Funding Corporation Tax, VAT and Partners’ Tax: Loans or HMRC Payment Plans?

Why tax bills catch profitable practices out

Professional practices are frequently profitable on paper and short of cash in the bank at the same moment. The reason is structural rather than a sign of poor management. Tax is calculated on accounting profit, and in most professions profit is recognised well before the cash arrives. A law firm carries work in progress and unbilled time; an accountancy practice bills in arrears and often waits on clients; a dental or veterinary practice may be funding stock, equipment and staff costs ahead of income; a chambers or barrister may wait a long time for fees to be paid.

VAT adds a second timing gap. Under standard VAT accounting, VAT becomes due by reference to the invoice rather than the receipt, so a practice can find itself paying HMRC VAT on fees that clients have not yet settled. HMRC offers a Cash Accounting Scheme under which eligible businesses pay VAT on sales when customers pay them and reclaim VAT on purchases when they have paid their suppliers. GOV.UK sets out the turnover limit for joining. Whether it suits a particular practice is a question for your accountant or tax adviser, but it is worth raising if unpaid invoices regularly inflate your VAT bill.

The third pressure point sits with the people rather than the entity. In partnerships and LLPs, partners are generally taxed personally on their share of profit, whether or not it has been drawn. A partner who has left capital or undrawn profit in the firm can still face a significant personal self assessment bill, and many firms handle this by retaining a tax reserve on the partners’ behalf. When that reserve falls short, the problem lands on the firm’s cash flow anyway. The dynamics are set out in more detail in our guide to reducing lock-up.

The HMRC deadlines, as GOV.UK states them

The dates are not negotiable once they arrive, so it helps to plan backwards from them. According to GOV.UK:

• Corporation tax: most companies must pay corporation tax 9 months and 1 day after the end of the accounting period. GOV.UK explains that companies with taxable profits of more than £1.5 million pay in instalments instead, under separate rules.
• VAT: the deadline for submitting a VAT return online is usually one calendar month and 7 days after the end of the accounting period, and this is also the deadline for paying HMRC. GOV.UK notes that different arrangements apply to businesses using the Annual Accounting Scheme or making VAT payments on account.
• Self assessment: partners, sole practitioners and many directors pay by 31 January (the balancing payment for the previous tax year and the first payment on account) and by 31 July (the second payment on account), as set out on the GOV.UK self assessment payment page.

The self assessment pattern deserves particular attention. In a year when profits rise, the January payment can combine a balancing payment for the year just ended with the first payment on account for the current year. That is often the single largest cash call a partner faces, and it frequently coincides with a quieter billing month. Your accountant can confirm the figures and whether any reduction to payments on account is appropriate; we deal only with how the bill is funded.

Your options when a tax bill exceeds available cash

When the bill is known and cash will not cover it comfortably, practices usually consider some combination of the following:

• Pay from reserves or an overdraft, accepting that working capital will be tight for a period.
• A dedicated tax funding loan, where a lender pays or funds the liability and the practice repays over a short term in monthly instalments.
• An HMRC payment plan, agreed directly with HMRC, where the practice pays the debt in instalments.
• Accelerating cash through billing, collection or WIP finance and aged debt and lock-up finance, which address the underlying timing gap rather than the tax bill itself.
• A broader working capital facility, where tax is one of several recurring cash calls. See practice working capital.

These are not mutually exclusive. A practice might agree a modest HMRC arrangement for one liability while funding another privately, or fund the VAT quarter while it tightens collections. The right mix depends on the size of the gap, how long it will last and what it costs relative to the alternatives.

How tax funding loans work

Tax funding loans are short-term facilities designed around a single, predictable liability. Depending on the lender, funds may be paid directly to HMRC or to the practice for onward payment, and the balance is repaid in monthly instalments over a short term that broadly matches the period until the practice’s cash position recovers. Some practices use them once, to absorb an unusual spike; others use them each year for the corporation tax or partners’ tax bill, effectively turning an annual lump sum into a monthly cost.

Lenders in this area include specialist professions lenders, which understand fee income, lock-up and partnership structures, as well as broader business lenders and alternative funders. Some facilities are unsecured and may ask for personal guarantees from directors or partners; others sit alongside existing banking. Pricing and terms vary widely between lenders and are subject to status, lender criteria and approval, so the market is worth searching properly.

