VAT loans explained

Every business with a turnover of more than £90,000 a year and making vatable supplies is legally required to charge VAT and complete VAT returns.

It adds a layer of complexity and administration for all businesses and can cause challenges for small or fast-growing businesses where cash flow can be tight. Paying VAT late or missing a payment entirely will see HMRC issue fines that can quickly rack up.

Good financial practice will see a business allocate charged VAT into a dedicated bank account to meet the quarterly VAT demands, but there will be times when unexpected costs or seasonal fluctuations might mean that was not possible.

Here, specialist VAT loans may help.

VAT loans are a form of short-term lending and work broadly in two ways: some lenders will, once a loan is approved, pay VAT due directly to HMRC on behalf of the borrower, and others will forward the business funds to allow it to pay HMRC directly.

Interest rates on VAT loans will vary depending on the financial performance of the business , but are typically repaid over a three-month window. Personal guarantees are typically required.

There are two broad types of VAT loans:

• A short-term bridging loan enabling a business to pay VAT on time; and
• A loan that allows a business to spread its VAT or corporation tax payments over the course of the year.

Loans can be arranged often at short notice and range in value from as little as £5,000 to as high as £5 million, depending on the circumstances of the business.

Additionally, where a business is due a significant VAT payment from HMRC, some lenders offer a VAT advance to release those funds early. Effectively, lenders will typically take a small percentage of the advance as its fee.

As with all borrowing, businesses should look closely at the loan terms, interest rates and any additional fees.

Businesses considering a VAT loan are advised to take specialist advice, particularly if the business has existing borrowing in place.

The Kreston Reeves dedicated Funding team can offer advice on VAT funding, the impact it might have on existing borrowing and make introductions to appropriate lenders, so please contact us today for more information.

The content of this article is for general information only. You should not rely on this information to make, or refrain from making any decisions. Always obtain independent, professional advice for your own particular situation.