Financing Business Tax Arrears

Managing cash flow and proactive tax planning ahead of key filing and payment deadlines should be a business priority. However, many SMEs in the UK fall into business tax arrears, due to an array of different reasons.

In this article we discuss how businesses get into tax arrears, ways to mitigate the impact and what payment plans and finance options are available. 

What are business tax arrears and why do they happen?

Business tax arrears are when a company fails to pay what tax is owed to the government by a certain pre-agreed deadline and, therefore, is in arrears. This can be a failure to make VAT, PAYE or Corporation Tax payments, or meet any other HMRC liabilities, in the required timeframe.

Missing deadlines is more common than you might think and there are various reasons it occurs. However, you should be aware of the impact of business tax arrears, penalties you may incur and the financial and reputational risks. 

Common causes of business tax arrears

Specific events or unexpected issues cause some tax arrears while other cases are due to poor money management and planning. 

Here are the common causes of business tax arrears in the UK:

• Seasonal business fluctuations, which lead to shortfalls in key periods.
• Cash flow gaps (caused by unbalanced working capital, delayed client invoice payments, declining revenue, etc.).
• Economic downturn or changing market conditions.
• Inefficient forecasting, miscalculations and accounting errors.
• Urgent operational expenditure ahead of tax deadlines.
• Unexpected bills or unforeseen events.

Why SMEs are most at risk of business tax arrears

SMEs are the backbone of the UK economy, but are the most vulnerable and at risk of falling into tax arrears. Whether from rising running costs, seasonality or overdependence on client payments, many small businesses are in a precarious position in today’s business environment. Your ability to meet business tax obligations can be affected if certain things don't align.

Nearly half of UK SME owners (42%) cited rising costs and taxes as their biggest concerns for 2025, according to insights from iwoca’s recent SME Outlook research.

The consequences of unpaid tax: what businesses need to know

Missing tax deadlines and getting into business tax arrears can have numerous repercussions. While one misstep may not seem like the end of the world, regularly missing HMRC deadlines and ongoing tax arrears can have a snowball effect that may threaten your company’s stability and even survival.

Here are the main consequences of unpaid tax:

• Fines: HMRC hands out fines to businesses for late tax payments, including one-off charges, surcharges and penalties for repeat offences and recurring issues.*
• Interest: You’ll be charged interest by HMRC on late payments, including ongoing debt and fees from previously missed payments.
• Investigations and enforcement actions: If you’re in tax arrears for a significant time, HMRC may send you a warning, investigate your business for tax avoidance or take legal and enforcement actions like winding-up orders.
• Pressures on other liabilities: The knock-on effect of slipping behind with tax payments is problems meeting other liabilities, such as supplier payments and regular monthly outgoings to third parties or staff.
• Reduced trust and reputational damage: Business tax arrears can result in loss of trust from suppliers, partners and various financial institutions.
• Negative credit impact: Persistent failure to meet tax payment deadlines and repay debts to HMRC will negatively affect your credit rating, harming your chances of getting approved for various forms of business finance.

*See our guide to handling HMRC tax penalties for all key details about deadlines, penalty thresholds and ways to avoid and reduce the impact of late payments.

How to negotiate a Time to Pay arrangement with HMRC

The government knows the importance of SMEs for a strong economy and the various reasons for missing tax deadlines. This is why it offers companies a way to spread the cost of outstanding payments. 

HMRC’s tax debt strategy sets out four key pillars to help achieve its goal of minimising the volume and value of tax debt, which are:

• Preventing tax debt
• Tailoring interventions
• Effective and efficient resolution
• Being adaptable

If you’re having difficulties meeting your tax liabilities, you can negotiate and agree to a Time to Pay (TTP) arrangement with HMRC. These tax payment plans can be used to manage existing VAT, PAYE or Corporation Tax payments owed. 

Typically, the programmes allow companies to spread their payments over 6-12 months – sometimes longer, depending on your situation – and there are options to consolidate tax debts, including incorporating existing late payment penalties. You’ll be charged interest on the money owed during the agreed repayment period, at the Bank of England (BoE) base rate + 2.5% (around 7.25%). 

It’s a handy first option for many small businesses and, on Gov.uk’s dedicated page, HMRC claims “90% of its TTP payment plans are completed successfully.”

Key steps involved in arranging a Time to Pay plan with HMRC

• Contact HMRC to discuss your predicament, explaining the situation and reasons you can’t meet certain deadlines.
• Provide evidence and financial statements to support your case and the need for a TTP arrangement.
• Propose how long you need to be able to pay the debt and what monthly repayments you can afford, including supporting information about affordability.
• HMRC will consider your case and the details provided before agreeing to offer you a TTP agreement.
• If you owe large sums and HMRC identifies that you have assets that can be liquidated, they can request this action before approving a TTP arrangement​.

Tip: Act promptly and provide as much information as possible, as HMRC responds favourably to proactive communication and those showing intent to pay tax arrears.

What to do if your business is struggling with tax debt

If your business is struggling with its tax obligations and at threat of mounting debt, there are various routes you can take. As mentioned, your first port of call should be to contact HMRC immediately, as this will show you’re not deliberately avoiding paying tax, you have valid reasons for missing any deadlines and you’re seeking reasonable ways to repay what’s owed.

Exploring a TPP arrangement is a way to spread the cost of your immediate tax payment requirements. You may get a suitable agreement that allows you to meet your obligations. However, you can seek expert advice from a specialist accountant, consultancy or financial adviser to determine the optimum approach to short-term needs and long-term corporate tax planning. 

Also, you may be eligible for other government support and schemes, defer certain payments or agree to a different schedule for tax payments. 

