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:
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:
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.
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: