3 Scenarios for Which VAT Loans Make Sense

Collecting and remitting value-added tax (VAT) is something nearly every UK business has to deal with. Sometimes though, circumstances work out in such a way that a business does not have enough money in the bank to pay VAT when due. Then what? One option is to take a look at vat loans.

A typical VAT loan is a short-term loan intended to cover a company’s tax bill. VAT loans take many forms. They can be based on credit card receipts or invoices. They can be straight up small business loans offered as secured or unsecured instruments. It really just depends on the arrangements agreed to by lender and borrower.

Before you dismiss VAT loans as being completely unreasonable, consider the following three scenarios for which a loan makes good sense. Note that VAT loans serve a very important purpose in the modern business environment. More companies than you probably know make use of VAT loans from time to time.

1. Cash Flow Needs to Be Preserved

One of the most common reasons companies find themselves unable to pay VAT on time is limited cash flow. And if you know anything about business, you know just how critical cash flow is. You could have a company that turns profits prolifically but, due to receivable and payable cycles, still finds itself in a position of having very little cash.

The fact is that companies have to keep a certain amount of cash on hand at all times. But unlike vendors, HMRC does not accept credit as payment for taxes. They only accept cash by way of electronic bank transfers and paper cheques.

A company with lower-than-normal cash flow when the tax bill comes due has to make a decision. Is it more important to reserve whatever cash is currently available, or is it more important to pay the tax bill without incurring interest charges and fees? For some, preserving cash flow is more important. They are willing to borrow on a short-term basis in order to pay the taxman and simultaneously preserve their cash.

2. Previous Problems with HMRC

The second scenario for which VAT loans make sense is one involving previous problems with HMRC. One example of such problems is not having enough money to pay VAT at some point in the past. Consistent VAT problems should definitely be addressed, but that’s another topic for another post. The point here is that a VAT loan might make sense if you have already had trouble paying your taxes.

HMRC has the authority to work out payment plans with businesses unable to pay VAT on time. However, there are certain restrictions. They cannot continually offer payment plans for subsequent missed payments. They cannot offer a new payment plan when a company is still working to pay off a previous tax bill.

It should be obvious that these restrictions prevent a business from working on two payment plans simultaneously. So a company already working on a payment plan to make good on a previous VAT bill may have no other choice but to get a VAT loan to pay the current bill.

3. Paying VAT for the First Time

The third and final scenario involves paying VAT for the first time. You should know that not every company in the UK has to start collecting and remitting VAT right away. VAT requirements do not kick in until turnover reaches £85,000 (at the time of this writing).

Companies must register with HMRC if they have reason to believe that their turnover will reach the threshold within the next 30 days. Alternatively, a business that looks back on its records and discovers it has eclipsed the turnover at some point within the last 12 months must also register.

The whole process of registering and starting to collect VAT is confusing enough. But making that first payment can make matters worse. It takes some companies quite a bit of time to get used to the entire VAT system even though they are not excused from paying that first bill on time. So it might make sense to take out a VAT loan for that first bill so as to not fall behind right away.

VAT loans certainly aren’t the right solution for every scenario. But there are times when taking a loan to pay VAT makes complete sense. Thank goodness there are lenders out there willing to make loans to businesses in need.

photo credit: wuestenigel Pile of cash with text Business via photopin (license)

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