Intercompany Loans: How to Document Them Before HMRC Comes Knocking

Why HMRC Is Paying Close Attention

If you run a group of companies, have a holding structure, or regularly transfer money between your limited company and a connected business or yourself as a director, HMRC classifies these as related party transactions. Since 2023, HMRC has significantly increased its compliance activity in this area, particularly targeting small and medium-sized company groups where informal arrangements are common. The core concern is that transactions between connected parties may not reflect what independent businesses would agree, allowing profits to be shifted to lower-tax entities or deductions to be inflated artificially.

The Transfer Pricing and Arm's Length Principle

UK transfer pricing rules, found in Part 4 of the Taxation (International and Other Provisions) Act 2010, require that transactions between connected parties are priced as if they were between independent parties dealing at arm's length. While full transfer pricing rules historically applied mainly to large businesses, HMRC can still challenge intercompany loans in smaller companies using the general anti-avoidance principles and loan relationship rules under the Corporation Tax Act 2009. If a loan carries no interest, a below-market rate, or has no realistic repayment schedule, HMRC may impute a market rate of interest and adjust taxable profits accordingly.

Director's Loans: A Specific Risk Area

Loans from a limited company to a director are governed by additional rules. If you borrow more than £10,000 from your company and the loan remains outstanding nine months after your company's accounting year end, the company must pay a Section 455 tax charge of 33.75% on the outstanding balance. This is repayable when the loan is repaid, but cash flow damage can be significant. HMRC also looks closely at whether interest is being charged at a commercial rate and whether loans are being written off informally, which would trigger income tax and National Insurance on the director.

What Documentation You Must Have in Place

Good documentation is your first line of defence. For every intercompany loan or related party transaction, you should maintain the following:

• A signed loan agreement setting out the principal amount, interest rate, repayment terms, and what happens on default. This should be dated before or at the point funds are transferred.
• Evidence of the interest rate benchmark used to establish that the rate is arm's length. Referencing Bank of England base rate plus a commercial margin is a widely accepted approach. As of June 2026, the base rate sits at 4.25%, so a total rate of 5.5% to 7% for an unsecured intercompany loan would typically be defensible.
• Board minutes approving the loan, particularly for director loans, to demonstrate proper corporate governance.
• Regular loan statements showing the balance, interest accrued, and payments made, updated at least annually.
• A written assessment of repayability confirming the borrowing entity has a realistic ability to repay. If the borrower is loss-making with no clear recovery plan, HMRC may argue the loan should be treated as a capital contribution rather than debt.

Interest Income and Deductions Must Be Symmetrical

A common mistake is crediting loan interest in the lender company's accounts without the borrower company actually deducting it, or vice versa. Both sides of the transaction must be reported consistently. The lender must include interest received as taxable income. The borrower may deduct interest paid, provided it passes the wholly and exclusively test and the loan relationship rules are satisfied. Mismatches are a red flag in HMRC compliance checks.

Practical Steps to Take Now

• Review all current intercompany balances and ensure a formal written agreement exists for each one.
• Check your director's loan account balance before your company's year end and clear any overdrawn balance to avoid the Section 455 charge.
• Ask your accountant to prepare a simple transfer pricing file if your group has annual related party transactions exceeding £500,000.
• Ensure your Corporation Tax return accurately discloses related party transactions where required.

Getting intercompany loans right is not just about avoiding penalties. Done properly, they are a legitimate and tax-efficient way to manage cash across a group. The key is treating them with the same formality you would apply to a loan from a bank.