tax position. While the advance itself is not taxable income, the cost of the advance may have implications for your business tax return.
This guide provides a general overview, but tax treatment can vary depending on your business structure and circumstances. Always speak to a qualified accountant for advice tailored to your situation.
Is a merchant cash advance taxable income?
No. The lump sum you receive from a merchant cash advance is not taxable income. It is an advance against your future revenue, not earnings or profit. This means you do not pay income tax or corporation tax on the amount you receive.
This is the same treatment as a bank loan, where the borrowed amount is not considered income for tax purposes.
Is the cost of the advance tax deductible?
The fee element of a merchant cash advance, which is the difference between the amount you receive and the total amount you repay, is generally treated as a business expense. For example, if you receive £10,000 and repay £13,000, the £3,000 fee may be an allowable deduction against your business profits.
The exact treatment depends on how the advance is structured and how HMRC classifies the cost. In most cases, it is treated similarly to interest on a business loan, which is deductible.
How to record it in your accounts
Keeping clean records of your merchant cash advance is important for both your tax return and ongoing financial management.
- Record the advance amount received as a liability on your balance sheet, not as income
- Track each daily repayment and split it between the capital element and the fee element
- Record the total fee as a finance cost or business expense in your profit and loss account
- Keep a copy of the original agreement showing the advance amount, factor rate, and total repayable
- Retain all correspondence and statements from the provider
VAT considerations
A merchant cash advance is a financial transaction, and financial services are generally exempt from VAT. This means you will not be charged VAT on the fee element of your advance, and there is no VAT to reclaim.
The goods or services you purchase with the advance funds may be subject to VAT in the normal way, and you can reclaim VAT on those purchases through your regular VAT return if you are VAT registered.
Corporation tax and sole trader considerations
The treatment of the advance fee differs slightly depending on your business structure, but the principle is the same.
| Business structure | How the fee is treated |
|---|---|
| Limited company | Deducted as a finance cost against corporation tax |
| Sole trader | Deducted as a business expense on your self-assessment |
| Partnership | Shared among partners as an allowable expense |
When to involve your accountant
While the general principles are straightforward, you should involve your accountant when taking out a merchant cash advance.
- Before applying, to understand the impact on your tax position
- When setting up the advance in your accounting software
- At year-end when preparing your tax return
- If you take out multiple advances in the same tax year
- If you are unsure how to split repayments between capital and fee elements
Frequently asked questions
Do I pay tax on the money I receive from a merchant cash advance?
No. The advance is not taxable income. It is treated as a financial advance against your future revenue.
Can I deduct the cost of the advance from my profits?
In most cases, the fee element of the advance is an allowable business expense that can be deducted from your taxable profits. Consult your accountant for guidance specific to your situation.
Do I need to report the advance on my tax return?
Yes. The advance should be recorded in your business accounts, and the fee element should be included as a business expense on your tax return.
Is VAT charged on a merchant cash advance?
No. Financial services are generally VAT exempt, so no VAT is charged on the fee element of the advance.