Where to get help for managing and financing business tax arrears

Some agreements and arrangements just kick the can down the road. Various forms of support are available to help you manage and finance business tax arrears, such as accountants, financial advisers and non-profit organisations like Citizens Advice Bureau. These can address key concerns and offer insights to guide your approach to resolving your debts.

It’s also worth exploring different forms of business finance, where a quick cash injection can help you pay off your existing tax debt, access key funds for operational needs and align loan repayments with your cash flow. This could be a small business loan or other forms of financing, such as a line of credit or invoice finance (if your main issue is working capital tied up in delayed client invoice payments).

Flexible business loan providers, like iwoca, offer fast access to finance which SMEs can use to clear any debt and support operational needs in key financial periods, with manageable monthly repayment terms tailored to your needs. 

How tax arrears impact business operations and cash flow

Business tax arrears hinder operational efficiency and lead to issues with cash flow. Here are some of the ways your operations and cash flow can be affected:

• Restricting working capital available for crucial operational expenditure.
• Slowing business growth and preventing investment in new opportunities. 
• Limiting scope for modernising operations, hiring new staff and upgrading equipment.
• Underperforming in peak seasons due to the impact on marketing spend, promotional activities and inventory replenishment.
• Damaging supplier relationships or difficulties getting credit agreements.
• Increasing risks of escalating penalties, asset seizure or HMRC investigations.  

Preventing tax arrears: smart financial planning strategies

Beyond ways of managing and financing business tax arrears, what about preventing tax arrears in the first place? Smart financial planning can keep you on top of your corporate tax obligations and minimise risks of missing deadlines, incurring penalties and other unwanted issues.

These are some smart ways to prevent business tax arrears:

• Aim to build regular tax reserves throughout the year.
• Set up filing and payment reminders, workflows and task automation to prevent unnecessarily missing deadlines.
• Increase accounting efficiency with some of the latest cloud solutions and forecasting tools.
• Do thorough research into potential tax relief, capital allowances and exemptions, to reduce your overall tax liabilities.
• Consider spreading liabilities and income or accelerating expenses into different financial periods to help with cash flow management.
• Explore flexible credit facilities and loan solutions from alternative finance lenders to ease cash flow and prevent business tax arrears.

Read our article on effective corporate tax planning for more in-depth insights and tax strategies.

Business loans and financing options to clear tax debts

Rather than missing tax deadlines and seeking payment plans, business loans and flexible financing options can help you avoid costly penalties and impact. They can be a preventative measure or used to clear existing tax debts.

Alternative lenders often provide faster, more flexible access to working capital than banks and traditional lenders. For example, many digital lenders offer flexible business loans with less rigid terms and eligibility criteria, looking beyond the credit score. 

Learn more in our dedicated article on how to pay your tax bill: HMRC Time to Pay Arrangements or Business Loans.

Exploring iwoca’s Flexi-Loans

At iwoca, our loans are designed to meet the needs of UK SMEs. We don’t charge early loan repayment fees and you only pay interest on the funds you use. 

You can borrow between £1,000 and £1,000,000 for a few days, weeks or up to 60 months, with manageable monthly repayments based on your needs and cash flow. Apply online in minutes and get an approval decision within 24 hours, with funds often transferred on the same day.

Find out how to get a business loan with iwoca or use our business loan calculator to see your likely repayment costs using our Flexi-Loan solutions.

Business tax arrears FAQs

What should I do if my business can’t pay its tax bill on time?

Contact HMRC as soon as possible outlining why you can’t pay your tax bill on time. The quicker you raise the issue, the better, as it shows proactivity and mitigating circumstances before HMRC issues penalties or starts investigations into tax avoidance. 

You can negotiate a Time to Pay (TTP) arrangement to spread the cost of your tax liabilities, request to defer payments or get other forms of support, depending on your circumstances. Make sure you keep records of all your communications.

Whilst it’s important to contact HMRC if you think you’re going to miss tax deadlines, you can also explore short-term finance options to cover the cost of upcoming or existing corporate tax payments. This could be a business loan, line of credit, overdraft or alternative funding solution, like invoice finance.

Can a business loan help me pay off tax arrears?

Yes, many small businesses use loans to pay off tax arrears. Rather than letting tax debt mount up, incurring further charges, penalties and reputational damage, a short-term loan can clear the debt and provide additional funds to stop other outgoings putting pressure on your cash flow.

The great thing about business loans like iwoca’s Flexi-Loan is that they’re tailored to your situation. This ensures you can afford the monthly repayments and manage your working capital needs and tax obligations. You only pay interest on what you use and we don’t charge for early repayments. 

Will tax arrears affect my business credit score?

Yes, tax arrears can affect your business credit score. Your score will suffer a negative impact if you let things escalate, triggering HMRC investigations or worse, such as CCJs, winding up orders, etc.

Also, missed tax payments can appear on supplier reporting and result in reputational damage, which makes it harder to get loans and trade credit in the future. 

Maintaining regular contact with HMRC when in tax arrears and settling debts promptly is key for reducing the impact on your credit rating, whether through a TTP arrangement or with help from a business loan.

Sources:

• 2025 SME Outlook [iwoca]
• Dealing with Tax Arrears [British Business Bank]
• How to Pay a Debt to HMRC with a Time to Pay Arrangement [Gov.uk]
• HMRC’s Tax Debt Strategy [Gov.uk]
• If You Cannot Pay Your Tax Bill on Time [Gov.uk]
• How to Handle HMRC Tax Penalties: A Guide for UK Small Businesses [iwoca]
• HMRC Time to Pay Arrangements or Business Loans: How to Pay Your Tax Bill [iwoca]

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