If you cannot pay a VAT bill from cash, your main options are to ask HMRC for a Time to Pay arrangement, take a short-term VAT loan that spreads the cost over several months, or use an existing facility such as an overdraft, revolving credit or invoice finance. The most important step is to act before the deadline. Late payment can lead to penalties and interest, and ignoring a bill makes every option harder.

For most businesses on quarterly returns, the deadline to file and pay is usually one calendar month and seven days after the end of the VAT period. HMRC charges late payment interest from the first day a payment is overdue, and a first late payment penalty applies once it is 16 or more days overdue, with a second from 31 days. HMRC says that agreeing a Time to Pay arrangement can mean lower, or no, late payment penalties.

Choose a topic to read more.

01

Why VAT bills cause cash flow problems

VAT is money you collect on HMRC's behalf, but it passes through your bank account first. It is easy for it to become mixed with working capital, especially when customers pay late, sales are seasonal or you have invested in growth. A large quarterly bill can then land when cash is tight.

02

HMRC Time to Pay

If you genuinely cannot pay, HMRC may agree a Time to Pay arrangement, letting you spread the debt over an agreed period. Key points:

  • Contact HMRC as early as possible, ideally before the due date.
  • Be ready to explain why you cannot pay, what you can afford, and how you will keep up with future bills.
  • HMRC usually charges interest on the outstanding amount.
  • Arrangements are not guaranteed and depend on your circumstances and compliance history.
  • Missing agreed payments can cause the arrangement to be cancelled.
  • Smaller VAT debts may be eligible for an online payment plan, subject to HMRC conditions such as having filed your latest return; otherwise you contact HMRC directly.

Your accountant can help you prepare and may be able to contact HMRC on your behalf. If Time to Pay is available and affordable, it is often worth exploring before you borrow.

03

A VAT loan

A VAT loan is a short-term business loan, often for a few months up to a year, used specifically to pay a VAT bill on time. Some lenders pay HMRC directly; others pay you. You then repay the lender in instalments, often matched to your VAT quarter so the loan is cleared before the next bill.

Advantages include paying HMRC on time, predictable repayments and keeping your HMRC record clean. The downsides are that it adds a cost, usually needs a personal guarantee, and does not fix any underlying cash flow gap. A similar approach can be used for corporation tax through a tax loan.

04

Existing or flexible facilities

  • Overdraft or revolving credit facility: useful if you have headroom, but check the cost and whether it will leave you short for other outgoings.
  • Invoice finance: releasing cash from unpaid invoices can fund a VAT bill and help with ongoing cash flow if slow-paying customers are the root cause.
  • Merchant cash advance: sometimes used by card-taking businesses, though compare the cost carefully.
  • Business credit card: occasionally used for smaller bills, though HMRC does not accept personal credit cards and card fees may apply.
05

Comparing the options

  • Cost: Time to Pay usually carries HMRC interest; loans carry interest and possibly fees; overdrafts and revolving credit charge on what you use.
  • Certainty: a loan approved before the deadline gives certainty; Time to Pay depends on HMRC agreeing.
  • Speed: short-term lenders can sometimes move quickly, but leave time for paperwork.
  • Impact on future bills: whichever route you take, the next VAT quarter still arrives. Make sure repayments do not collide with it.

If the VAT bill is a symptom of a wider cash flow problem, such as ongoing losses, borrowing may only delay the issue. In that case speak to your accountant before taking on new debt.

06

What lenders look at for VAT funding

  • Your trading history and turnover.
  • Recent bank statements and management figures.
  • The VAT return or bill you need to fund.
  • Whether you are up to date with HMRC or already have arrears or a Time to Pay arrangement.
  • Business and director credit history.

Existing HMRC arrears do not always rule you out, but lenders will want to understand the situation and how it will be resolved.

07

How to avoid the same squeeze next quarter

  1. Move the VAT element of each receipt into a separate savings account as it comes in.
  2. Forecast VAT bills in your cash flow projections alongside wages, rent and suppliers.
  3. Speak to your accountant about the right VAT scheme for your business, such as cash accounting or annual accounting, if eligible.
  4. Tackle slow-paying customers with tighter credit control or invoice finance.
  5. If you use a VAT loan, plan to repay it before the next bill is due so you do not stack borrowing.

Borrowing is not the right answer if the business cannot realistically meet both the loan repayments and the next VAT bill, or if HMRC arrears are part of a wider pattern of unpaid debts. In that case, speak to your accountant or a licensed insolvency practitioner before taking on new debt.

08

Next step

Welcome Finance is a commercial finance broker for limited companies, LLPs and partnerships of four or more partners. We compare VAT loans and other short-term options and will tell you if talking to HMRC first looks the better route. With a deadline approaching, start early: check your eligibility in 60 seconds, and it will not affect your credit score.