How Can My Business Finance a Tax Bill?
Paying tax is a normal part of running a business, but substantial VAT, Corporation Tax or PAYE liabilities can sometimes put pressure on cash flow.
Even profitable businesses can experience difficulty meeting tax payments when cash is tied up in stock, equipment, outstanding customer invoices or other working-capital requirements.
If your company has a tax bill approaching, there may be several ways to manage the payment, including business loans, overdrafts, revolving credit facilities, invoice finance or an HMRC Time to Pay arrangement.
The most appropriate solution depends on how much you owe, when the payment is due, how long you need funding and whether the business can comfortably afford any additional financial commitments.
Importantly, there is a difference between financing a temporary cash-flow requirement and borrowing because the business is consistently unable to meet its tax obligations.
What options are available for financing a business tax bill?
There are several potential funding options, each with different advantages and limitations.
Funding option | Potentially suitable for |
Business loan | A defined tax or working-capital requirement repaid over an agreed period |
Business overdraft | Short-term cash-flow gaps |
HMRC Time to Pay | Businesses unable to settle an overdue tax liability immediately |
Revolving credit facility | Recurring or fluctuating working-capital requirements |
Invoice finance | Businesses with unpaid customer invoices |
Existing cash reserves | Meeting tax liabilities without additional borrowing |
Other working-capital measures | Releasing cash tied up in the business |
Not every option will be available or appropriate for every company.
The important question is which funding structure best addresses the underlying cash-flow requirement at an acceptable cost and risk.
1. Using a business loan to pay a tax bill
A business loan provides a fixed amount of capital that is repaid over an agreed period.
Some lenders may allow the proceeds to be used to meet tax obligations, although others restrict or exclude tax-related borrowing.
For example, a company facing a £40,000 tax payment might consider borrowing £40,000 over 18 months.
Rather than paying the entire amount immediately, the business makes regular repayments of principal and interest.
This can help spread a substantial cash requirement over a longer period.
However, a business loan introduces an additional financial commitment.
The company must be able to support the repayments alongside its existing borrowing, operating expenses and future tax liabilities.
A lender will generally assess factors such as turnover, cash flow, profitability, recent bank conduct, existing debt and trading history.
When might a business loan be appropriate?
A loan may be worth considering where:
the company is established and financially sound;
there is a clearly identifiable funding requirement;
the business has sufficient cash flow to service repayments;
the tax liability is not part of a recurring pattern of unpaid obligations; and
the lender accepts the proposed borrowing purpose.
The loan should provide a sustainable financing solution rather than simply postpone an underlying financial problem.
2. Using a business overdraft
A business overdraft can be useful where the funding requirement is temporary.
Rather than receiving a fixed advance, the company can borrow through its business current account up to an agreed limit.
For example, suppose a company has a £25,000 VAT bill due but expects a £60,000 customer payment two weeks later.
An overdraft could potentially allow the company to pay HMRC on time and then reduce the borrowing when the customer pays.
This may be more efficient than taking a longer-term loan for a requirement expected to last only a few weeks.
Overdraft interest is generally charged on the amount utilised, although arrangement fees and other charges may apply.
What are the limitations?
Overdraft facilities are subject to the bank's lending criteria and terms.
Banks may review, reduce or withdraw facilities in accordance with those terms.
An overdraft may also become less suitable if the business remains permanently at or close to its limit.
If a company needs to borrow £50,000 continuously rather than for a temporary period, a term loan or another funding structure may be more appropriate.
3. Arranging an HMRC Time to Pay agreement
If a business cannot pay its tax liability when due, HMRC may agree to a Time to Pay arrangement.
This allows the company to repay an outstanding liability through instalments rather than settling the entire amount immediately.
Arrangements may be available for liabilities including VAT, Corporation Tax, PAYE and National Insurance contributions.
The terms depend on the company's circumstances and HMRC's assessment of its ability to pay.
For example, a business owing £30,000 in overdue tax might seek agreement to repay the amount over an affordable period.
