How to finance tax bills and prevent sleepless nights

Published · 4 min read

Business owners are no longer allowed to pay their taxes with a personal credit card, which might keep some of the five million small businesses in the UK up at night when it comes to dealing with tax bills.

The new EU Payment Services Directive, known as PSD2, removes the ability for merchants to charge fees to their customers for personal debit and credit card payments – and HMRC has chosen to remove the payment option rather than shifting the cost on to other taxpayers.

As the Gov.uk website puts it: “As a public funded body, HMRC is unable to absorb the cost of personal credit card fees as this would ultimately mean charging the fees back to customers through the public purse.”

It’s quite common for business owners to use their personal credit card to pay tax bills, so the removal of this option could create problems for many.

Luckily, there are some lenders that offer products specifically made for paying your tax bills. Let’s take a look at some possible options, now that you can’t use a personal credit card to pay your tax bill.

Business credit cards

The most obvious solution to this problem is to use a business credit card – these payments are still accepted. But there are a couple of reasons why this might not work for your business. First and foremost, while they’re still accepted, you’ll have to pay a fee to use a business credit card.

More importantly though, lots of companies don’t have business credit cards, which may be why they have used personal cards in the past – and your business might fall into this category.

Also, if they do have them, many firms use business credit cards to manage daily expenses – and won’t want to use up their limit on a lump sum such as a tax bill payment. There are a few other options that might work better for your business.

Funding for tax bills

If your business doesn’t have enough working capital to settle all its tax liabilities, there are products on the market specifically designed to finance a tax or VAT bill. Sometimes, the lender will make payments directly to HMRC, so you don’t have to worry about missed payments or late penalties either.

Depending on what kind of tax you need to pay, the terms of your loan can vary, but generally speaking you’ll get a term between three and 12 months. If you’re looking to borrow money to settle your corporation tax, 12 months makes sense, while a shorter term is more suitable for VAT payments since they happen quarterly.

Either way, this funding option gives you the flexibility to spread the cost of your tax bill and pay it in more affordable monthly instalments. In other cases, the lender will give you a classic business loan for working capital reasons, which you can then use to settle the bills and any other costs you’d like to cover in the short term.

Your individual situation will vary but the important takeaway here is that you can be honest about why you want a loan – and using finance to pay a tax bill isn’t the taboo it might have been in the past.

Are unpaid invoices holding up your chances of paying your tax bills? There are ways to make sure you can still pay them on time
Are unpaid invoices holding up your chances of paying your tax bills? There are ways to make sure you can still pay them on time

Unlock your invoices

You might not have the cash for your tax bill because you’re waiting for customers to pay your invoices. In these cases, invoice finance may help you boost your cash flow when you need it.

Invoice finance is based on the money business customers owe your firm. When you raise an invoice, the lender gives you most of the amount immediately, then when your customer pays you get the remainder minus fees.

Invoice finance is a good option if late payments and unpaid invoices regularly restrain your cash flow, or if your company has particularly long payment terms – and might be a good way to unlock extra cash in the short term for your tax bill.

Merchant cash advance

Another way of getting some extra funds is through your card machine transactions. Merchant cash advances give you a cash sum based on your previous card sales, which you’ll pay off with a percentage of your monthly takings.

Merchant cash advances don’t give you an interest rate – instead, you’ll have a pre-agreed fixed fee, which you’ll have to pay back on top of the amount the lender will give you. So, there’s no interest running constantly and you know the total cost up front.

However, how long it’ll take you to repay the whole amount depends on your monthly sales – you make repayments as a percentage of your takings, so the more you sell the faster you’ll repay. Additionally, you won’t have to worry about missing repayments because the lender works with your payments provider to take repayments at source.

This might sound like a small detail but fans of the merchant cash advance will often talk about low management overhead – it’s a “set it and forget it” scenario that doesn’t require much oversight once it’s up and running. This convenience comes at a price though, and this type of funding tends to be more expensive.

Final thoughts on tax bills

Tax bills can give business owners sleepless nights but there are other options out there if you can’t afford the lump sum in one go. Whichever type of finance you choose, it’s important to be open and honest with the lenders you approach.

Using a loan to pay tax bills isn’t something you need to hide and in fact there are products designed for exactly this purpose. If you start looking for funding early on, the taxman won’t seem so frightening any more.

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