VAT and business finance explained

Why VAT creates a cash gap

VAT is a tax you collect on HMRC's behalf. You add 20% to most sales, your suppliers add it to their invoices to you, and four times a year you pay over the difference between the VAT you charged (output tax) and the VAT you were charged (input tax). On paper it nets off. In practice, the timing rarely lines up with your bank balance.

The standard scheme works on invoice date, not payment date. If you raise a £30,000 invoice in March, you owe HMRC the £6,000 of VAT on it for that quarter — even if the customer has not paid you yet. A growing company that sells on 60-day terms can therefore owe VAT on cash it has not received, in a quarter where it also bought stock for the next push. That is how a profitable business runs short.

The quarterly rhythm and the deadline

Most VAT-registered companies file and pay quarterly. The deadline is one calendar month and seven days after the end of the VAT period — so a quarter ending 31 March is due by 7 May. Under Making Tax Digital, returns are filed through compatible software, and HMRC takes payment by Direct Debit on or just after the deadline. Miss it and you enter the points-based penalty regime, with surcharges that escalate on repeat defaults.

The practical risk is a deadline that lands in a thin month. If your busy season bills in one quarter but the VAT falls due in the next — quieter — one, the bill arrives precisely when the bank is lowest. Mapping your VAT due dates against your real cash curve is the single most useful planning step. Our how to forecast cash flow guide shows how to build that view.

Where a VAT loan fits

A VAT loan is short-term finance taken specifically to pay a quarterly bill, then repaid over the following two to three months — usually clearing before the next return is due. Rather than draining the current account in one hit, you spread a known, recurring cost across the quarter it relates to.

It suits companies whose VAT is genuinely a timing problem: the money is coming, it is just not in the account on the seventh. It is not a fix for a business that cannot afford its VAT at all — that is a deeper margin or pricing issue. Used well, a VAT loan keeps working capital free for stock and wages instead of being swallowed by a tax deadline. Because Credicorp lends to the company with no personal guarantee, the facility sits on the business, not on you.

Planning around your returns

A few habits remove most of the stress. Ring-fence the VAT as you collect it — moving the 20% into a separate account the moment an invoice is paid stops it being spent twice. If your cash dips at predictable points, consider whether the cash accounting scheme (you account for VAT only when paid, available below a turnover threshold) or the annual accounting scheme (nine monthly instalments plus a balancing payment) smooths your profile. Confirm eligibility and treatment with your accountant.

Then size any facility to the bill, not your appetite — see how much should your business borrow. You can model the spread cost with the true cost of borrowing calculator. This guide is educational and not tax or financial advice.