HMRC will want to understand the company's financial position and how quickly the liability can realistically be settled.
What are the advantages?
An HMRC arrangement may allow the company to manage its tax liability without taking on a separate commercial loan.
It may also help reduce certain late payment penalties, depending on the tax involved, the timing and whether the arrangement is agreed and maintained.
However, interest can continue to accrue on outstanding tax.
HMRC will also expect the business to keep to the arrangement and address its ongoing tax obligations.
Is Time to Pay always available?
No.
HMRC assesses applications individually and is not obliged to agree to a proposed repayment plan.
Where a business has available cash or assets, HMRC may expect it to use those resources to reduce the outstanding liability.
If the company is unable to meet an agreed arrangement, it should contact HMRC promptly rather than simply missing payments.
4. Using a revolving credit facility
A revolving credit facility provides access to an agreed borrowing limit that can be drawn and repaid as required, subject to the facility's terms.
Unlike a conventional term loan, the business doesn't necessarily receive the full facility amount at the outset.
For example, a company might have a £100,000 revolving facility but only draw £35,000 when it needs additional working capital.
As the company receives cash, it can repay the borrowing and potentially draw again when required.
This can be useful where cash requirements fluctuate throughout the year.
Can a revolving facility help with tax payments?
Potentially.
A business may experience predictable peaks in expenditure around VAT payments, payroll or major supplier commitments.
A revolving facility can provide flexibility where those requirements arise at different times.
However, the lender's terms must permit the relevant use of funds.
The business also needs a credible plan to reduce drawings rather than continually increasing borrowing.
A revolving facility should support the working-capital cycle rather than disguise a permanent cash-flow deficit.
5. Using invoice finance to release working capital
Invoice finance may provide another option where a business has substantial amounts owed by customers.
Instead of borrowing specifically against a tax liability, the company obtains funding against eligible outstanding invoices.
This can release cash that would otherwise remain tied up until customers pay.
For example, a business might have:
£150,000 of outstanding customer invoices;
a £30,000 VAT payment approaching; and
insufficient immediately available cash.
Subject to the lender's criteria and invoice eligibility, invoice finance could potentially release some of the cash tied up in those receivables.
The business could then use its improved liquidity to meet operating and tax commitments, subject to the facility terms.
What are the limitations?
Invoice finance won't suit every company.
It is generally more relevant to businesses that invoice customers on credit terms.
The amount available depends on the quality and eligibility of the invoices, the customers involved and the lender's funding structure.
There are also fees and other contractual conditions to consider.
For businesses with substantial receivables, however, it can sometimes address the underlying working-capital issue more directly than taking an additional term loan.
6. Using existing cash reserves
Before borrowing, businesses should consider whether they can meet the tax liability from existing resources.
Borrowing introduces interest costs, fees and potentially personal guarantees or security requirements.
If sufficient cash is available without compromising the company's operational liquidity, using existing funds may be the simplest and cheapest solution.
However, the decision isn't always straightforward.
A company may have substantial cash reserves but need those funds for payroll, stock purchases, essential suppliers or other commitments.
The relevant question is therefore not simply how much money is in the bank today.
It is how much cash the business can safely use after allowing for its near-term obligations.
7. Improving working capital without taking another loan
Sometimes the most appropriate solution isn't another finance facility.
A business may be able to release cash by reviewing its working-capital management.
Potential measures include:
Collecting overdue customer invoices
Improving debtor collection can release cash without increasing debt.
Reducing unnecessary stock
Where substantial cash is tied up in slow-moving inventory, better stock management may improve liquidity.
Reviewing supplier payment terms
Negotiating appropriate payment terms can help align cash outflows with customer receipts.
Deferring non-essential expenditure
Postponing discretionary investment may preserve cash for unavoidable tax obligations.
Reviewing shareholder distributions
Dividends and other discretionary payments should be considered alongside the company's current and upcoming financial commitments.
These measures won't always solve an immediate problem, but they can reduce reliance on external finance over time.
Which option is best for a short-term tax funding requirement?
