VAT loans – what they are and how do you get one

Although charging Value Added Tax (VAT) is a legal requirement for UK businesses with a total taxable turnover of £85,000 a year or higher, it can still cause smaller businesses headaches when their VAT payment is due to HMRC.

Smaller businesses may be working with limited cash reserves, and cash flow can be challenging, so a company might not have the necessary cash to pay a VAT bill when it comes due.

Since VAT is a legal requirement, VAT payments to HMRC are not optional.

Not paying VAT on time could result in a late payment fine, and HMRC could employ various recovery processes to secure the payment.

While careful planning – such as putting charged VAT into a separate bank account – can help alleviate the issue of lack of funds, there may be times when unexpected costs leave a business exposed when VAT payments are due.

When this happens one solution to consider is a VAT loan.

Unlike a standard secured business loan, VAT loans can provide a safety net to smaller businesses who cannot pay the total amount of VAT due to HMRC.

As with any financial decision, it’s important to seek independent, specialist advice before entering into any financial agreement.

What are VAT loans?

VAT loans are a short-term form of financial help designed to give UK businesses financial leeway when managing the point where cash flow and quarterly VAT payments occur.

If a small business is at a point of low cash flow or has a large, upcoming investment opportunity, VAT loans offer UK businesses the opportunity to pay their bills on time without disrupting their business plans.

Why might a small business need a VAT loan?

VAT is a tax levied on the price of certain supplied products and services throughout their entire process, from production and distribution to sales.

If your smaller business supplies VAT-rated goods or services with a turnover of over £85,000 in any 12-month period, you must be registered with HMRC for VAT purposes.

As of 2022, there were 2.7 million VAT-registered private sector businesses in the UK.

VAT-registered businesses collect VAT on behalf of HMRC by adding the correct level of VAT to their products or services and must pay the collected VAT to the government regularly, typically once a quarter.

Similarly, businesses can claim back eligible VAT they were charged, such as on raw materials or services, with the difference owed to HMRC.

If a UK business does not have the total amount required to pay a VAT bill on time, it can consider taking out a VAT loan.

There are several reasons why a small business may need to take out a VAT loan:

• seasonal fluctuations in cash flow
• unexpected expenses, such as repairs
• saving money for a significant investment purchase
• cash flow issues.

If a business’ VAT bill is not paid on time, the company could face several consequences, including late payment interest and potentially hefty fees.

If your VAT bill remains unpaid, your business could be investigated for tax avoidance.

How do VAT loans work?

You can apply for a VAT loan from a bank or independent lender, but as a VAT loan counts as a secured business loan, you must put up assets to act as security.

Your business may be able to get a VAT loan from as little as £5,000 to as high as £5 million – the ultimate amount will depend on your business’s circumstances, eligibility, and which lender you choose.

Once your business has been approved for a VAT loan, the lender will pay the amount directly to HMRC.

You will then need to pay back the lender the loaned amount plus the agreed interest in monthly instalments.

How long this takes may be able to be tailored to suit your business, but typically is spread across a period of either three, six, nine, or twelve months.

Applying for a VAT loan

Applying for a VAT loan does not have to be long and complex.

Lenders may require your business to meet several requirements to be eligible for a loan, such as proof of turnover and a good credit history.

This is to prove you are a legitimate business.

You must provide your lender with several documents to verify your business is eligible.

This would include proof of your identity, the business’s address, and proof that you can repay loans on time, such as bank statements.

The time it will take to secure your VAT loan will depend on the lender.

The application review process may take as little as 48 hours, and the money can be paid to HMRC within a few days of approval.

What to look for when applying

When applying for a VAT loan, there are several factors you need to consider:

• if the lender has any interest rates and how high they are
• the loan terms
• additional fees.

All of these factors could affect your loan application process.

Before signing any loan agreements, you should seek expert, independent financial advice to understand better if the loan you are considering is the right one for you.

This would be the time to ask both the lender and an independent finance expert any questions you have regarding the terms and conditions.