If you are thinking of using Invoice Factoring you may want to know, are factoring fees tax deductible?
There are a number of fees associated with using invoice factoring and other types of invoice finance. For example service fees, interest and discounting fees. Learn more about the Costs of Factoring.
So are these service fees and interest deductible?
The short answer
Yes. Factoring fees are a business expense and are deducted from your pre-tax profits, provided the facility is used wholly for business purposes. That applies to the service fee, the discount fee and the one off charges.
The separate question people usually mean to ask next is VAT, and the answer there is split. Your service fee normally carries VAT, your discount fee normally does not. That section is below.
Written by Marcus Wright, owner and founder of Bolton Business Finance Ltd, in financial services since 2008 and a commercial finance broker since 2019. Last reviewed September 2026. We are commercial finance brokers, not accountants or tax advisers. This page is general information, not tax advice.
Are Invoice Factoring Fees And Interest Tax Deductible?
The simple answer is yes, factoring fees are tax deductible. Provided funds are being used purely for business purposes, factoring fees and interest are classed as a business expense. We would still recommend speaking to a qualified accounting professional about your individual circumstances.
When you take out an invoice factoring facility, your trade debtors will remain as an asset on your balance sheet. Any funds drawn down on the facility will sit as a liability on your balance sheet.
Any fees and charges related to having an invoice factoring or discounting facility will be deducted from pre-tax profits on your profit and loss account.
The test HMRC applies to a business expense is whether it was incurred wholly and exclusively for the purposes of the trade. A funding facility used to finance your sales ledger meets that test comfortably. Where it can become less clear cut is if a facility is partly used for something outside the trade, which is a conversation for your accountant rather than your broker.
Where Each Charge Appears In Your Accounts
| Charge | Usual treatment |
|---|---|
| Service fee | Operating expense in the profit and loss account, often shown under administrative expenses or finance costs depending on your accountant’s preference |
| Discount fee | Finance cost in the profit and loss account, treated like interest |
| Setup or arrangement fee | Expensed, or spread across the facility term if material |
| Money drawn down | A liability on the balance sheet, not an expense |
| Trade debtors | Remain an asset on your balance sheet under a standard recourse facility |
Only the charges hit your profit and loss. The advance itself is borrowing, so it does not reduce your taxable profit and drawing more money does not create a deduction.
Is There VAT On Factoring Fees?
This is the question most people are really asking, and the answer is that it depends which charge you mean. HMRC splits a factoring facility into two different supplies for VAT purposes.
| Charge | VAT | Why |
|---|---|---|
| Service fee | Standard rated, currently 20% | Factoring is treated as a form of debt collection, and the administrative, clerical and accounting work is a taxable supply |
| Discount fee | Normally exempt | This is consideration for the supply of credit, which falls within the finance exemption |
HMRC sets this out in its VAT Finance Manual at VATFIN3220 and in VAT Notice 701/49 at paragraph 5.5. The practical effect is that a factoring facility is a partly exempt supply from the funder’s point of view, and your invoice from them should show the split line by line.
This matters most if you are not VAT registered. A VAT registered business recovers the 20% on the service fee in the normal way, so it is a cash flow point rather than a cost. If you are not VAT registered, that 20% is a real additional cost on the largest of the two charges, and it is worth factoring into any comparison you are running between funders or against other types of borrowing.
Bad Debt Relief When Invoices Are Factored
This one catches businesses out and is rarely mentioned when a facility is sold.
Normally, if a customer does not pay and the debt goes bad, you can reclaim the VAT you already accounted for on that invoice. Where a debt has been assigned to a factor, you cannot claim bad debt relief on it while the factor holds it. If the factor re-assigns the debt back to you, which is what happens under a recourse facility once the approval period expires, you can then claim it.
So the ability to reclaim is not lost, but it is deferred until the debt comes back to you. This is set out in HMRC VAT Notice 700/18. Whether a debt returns to you at all depends on whether your facility is recourse or non recourse, which is worth checking in your agreement.
Factoring And Tax FAQ
Are invoice discounting fees tax deductible too?
Yes, on the same basis. The treatment follows the nature of the expense rather than the label on the product, so invoice discounting, selective facilities and single invoice deals are all treated as business expenses where the facility is used for the trade.
Is the money I draw down taxable income?
No. The advance is borrowing against an invoice you have already raised. The sale was recognised as income when you invoiced it, so the drawdown does not create income a second time. It sits on your balance sheet as a liability until your customer pays.
Can I reclaim the VAT on my factoring service fee?
If you are VAT registered and the facility is used for your taxable business activities, yes, in the normal way as input tax. If you are not VAT registered, or you are partly exempt yourself, the position is different and you should check it with your accountant.
Can I claim bad debt relief on a factored invoice?
Not while the factor holds the debt. If the factor re-assigns it back to you, which happens under a recourse facility once the approval period expires, you can then claim. The relief is deferred rather than lost. HMRC sets this out in VAT Notice 700/18.
Does factoring affect my corporation tax bill?
Indirectly, yes. The fees reduce your taxable profit in the period they are incurred, so they reduce corporation tax in the same way as any other allowable expense. The advance itself has no effect on taxable profit.
What about bad debt protection premiums?
Bad debt protection charged by a funder is generally an allowable business expense on the same basis as the other charges. Its VAT treatment can differ from the discount fee, so check how it appears on your fee schedule rather than assuming it follows the finance element.
Please take proper advice. We arrange invoice finance facilities, we do not prepare accounts or file tax returns. Tax treatment depends on your specific circumstances, your business structure and how your facility is written. Everything above is general information based on HMRC’s published guidance as at September 2026. Confirm the position with your accountant before relying on it.
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About the author
Marcus Wright is the owner and founder of Bolton Business Finance Ltd. He has worked in financial services since 2008, beginning his career at Santander, and spent time on the lender side at an independent invoice finance provider before becoming a commercial finance broker in March 2019.
He founded Bolton Business Finance in 2020 to give businesses access to the whole lending market rather than one bank’s own product range. The firm is a member of the National Association of Commercial Finance Brokers and works with a panel of 135+ lenders.
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Bolton Business Finance Ltd is an independent commercial finance brokerage, not a lender, and is not an accountancy or tax advisory firm. We are not authorised by the Financial Conduct Authority and can only complete non-regulated introductions. All lending is for business purposes only. Tax and VAT information on this page is general guidance based on HMRC published material as at September 2026, including VAT Finance Manual VATFIN3220, VAT Notice 701/49 and VAT Notice 700/18, and is not tax advice. Rates and reliefs change and treatment depends on individual circumstances. Always confirm the position with a qualified accountant. Registered address: Westgate House, 1 Westgate Avenue, Bolton, Greater Manchester, BL1 4RF. Company number 12495909.