For partners, there are two broad structures. The firm can borrow to fund a tax reserve shortfall, or individual partners can borrow personally to settle their own self assessment liabilities. The second is closer in character to partner capital lending and raises the consumer credit point covered below. Our pages on corporation tax funding, VAT funding and tax and VAT funding describe the options in more detail.

HMRC payment plans (Time to Pay): when they are appropriate

HMRC can agree instalment arrangements for businesses and individuals who cannot pay in full. GOV.UK states that if you cannot pay your tax bill in full you may be able to set up a payment plan, that HMRC will check whether the plan is affordable for you, and that if a plan cannot be agreed HMRC will ask you to pay the amount owed in full.

A payment plan can be the right answer, particularly where the practice has a genuine cash shortfall, cannot obtain commercial finance on sensible terms, or needs breathing space while it restructures. It keeps the relationship with HMRC open and avoids an additional lender. The considerations are practical:

• It is HMRC’s decision, not the practice’s, and HMRC will look at income, spending and what the business can afford.
• Interest continues to apply to unpaid tax; GOV.UK explains how charges work on its payment plan pages.
• An existing arrangement may be relevant when a lender later reviews an application, and some lenders will ask about it directly.
• Future liabilities generally need to be kept up to date while the plan runs, so it does not create headroom for the next bill.

A commercial loan, by contrast, settles HMRC in full and on time, and replaces the tax creditor with a lender on agreed terms. Which is better depends on the practice’s position and on cost. Your accountant is best placed to advise on the tax side and on any approach to HMRC; our role is to show you what the finance market would offer so the comparison is made on real terms.

What lenders assess on a tax funding application

Because the liability is known and the purpose is clear, tax funding decisions often turn on a relatively focused set of questions:

• Trading and profitability: the latest filed accounts and current management accounts, showing that the profit giving rise to the tax is real and recurring.
• The liability itself: the corporation tax computation, VAT return or self assessment calculation, so the lender can see what is being funded.
• HMRC position: whether the practice is up to date, and whether any payment plan or arrears exist.
• Cash flow and lock-up: bank statements, aged debtors and, for law firms, WIP, to judge how repayments fit around fee receipts.
• Existing borrowing: other loans, overdrafts, premium finance and asset finance, and any charges over the business.
• Regulatory standing and people: for regulated professions, the lender may want to understand the practice’s standing with its regulator, and will usually look at the credit profiles of directors or partners, particularly where guarantees are requested.

Applications presented early, with the tax figure confirmed by the accountant and a clear account of why cash is tight at this point, are generally more straightforward than ones made a few days before the deadline. The general preparation points are covered in preparing a practice finance application.

Building a tax reserve so funding becomes optional

Funding solves a timing problem. It does not remove the need to provide for tax, and repaying one year’s liability while the next accrues can compound the pressure if nothing changes. Most well-run practices treat tax as a cost that accrues every month, not an event that arrives once a year.

• Ask your accountant for an estimate of the coming liabilities early in the year and update it as management accounts come through.
• Transfer a set amount each month into a separate reserve account, so the money is visibly not available for drawings or spending.
• In partnerships and LLPs, agree a clear policy on retentions from partners’ profit shares for their personal tax, and review it when profits move.
• Map the deadlines against the practice’s seasonal billing and collection pattern, so the known cash calls are not a surprise.
• Tackle the root cause: faster billing and collection reduce the gap between profit and cash that creates the problem in the first place.

If a tax funding loan is used while a reserve is being built up, the aim should be that the facility becomes smaller or unnecessary over time rather than a permanent fixture.

Partners borrowing personally: a consumer credit note

When an individual partner, a sole practitioner or a small partnership borrows, the consumer credit rules may be relevant. Finance of £25,000 or less for sole traders and small partnerships can be regulated consumer credit, and we will say at the outset if that applies. Our guide to business finance and consumer credit explains when the rules come into play.

Companies and LLPs are generally outside the consumer credit rules for their own borrowing, but guarantees given by individuals, and loans taken by partners in their own names, are considered separately. Lenders will tell you which rules apply to the agreement you are offered.

How we can help

We search the market across 300+ lenders for tax funding, including specialist professions lenders and broader business funders, and present the practice’s case with the tax computation, accounts and cash flow context set out clearly. Where an HMRC payment plan looks like the better route, we will say so and suggest you discuss it with your accountant. See how it works, or start with tax and VAT funding. All finance is subject to status, lender criteria and approval.

Common questions

This guide is for general information only and should not be treated as legal, tax, accounting or financial advice. Funding availability and lender requirements depend on individual circumstances.