Why it’s so important to pay your tax or VAT bill on time (and what to do if you can’t)


For businesses, January and April are some of the most stressful times of the year. HMRC imposes multiple tax and company accounts filing and payment deadlines on these dates.

Usually, firms and their accountants schedule automatic tax payments and pay them to the authorities on time. However, you can find yourself in a situation where you don’t have enough cash on hand to finance both your operations and pay HMRC the money you owe.

Firms should set aside money for taxes and VAT bills throughout the year. Many set up standing orders with HMRC to ensure that they make regular contributions to their tax estimate.

Jack Smith, Director of Love Finance said: HMRC doesn’t take too kindly to businesses paying their taxes late. In recent years, it has been increasing liquidations and winding-up orders in response to small businesses failing to pay their tax bills on time.

However, as business leaders know, things can and do go wrong (as we have seen in the recent pandemic). When crises hit, it is often hard to avoid raiding funds earmarked for the taxman.

Financing your tax and VAT bills

Fortunately, you don’t need to panic. To avoid building up arrears with the taxman (and facing some pretty stiff penalties), you can finance your tax payments. Here, lenders provide you with the money you need upfront for any tax bills you owe, and then you pay them back when your cash position improves later on.

VAT loans work by bridging the gap between the working capital you have on hand, and the amount you need to pay HMRC. Good VAT bill finance facilities provide all of the cash you need to meet your tax liabilities on time and then ask you to pay back in a series of instalments over the following months.

VAT loans are usually unsecured, short-term and run for three months, in step with HMRC’s reporting period. In most cases, loans are for £1,000 or more. However, the amount you borrow will depend on your current VAT position.

Jack at Love added: Some companies like to use VAT funding if they are running low on cash during any quarter. It provides peace of mind and allows them to spread the cost of VAT over the year and helps to smooth out payments across periods of high and low demand.

Why business VAT funding is so important

HMRC is becoming less consistent in the way it chases up taxes. Many companies wait for the authorities to send out warning letters before they act on any tax that they owe, but this might not be wise. HMRC may take more drastic action against non-compliant firms in the future.

The safest solution is to use tax finance products. These facilities provide HMRC with cash upfront and are often cheaper, particularly when cash flow is scarce.

Of course, if you believe that your company is not profitable long-term, you’ll need to communicate this to the authorities. Your accountant may be able to reduce certain tax bills for you in advance of any liquidation.

Remember, you don’t pay all your taxes at the same time. While VAT is quarterly, limited companies pay corporation tax annually and retrospectively. (The deadline is usually 12 months following the accounting period it covers). Many companies get caught out because they don’t set aside enough money to pay it. Payroll taxes are monthly and can be complicated, particularly over the Christmas period. Check that you have enough cash on hand to pay these and the money you owe staff.

If your business rents premises, you may have to pay quarterly rents. Again, these can be large lump sums that disappear from your accounts.

Remember, if you find that you can’t make any of these tax payments, finance solutions are available. Use them proactively instead of risking falling foul of the taxman. If you find deadlines creeping up on you, companies such as Love Finance aim to make funds available for small businesses in 24 hours.