A £28,000 VAT bill due on the 7th of each quarter can make cash flow harder to plan, even for an established and profitable law firm. In this case, a North West firm with annual turnover just over £1 million used an approved VAT funding facility to spread the cost and make its monthly outgoings more consistent.
The firm had traded for more than 15 years, employed over five people and had one main shareholder, who was also its managing director. Rather than meet a much larger quarterly payment from its own cash flow, it wanted to use VAT funding as a way to manage the regular cycle of bills.
The application was approved with Premium Credit. No personal guarantee was required for this facility (see below for when one may apply). The outcome and terms relate to this particular business and are not typical terms or a guarantee that another application will be approved.
Why VAT can put pressure on a law firm’s cash flow
VAT collected from clients is not the same as income that a firm can spend. But the amount due to HMRC can still create a significant cash-flow event, especially when the firm has to pay a large sum in one go.
For some professional services businesses, including law firms, VAT charged on services can add up while there may be fewer purchases of equipment or materials on which to reclaim VAT. The result can be a sizeable quarterly bill that falls due regardless of when client invoices are paid.
That can make it more difficult to plan for other regular costs, such as staff, premises and business expenses. The timing and effect will vary from firm to firm, so it is important to look at actual cash flow and upcoming commitments rather than assuming funding is the right answer.
How VAT funding worked for this firm
The law firm’s VAT liability was around £28,000 each quarter, due on the 7th. It wanted to avoid a single, much larger quarterly cash outflow and use a funding facility to help keep its monthly outgoings more consistent.
The facility was approved with Premium Credit. The client signed a credit agreement that could be used for future VAT bills, subject to the lender’s process. For this firm, that meant the agreement could support repeat use without completing a new agreement package at each renewal. Supporting information was still needed for applications.
The arrangement had one fixed fee for the funding. A fixed fee makes the cost easier to identify in advance, but the facility is still borrowing and has a cost. Before deciding, a business should compare the full amount repayable with paying the VAT bill directly, and check the repayment schedule and any other charges in the proposed agreement.
A VAT facility may help smooth cash flow, but it does not reduce the tax owed. The firm remains responsible for making the agreed repayments as well as meeting its other business commitments.
What documents were needed?
For this application, the information required included:
- The latest full accounts.
- The previous six months of business bank statements.
- Directors’ details.
For larger VAT bills, lenders may sometimes ask for further information, such as management accounts and an HMRC screenshot showing the firm’s position in relation to its tax liabilities. Document requirements vary according to the lender and the application, so a broker can explain what is needed for a particular case.
What to consider before using VAT funding
Spreading a tax bill can make monthly cash-flow planning more predictable, but it is not automatically the lowest-cost option. Before accepting an offer, a business should weigh the convenience of instalments against the cost of funding.
Questions to consider include:
- What is the total amount repayable? Compare this with the cash cost of paying HMRC directly.
- How are repayments scheduled? Make sure the amounts and dates work alongside payroll, supplier payments and other borrowing.
- What does the fixed fee cover? Read the agreement carefully and check whether any other charges apply.
- Is the facility suitable for repeated use? A facility may be available for future tax bills, but future applications and funding remain subject to the lender’s requirements.
- What security is required? Some similar business finance facilities can require a personal guarantee. A personal guarantee can make an individual personally responsible for debt if the business cannot repay, subject to the agreement’s terms. No personal guarantee was required in this particular case; requirements can differ between products and lenders.
VAT funding is more likely to be worth exploring when the firm can comfortably afford the repayments and the benefit of smoothing the quarterly outflow justifies the funding cost. It may be less suitable if repayments would add pressure to already-tight cash flow or if paying the bill directly is more affordable overall.
VAT funding for law firms: what might be available?
VAT funding is one option for managing a tax liability. Depending on the lender and the circumstances, tax funding can also be used for other HMRC obligations. SME Finance Hub’s VAT funding page explains the product and how to enquire. Further information on other tax liabilities is available on the tax funding page.
The eligibility requirements shown on our website are indicative and reflect what many lenders may look for: a UK-registered business, at least £10,000 in monthly turnover, six or more months of trading and a UK-resident director. They are not a guarantee of approval, and requirements can vary for specialist products.
An enquiry involves no hard credit search and does not affect your credit score. If you decide to proceed, further checks may apply; these will be explained beforehand. A named broker can review the firm’s circumstances and explain potential options, costs, repayments and any security requirements. Read more about finance for law firms.
About the lender and the broker service
Premium Credit describes its tax funding as a facility that can allow businesses to pay VAT in monthly instalments. Its published information says that, depending on the arrangement, payments can be made directly to HMRC or reimbursed if the bill has already been paid. Those details should not be taken as a description of this client’s payment route. Read more on Premium Credit’s website.
SME Finance Hub works with a specialist lender panel and supports businesses through the funding process. There are no upfront broker fees and no obligation to proceed. Where a lender pays commission, it is disclosed before the client commits. More information is available on our how we get paid page.
SME Finance Hub is a trading style of Capital Business Loans Limited, an FCA-authorised credit broker, not a lender. To discuss VAT funding for your law firm, call 01244 906505 or email hello@smefinancehub.co.uk.