What is a Business Tax Loan?
A business tax loan is a loan, usually a short-term financial product, designed specifically to help a business pay its tax bills. Instead of using a lump sum of cash to cover a large tax liability, such as Corporation Tax or VAT, a business can take out a loan to pay the bill and then spread the cost of that loan into monthly repayments over a set period.
This type of loan is a strategic tool for cash flow management. It allows a business to meet its tax obligations on time without putting the full strain on its working capital. This means a business can preserve its cash reserves for other essential operations, such as paying staff or purchasing inventory..
For small to medium-sized businesses, tax bills, especially quarterly VAT or annual Corporation Tax, can create a significant financial squeeze, if it coincides with other less predictable business costs. A tax loan provides a solution by ensuring the bill is paid promptly, helping the business avoid potentially costly penalties and interest charges from HMRC for late payment.
The Main Types of Tax Loans Can Be Used For:
Tax loans are used for different types of business tax liabilities. The most common forms are used for Corporation Tax, VAT, and self-assessment tax.
Corporation Tax
A loan used for Corporation Tax is for limited companies that need to pay their annual Corporation Tax bill. The loan allows a business to cover up to the full amount of the tax bill when it’s due and then repay the loan over a period of up to a year. This can be a useful way to smooth out a large, one-off payment and make it easier to budget for the expense.
VAT
For businesses that need to pay their quarterly Value Added Tax bill. The repayment term can be aligned to a shorter one than a loan used for Corporation Tax, usually over a few months and the loan is used to provide a quick injection of cash to meet the deadline. This could help businesses that have a significant turnover but may be experiencing a temporary cash flow issue.
Self-Assessment Tax
Using loans here are for self-employed individuals, sole traders or partnerships who face a large annual self-assessment tax bill. This can be a significant financial burden, and a loan for self-assessment tax allows them to pay the bill on time and spread the cost .
Tax Loans in the Context of Business Finance
A loan for tax is using a financial product for a specific need, but it sits within a wider portfolio of business finance. Unlike using a business loan for a variety of purposes, a tax loan is ring-fenced for the sole purpose of paying a tax bill.
It is also important to understand the HMRC “Time to Pay” arrangements. An HMRC Time to Pay arrangement is a formal agreement between limited companies and the government to have longer to pay a tax liability. The agreement is sometimes permitted if firms have previously demonstrated a good history of paying its tax. A loan used for tax, on the other hand, is a proactive measure taken by a business to manage its cash flow and avoid a Time to Pay arrangement .The ability to access a loan will depend on a number of factors. Most loans used for this purpose are unsecured loans, which means the business is not using its own assets as collateral. You must make sure the lender allows the loan to be used for payment of tax liabilities as some lenders do not allow them to be used for this purpose.
Loans used for tax purposes can be a financial tool that allows a business to remain compliant with their tax obligations. The important consideration businesses must take into account is that tax is an ongoing financial cost and whilst repaying a loan used for older tax liabilities, the business must budget for upcoming ones. If a tax loan is being used in response to a businesses struggling finances, it should be very carefully considered, as adding debt in these circumstances can spiral with significant consequences. However the flip side is that the use of a loan for tax as part of a well planned strategic view, can be very useful, preserving cash flow, assets and protecting day to day operations of a business.
Tax Loans FAQs
How quickly can a business get a tax loan?
The application and approval process for a business loan for tax is often prompt, with some lenders providing a decision and funding within a day or two. Speed of applications, approval and access to funds varies between lenders, loan type and the individual profile of the applicant business.
Are tax loans secured or unsecured?
Business tax loans are best suited to be unsecured, meaning you do not have to use an asset like a property or vehicle as collateral. Lenders assess the business’s creditworthiness and cash flow as part of the decision, and unsecured makes this a lower-risk option for a business with assets in the event of defaulting on the loan.
What can a business use a tax loan for?
Usually Corporation Tax, VAT and self-assessment tax. Some lenders may also allow the funds to be used for other types of tax, but it is important to confirm this with the provider.
Can a business get a tax loan if it has a poor credit history?
Lenders will perform a credit check as part of the application process. A strong credit history will increase the chances of getting a loan with a competitive rate. However, some lenders may be willing to consider businesses with a less-than-perfect credit record taking into account other factors such as the business’s recent cash flow and overall financial viability.
What is the typical repayment period for a tax loan?
The repayment period for a tax loan is usually taken over a short-term period with the loan being repaid over a period of a few months up to a year. This allows a business to spread the cost of a tax bill but without it going over to the subsequent tax year, creating a stacking tax payment situation.