What is a VAT Loan and Is It a Good Idea to Get One?

30 April 2018, 15:09

Most people are aware of what VAT is and how it is applied to goods and services. If you are registered for VAT, you’ll need to submit a VAT return every three months. You then pay anything you owe in VAT, so that is a payment made every three months as well.

Just recently, we’ve come across several companies offering VAT loans to businesses looking to pay their VAT bills. The idea is you can take out a loan to cover the payment and then pay it back in affordable monthly instalments.

However, is this such a good idea? Certainly, if a company finds itself faced with a larger VAT bill than they had anticipated, such a loan would be a lifesaver. It means the bill can be paid on time without any charges being applied. It also means the company must account for the monthly repayments on the loan though – and of course, in three months’ time, another VAT payment will be due. 

No doubt it is already clear that a VAT loan should not be a regular financial product for any business to take out. You’re going to pay interest on this loan, just as you would with any other loan. That means it will cost you more in the long run. However, a VAT loan can come in very useful in certain circumstances.

For example, let’s suppose you knew in advance roughly how much you would need to pay in VAT. However, just before the bill was due, your business suffered a dip in sales and you couldn’t find the required cash to pay the bill. In this scenario, you would be charged penalties if you didn’t pay the VAT when it was due. Even though you would pay interest on a VAT loan, it is by far the preferable option.

As such, a VAT loan is ideal for those times when you plan and yet something still goes wrong. If you had a sudden unforeseen drop in income, a VAT loan could be the perfect solution. However, if you knew how much you would need to pay and simply didn’t save for it, you should consider how you can make changes in future to ensure this doesn’t happen again.

You’ll need to make those regular payments to clear a loan used for this purpose. If you come unstuck at some point and you want to get a loan, take it as a sign that you should focus on saving in future. You might benefit from saving a slightly higher percentage of your income each week or month, to allow for any hiccups you might experience. This creates a buffer for you – and that can be a lifesaver. In short, a VAT loan is ideal in some circumstances, but it should only ever be viewed as an emergency solution, not a regular three-monthly product.