The appropriate structure often depends on how long the cash shortfall is expected to last.
Consider a company with a £30,000 VAT liability due in two weeks.
It has sufficient underlying profitability but expects a substantial customer receipt approximately one month later.
In this situation, an overdraft or suitable revolving facility might be worth considering because the funding requirement is relatively short.
Taking a 24-month term loan may be unnecessary if the company genuinely expects to repay the borrowing within a few weeks.
However, expected customer receipts aren't guaranteed.
The company should consider what happens if the customer pays later than anticipated.
What if I need to spread the tax payment over several months?
Where the requirement extends over several months, a term loan or HMRC Time to Pay arrangement may be more appropriate.
For example, suppose a company has £36,000 of tax to pay and can afford approximately £3,000 per month before financing costs.
A repayment structure extending over 12 months might appear attractive.
But the business must also consider:
interest;
fees;
existing debt repayments;
future VAT or Corporation Tax liabilities;
seasonal cash-flow fluctuations; and
unexpected operating costs.
The affordability assessment should reflect the company's actual cash generation rather than simply dividing the tax liability by the proposed repayment period.
Is an HMRC payment plan cheaper than a business loan?
It may be, although the comparison depends on the circumstances.
HMRC charges interest on overdue tax. Commercial lenders may charge considerably higher rates, depending on the product and risk.
A business loan can also involve arrangement fees and potentially early repayment costs.
For illustration, consider a hypothetical £30,000 liability:
Funding structure | Illustrative monthly principal repayment |
6-month repayment | £5,000 |
12-month repayment | £2,500 |
18-month repayment | £1,667 |
These figures exclude interest, fees and other costs. They are not quotes or representations of HMRC repayment terms.
A longer term reduces the monthly principal burden but may increase the total financing cost.
Businesses should compare the total amount payable and the timing of repayments, rather than focusing solely on the monthly instalment.
Can I finance a VAT bill?
Potentially.
VAT is a recurring tax obligation for many UK businesses.
Some lenders may provide working-capital finance that can help meet an upcoming VAT payment, subject to their permitted borrowing purposes.
However, a lender may distinguish between a normal quarterly VAT requirement and an overdue liability.
A business repeatedly borrowing to pay each new VAT bill may indicate that its working-capital position needs more fundamental attention.
The company should ensure that financing one VAT payment doesn't leave it unable to meet the next.
Can I finance Corporation Tax?
Potentially.
Corporation Tax can create a significant cash requirement, particularly where profits have been reinvested in the business.
For most companies outside the quarterly instalment payment regime, Corporation Tax is normally due nine months and one day after the end of the relevant accounting period.
The company may therefore have reported profits during an earlier period while its current cash position has subsequently changed.
A lender will generally want to assess the company's present financial position rather than relying solely on the historic profits that generated the tax liability.
Can I finance PAYE and National Insurance liabilities?
Potentially, but lenders may be particularly cautious where a business is struggling to meet regular payroll-related tax commitments.
PAYE and National Insurance liabilities usually arise frequently rather than as a single annual payment.
A business that repeatedly cannot meet these obligations may be experiencing an ongoing cash-flow problem.
Some lenders may exclude this borrowing purpose entirely.
Where the company is experiencing difficulty, early engagement with HMRC and a review of its financial position may be more appropriate than simply adding another loan.
What if my business already owes HMRC money?
Outstanding tax arrears can make obtaining additional finance more difficult.
A lender may want to understand:
total amount outstanding;
taxes involved;
how long the liabilities have been overdue;
whether HMRC has taken recovery action;
whether a Time to Pay arrangement exists;
whether payments are being maintained; and
whether the business is accumulating additional arrears.
A company with a relatively modest historic liability under a maintained arrangement may present a different risk from one whose tax debts continue to increase.
Some lenders will consider the former, while others exclude all HMRC arrears.
Does borrowing to pay tax affect my business credit score?
The effect depends on the borrowing structure and the lender's reporting practices.
