Updated: Aug 18, 2021
One question we regularly get asked is if invoice finance fees are tax deductible - in other words if you advance your invoices with Penny, can you claim tax relief on the percentage you pay to Penny?
The simple answer is yes...but let’s rewind a little.
Invoice Finance 101
What we do at Penny is essentially a type of invoice finance. That’s a pretty general term that describes a way for businesses to borrow money against the amounts due from their customers.
It can be an affordable and easy way of freeing up cash flow for your business, especially when you have challenging payment terms with customers.
Invoice finance includes factoring, invoice discounting and selective invoice finance. Penny falls into the latter. Unlike other types of invoice finance it allows businesses to pick and choose which invoices they want to raise finance against.
Penny fees - case study
Jack runs a coffee business. He has just landed a retail deal with a national coffee chain. They’ll buy his product, but the payment terms are 30 days from invoice- leaving him short on the cash flow front.
Jack submits an invoice worth £20,000 using Penny. Based on the debtor, terms and nature of the invoice, Jack is quoted an upfront Penny fee of £5% - £1,000.
Jack gets the entire remainder of his invoice - £19,000 - advanced by Penny within 24 hours.
Fast forward 30 days, and Jack’s retail customer pays Penny.
So Jack has incurred a tax deductible invoice finance fee of £1,000.
Here's the representative example using the case study above, for a limited company:
It's worth noting, that although our case study is based on a limited company, Penny also serves sole trader businesses - unlike the majority of invoice finance providers. And yes, for sole traders Penny fees are also tax deductible. They can be claimed as a business expense on your self-assessment tax return.
Take it from an accountant…
Candice Chandler, Head of Tax at Boox Accountants, explains:
“Generally, you can usually claim tax relief on any costs deemed to be incurred ‘wholly & exclusively’ for business purposes. Some companies use invoice factoring to reduce the amount of working capital tied up in late settlement of trading debts, essentially to enable continued trade whilst debts are settled. This means that invoice finance or factoring fees are tax deductible’
As such, provided the above applies and funds are being used purely for business purposes, then any associated fees and interest are classed as a business expense and will be deducted from pre-tax profits on your P&L. However it is always best to speak to a qualified accounting professional to discuss your individual circumstances”.
Invoice finance fees are tax deductible, so the Penny fee you pay will end up costing you less in real money, once your taxes are reconciled.