Tax payments are a necessary requirement, but one that proves a regular challenge for small businesses in the UK. When revenues dip or you need to invest in important assets, such as inventory or new equipment, it can impact your ability to meet your tax liabilities. Failing to pay VAT promptly or missing tax deadlines can result in fines from HMRC and damage to your reputation and credit record.

Spreading the costs of VAT payments or covering your bill with a loan can ease the pressure in tricky times and plug cash flow gaps, giving you time to build up your working capital. 

We explore what VAT loans are and how they can help you meet your obligations without straining your finances or incurring penalties.

What are VAT loans?

A Value Added Tax (VAT) loan is a type of short-term business loan that can help you spread the cost of your VAT bills over several months, offering flexibility and breathing space. These loans can be a crucial safety net during key times of the year, such as slow sales periods or when you need to make large-scale purchases. 

Using a VAT loan not only ensures you can cover the cost of your VAT bills, but it can also support businesses with budgeting, managing cash flow, and avoiding HMRC penalties for late payments.

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How do VAT loans work?

If you decide to opt for a VAT loan and submit an application, they usually work in two ways. The loan company will either make a payment directly to HMRC or provide you with the funds so you can pay your VAT bill without causing cash flow problems.  

Usually, you’ll have a few months to repay the loan, to align with periodic VAT returns and obligations, but some VAT loan providers will give you a little longer, such as up to 12 months.  

The terms of VAT loans vary depending on the lender, sometimes requiring collateral or a personal guarantee, and the agreements may come with higher interest rates than other types of loans. 

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Why would a small business need a VAT loan?

If your small business has a turnover exceeding £90,000 from supplying VAT-rated goods or services within any 12 months, you must register for VAT with HMRC – this was recently increased from £85,000 by the government. S

As a registered business, it’s your job to collect VAT on behalf of HMRC through the goods and services you sell, then pay this collected VAT to the government regularly, typically every quarter. However, during this process, many businesses find themselves out of pocket for certain periods, so VAT loans can come in handy.

Here are some common scenarios when small businesses may utilise a VAT loan:

• Price increases for certain products or raw materials impact your profits.
• You’re low on liquid capital when it becomes time to pay your VAT bill.
• Economic dips or changing industry conditions reduce your revenue levels. 
• Unexpected expenses arise, such as building repairs, technology upgrades and asset maintenance or replacements.
• An increase in investment in stock and promotional activity is required ahead of peak seasons.

In these circumstances, a VAT loan can make the difference between paying your bill on time and not, and avoiding various knock-on effects.

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In what industries are businesses best placed to leverage VAT loans?

Cash flow issues and VAT pressures can impact many different types of businesses, but some sectors are more regularly affected than others. Those suited to the use of VAT loans include:

• Construction businesses and property developers – large upfront costs on materials and lengthy payment schedules cause cash flow gaps. 
• Retailers and ecommerce businesses – seasonal fluctuations cause cash flow inconsistency, so VAT loans can ease pressure in slow periods or when boosting inventory to meet demand.
• Manufacturing firms – high capital expenditure, VAT on equipment and raw materials and long payment cycles are factors at play.
• Wholesalers – VAT on imported goods, cash tied up on stock and trade relationships can leave firms short in certain periods.
• Professional services businesses – long-term projects and contracts can mean lengthy waits for income.
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Are VAT bridging loans the same as VAT loans?

VAT bridging loans have a slightly different purpose from standard VAT loans. You can use them to cover the VAT cost on a high-value purchase, such as commercial property. Since real estate can be complex, full VAT costs for property purchases may reveal themselves later in the buying process. And given the costs involved, VAT numbers can be eye-watering. So, investors often use VAT bridging loans to secure the sale of a property, accounting for VAT costs.

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The pros and cons of VAT loans

If you're in a tight spot with your VAT payments, a VAT loan may be just what you're after. But it’s good to be aware of both the benefits and the potential drawbacks. Below are the main pros and cons of using VAT loans to consider:

Advantages of a VAT loan

• Typically, fast access to funds – ideal if you have pending tax deadlines. 
• In certain arrangements, HMRC receives the money directly, simplifying the process of covering your tax bill.
• Spread the cost of your VAT bill as instalments, rather than a lump sum.
• Freeing up cash flow for key business operations.
• Prevents costly penalties from HMRC for late tax payments.

Disadvantages of a VAT loan

• Repayment periods are relatively short, so you still need to ensure you have the funds available in the following months to repay the loan.
• Due to their short-term nature, VAT loan providers often charge higher interest rates than standard loan agreements.
• You may need to provide a personal guarantee, depending on your financial situation and the lender's requirements.
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VAT loan providers

Various UK lenders offer VAT loans and short-term funding solutions to help businesses spread the cost of VAT bills when cash is tight. Here are some of the most popular VAT loan providers to consider:

• Braemar Finance: Offering tailored finance solutions for covering any type of tax bill, Braemar Finance enables flexible repayments and gives businesses the option to have funds transferred into their bank accounts or sent directly to HMRC.
• Bluestar Leasing: You can get dedicated VAT loans from Bluestar Leasing to spread over three monthly instalments. There’s a fixed transaction fee for the service, and funds are paid directly to HMRC to cover your bill. You’ll need to have been trading for a minimum of two years to be eligible.
• White Oak: Providing flexible VAT finance for small businesses, White Oak offers tailored loans to spread VAT costs over 3 to 12 months. White Oak has various types of tax loans to support different scenarios, such as when taking out insurance or paying VAT for property purchases, and claims to provide funds in as little as 48 hours.
• Fleximize: If you’ve been trading for at least six months and have a minimum monthly turnover of £5,000, you can get a VAT loan from Fleximize. Businesses get options to top up, take a repayment holiday and borrow money for between 3 and 60 months (much longer than most VAT loan providers). Fleximize enable approval to deposit within 24 hours.
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Do you pay VAT on a loan?

No. You don't have to pay VAT on a business loan. The principal loan amount and the interest charged on the loan are both exempt from VAT, as lending money is considered a financial service, which is exempt from VAT in the UK. However, while you can’t claim back VAT on a loan, as no VAT is charged, it’s good to know that interest paid on business loans is tax-deductible, as it’s treated as a business expense. 
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What are the alternatives to VAT loans?

Keeping your cash flow consistent can be tricky, especially when bills are due. With the right loan, you don't have to worry about falling behind on your VAT. Of course, getting a VAT loan isn't the only option. 

You may choose to use HMRC’s own VAT payment plans (part of the government’s Time to Pay (TTP) arrangements, which allow businesses struggling to make tax payments or who’ve missed deadlines to spread the costs and get back on track. Alternatively, you can apply to defer tax payments if you import goods regularly or if an unexpected event has significantly impacted your finances. 

There are also various alternative funding options to consider, such as flexible business loans from digital lenders like iwoca, invoice financing or merchant cash advances, which have different repayment models and may offer lower interest rates and preferable features.
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Using a flexible business loan to cover your VAT bill

With iwoca’s Flexi-Loan, you can get fast access to finance thanks to our easy online application process and automation-powered funding decisions. It’s an unsecured, short-term loan solution that flexes with your cash flow and working capital needs. 

You only pay interest on funds you draw down, and you can repay the loan early, free of charge, to ensure cost-efficient borrowing. Discover how to get a business loan from iwoca and use our loan calculator to work out your likely repayments. 

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