Spread the Cost of Your VAT Bill

• What is a VAT tax loan?
• How does it work?
• Why would a business use a VAT loan?
• Are there any disadvantages?

VAT stands for Value Added Tax.

It is added to the price of a product or service at every stage of production, distribution, or sale to the end consumer. If the end consumer is a business that collects and pays VAT to the government on its products or services, it can reclaim the tax paid. If the end consumer is not a business or is not registered for VAT, they cannot reclaim the tax paid.

Many products and services in the UK are liable for VAT – that is, they are not VAT exempt. Goods and services that are not exempt typically accrue VAT at the following rates:

• Standard rate: 20% (most goods and services).
• Reduced rate: 5% (some goods and services, such as home energy and children’s car seats).
• Exempt rate: 0% (includes basic and essential items such as most food and children’s clothes).

VAT registered businesses collect VAT on behalf of HMRC and must pay the collected tax (minus any reclaimed tax), to the government on a regular basis – usually quarterly. Most VAT must be paid one month and seven days after the reporting period, but some types of business will have different payment requirements. 

Businesses must register to pay VAT if: 

• They expect their VAT taxable turnover to be more than £85,000 in the next 30-day period.
• They had a VAT taxable turnover of more than £85,000 over the last 12 months.
• The taxable turnover is on sales of goods and services that would be liable to VAT.

Every VAT registered business receives a unique VAT number which must be shown on invoices and most receipts.

It is important to paying VAT bills on time to significant penalties and surcharges. If a business is struggling to pay their VAT bill, they might consider avoiding late payment penalties and keeping cash in the bank by taking out a VAT loan.

What is a VAT loan?

A VAT loan is a type of commercial loan used to pay the quarterly VAT payment to HMRC. 

If a business is struggling with cashflow when their VAT is due to be paid or they would rather invest their cash into the business (e.g., to buy new assets), they might apply for a VAT loan. The lender pays HMRC the amount owed in full, and the business pays the lender back in instalments over time. Repayments are subject to fixed interest rates (which will vary depending on the business’ circumstances )and typically made on a monthly basis over 3, 6, 9 or 12 months. 

The amount a business can borrow will depend on the unique circumstances of the business and eligibility. In addition to credit checks and a review of the business’s financial situation, other eligibility criteria will usually apply, often including:

• the business is VAT registered.
• turnover is more than £85,000 ex VAT 
• UK business
• usually a limited company, although partnerships and some sole traders may also qualify.
• trading for more than one year.

Why would a business use a loan to pay VAT?

• A VAT loan ensures that HMRC receive their payment in full and on time, helping your business to avoid late payment penalties. 
• A VAT loan an prevent you from parting with a large chunk of cash that could be put to better use in your business, i.e. to be invested in growth.
• VAT loan repayments can be made on a monthly basis rather than making quarterly VAT payments which can help to maintain a healthy cashflow.
• VAT loans do not use existing banking or credit facilities and may be arranged as 'rolling' or drawdown borrowing (subject to eligibility). This allows the borrower to use loan funds on a fluctuating basis.

Disadvantages of VAT loans

• Interest will be applied to a VAT loan, so while the payments will be spread over a longer period of time businesses will pay more overall.
• VAT loans cannot be used to pay other tax liabilities such as corporation tax, although it is possible to obtain a loan to cover corporation tax bills.

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BS.202309.01.FS10