A business loan creates an additional financial obligation, regardless of whether the proceeds are used for tax, stock, equipment or another business purpose.
A lender may therefore consider the new debt when assessing the company's financial position.
Tax arrears themselves don't automatically become conventional credit defaults, although unresolved liabilities can lead to more serious recovery or enforcement action.
The company's ability to maintain its obligations remains fundamental.
What happens if my company doesn't pay its tax bill?
HMRC has powers to recover unpaid tax.
Depending on the circumstances, these can include debt collection activity, enforcement against assets and legal proceedings.
For limited companies, serious unresolved tax liabilities can ultimately result in a winding-up petition.
Late payment interest may also apply, and some taxes have additional penalty regimes.
If a business anticipates difficulty paying, it should contact HMRC promptly.
Ignoring the liability can reduce the options available and increase the risk of enforcement action.
Should I borrow to pay tax or speak to HMRC first?
Where the tax is already overdue or the business cannot meet the payment deadline, contacting HMRC is often a sensible first step.
It allows the company to understand whether a repayment arrangement may be available.
The business can then compare that option with any commercial finance available.
Where the business has a predictable short-term cash-flow requirement and suitable existing credit facilities, it may be possible to manage the payment without entering an HMRC arrangement.
The important point is to compare the available options before committing to borrowing.
When does borrowing to pay tax make commercial sense?
External finance may be appropriate where:
the company is established and financially sound;
there is a temporary and identifiable cash-flow requirement;
the borrowing purpose is permitted by the lender;
the business can comfortably support repayments;
future tax obligations remain affordable;
the total financing cost is justified; and
the funding structure matches the expected duration of the requirement.
For example, a company may have temporarily invested substantial cash into fulfilling confirmed customer orders and expect future receipts to replenish its working capital.
Appropriate finance could help bridge that timing difference.
The important distinction is that the business has a credible source of repayment.
When should a business avoid borrowing to pay tax?
Additional borrowing can be inappropriate where:
tax liabilities are repeatedly becoming overdue;
new debt is being used to repay existing debt;
the company is missing payments to current lenders;
HMRC arrears are continually increasing;
cash flow remains persistently negative;
operating losses are being financed through borrowing; or
there is no credible plan to meet future liabilities.
In these circumstances, another loan may temporarily improve the bank balance while making the company's overall financial position worse.
The business may instead need to review its costs, working capital, creditor arrangements or wider financial structure.
Where the company cannot pay debts as they fall due, directors should consider obtaining appropriate professional advice.
How can I reduce the risk of future tax funding problems?
Tax payments should form part of normal financial planning.
Businesses can reduce the risk of unexpected cash-flow pressure by:
Forecasting tax liabilities
Include VAT, Corporation Tax, PAYE and other relevant taxes in regular cash-flow forecasts.
Setting aside funds
Reserve cash for future tax payments where practical.
Maintaining current financial information
Regular management accounts can help identify likely liabilities before they fall due.
Monitoring working capital
Track customer payments, supplier commitments, stock and cash balances.
Reviewing funding structures
Ensure short-term requirements are not continually financed using expensive or inappropriate borrowing.
Considering suitable tax accounting schemes
For example, eligible businesses using VAT cash accounting may account for VAT based on customer receipts and supplier payments rather than invoice dates. This can help some businesses manage the timing of VAT cash flows.
The objective is to make tax payments predictable and manageable rather than repeatedly treating them as funding emergencies.
Business finance and tax-related working capital with Adelpha Capital
Adelpha Capital provides business finance to established UK SMEs.
We consider the purpose of borrowing alongside the wider financial position of the business, including turnover, profitability, cash flow, recent bank conduct, trading history and existing financial commitments.
Where a funding requirement relates to tax, the circumstances and commercial rationale are particularly important.
Not every tax-related borrowing request will meet our lending criteria. We focus on whether the proposed finance supports a sustainable business funding requirement and whether the company can comfortably maintain the repayments.
If your business is considering additional working-capital finance, you can apply online or contact the Adelpha Capital team to discuss your requirements.