Business owner reviewing a cash flow forecast before a Corporation Tax payment.

Business cash flow funding

Borrowing to pay a tax bill: sensible cash flow bridge or warning sign?

Published 26 July 2026 · 9 min read · By Ant Persse — Experienced CEO and SME Funding Specialist

Borrowing to pay a tax bill can be sensible when the business has a short, identifiable timing gap and a clear source of repayment. It is a warning sign when tax is repeatedly used as working capital, trading is loss-making, or the loan will still be outstanding when the next tax bill falls due.

The question is not whether tax funding is good or bad. It is whether the facility solves a timing problem at a cost and risk the business can afford.

Quick summary

Premium Credit reported on 22 July 2026 that 52% of surveyed SMEs were struggling with tax bills. It said 22% cited Corporation Tax, 12% VAT and 20% both.
The research was commissioned by a finance provider, so it should be treated as a commercial survey rather than an official measure of the whole SME population.
HMRC may agree a Time to Pay arrangement where a business cannot pay in full, but it will assess whether the proposed plan is affordable.
HMRC late-payment interest is currently 7.75% for the main taxes and duties. VAT can also attract late-payment penalties after the first 15 days.
External funding can protect wages, suppliers and stock, but it must not simply push the same cash problem into the next quarter.

The business problem

Tax is usually paid after the trading activity that created it. That can make the bill feel disconnected from the cash now sitting in the bank.

A profitable business can still face a tax shortfall because customers have not paid, stock has absorbed cash, a large order has been delivered on long terms, or money that should have been reserved for tax has been used elsewhere. This is the same mechanic we cover in why profitable businesses still run out of cash.

The danger is treating HMRC as an unofficial lender. Tax can look like flexible cash until the deadline arrives. By then, wages, suppliers and the next period’s tax liabilities may also be building.

Start with the cheapest practical fix

Before taking new debt, establish whether the gap can be reduced without damaging the business.

Accelerate collection of overdue customer invoices.
Ask customers for deposits, staged billing or earlier payment on new work.
Delay non-essential capital spending or discretionary drawings.
Renegotiate supplier timing where the relationship allows it.
Check whether the tax calculation is accurate and whether all legitimate reliefs have been claimed.
Speak to HMRC before the payment problem becomes enforcement action.

These actions are not always enough. But borrowing should be the result of a clear calculation, not the first reaction to a looming deadline.

HMRC Time to Pay or external funding?

HMRC says a business that cannot pay in full may be able to agree a payment plan. HMRC will look at affordability and may ask about income, spending, assets, liabilities and what the business can pay immediately.

A Time to Pay arrangement may be appropriate where the problem is temporary and the business can meet the agreed instalments. It is not guaranteed, and interest can continue to run.

External funding may be more useful where the business wants to keep supplier relationships intact, protect an agreed HMRC position, or preserve enough cash to deliver profitable work. The trade-off is that commercial finance may involve arrangement fees, security, a personal guarantee and stricter default terms.

When borrowing can make commercial sense

The tax bill is known and evidenced.
The shortfall is caused by a specific timing issue, not ongoing losses.
There is a credible repayment source, such as contracted receipts or a predictable seasonal peak.
The facility ends before the next material tax liability creates another gap.
The gross profit from preserving an order, customer or supplier relationship comfortably exceeds the funding cost.
The business still has headroom if customers pay later than expected.

In that situation, funding is not failure. It is a tool that protects liquidity while cash catches up.

Where it can go wrong

VAT, PAYE or Corporation Tax is short every period.
The business needs optimistic new sales to repay old tax.
Margins are too weak to cover both normal trading and finance repayments.
The owner is borrowing personally without understanding the risk.
The facility is short-term but the underlying problem is permanent.
The next tax bill is not being reserved while the old one is repaid.
The lender can demand repayment or reduce availability after a covenant breach.

If tax arrears are a symptom of weak trading, debt can make the business look better for a few weeks while making the eventual pressure worse.

Funding options that may fit

Time to Pay

Potentially suitable where HMRC agrees the proposal and the business can meet the instalments. It may be less disruptive than taking new secured borrowing, but it still needs a realistic cash plan.

Short-term tax funding or term loan

A term loan can spread a known liability over a fixed period. Check the full amount repayable, all fees, early-settlement rules, security and personal guarantee requirements.

Revolving credit

Revolving credit may work where the cash need moves up and down and the business has recurring but manageable timing gaps. It becomes dangerous when the balance never reduces.

Invoice finance

Invoice finance may be a better answer where the tax shortfall is really caused by unpaid business-to-business invoices. Funding the receivable can match the source of the gap more closely than a general loan.

Costs, risks and watch-outs

Compare the commercial facility with the realistic cost and consequences of paying HMRC late. HMRC currently charges 7.75% late-payment interest on the main taxes and duties. VAT payments that remain overdue can also attract staged penalties.

A lender may charge interest, arrangement fees, documentation fees, broker fees, monitoring fees and default interest. It may also require a debenture, specific asset security or a personal guarantee.

Do not compare only the annual rate. Compare the total amount repayable, the monthly cash commitment and what happens if the expected receipt is delayed.

Questions to ask before signing

What is the total amount repayable, including every fee?
Is the repayment period shorter than the cash-flow problem?
Will the next VAT, PAYE or Corporation Tax bill be fully reserved while this facility is repaid?
What security is required?
Is a personal guarantee required and is it capped?
Can the lender reduce availability or demand early repayment?
What happens if a major customer pays 30 days late?
What are the default triggers and default charges?
Are there early-settlement or exit fees?
Would an HMRC Time to Pay arrangement be cheaper or more suitable?
Is this solving a one-off timing gap or hiding weak trading?

What lenders will check and why

Due diligence is not box ticking. A lender needs to decide whether the tax bill is real, the request is affordable and the repayment route is credible. If you want the reasoning behind each request, see why lenders ask the questions they ask.

Recent business bank statements.
Filed and management accounts.
VAT returns and Corporation Tax calculations.
The current HMRC position and any existing arrangements.
Aged debtors and creditors.
Customer payment history and concentration.
A short-term cash flow forecast.
Existing borrowing, security and personal guarantees.
Companies House filings and director information.

Clean records and an early, transparent explanation make a credible application easier to assess. Hidden arrears and last-minute requests do the opposite.

Final practical summary

Borrowing to pay tax is not automatically a sign that a business is failing. A healthy business can have a genuine mismatch between cash going out and cash coming in.

But repeated tax borrowing is a red flag. The facility should bridge a defined gap, have a visible exit and leave the business able to meet the next liability.

Good funding creates room to act. Badly matched funding creates pressure. If the repayment plan depends on everything going right, the business needs a better plan before it needs more debt.

FAQ

Can a company get a payment plan from HMRC?

Possibly. HMRC says businesses that cannot pay in full may be able to agree instalments, subject to an affordability assessment. Contact HMRC as early as possible.

Is it cheaper to borrow or pay HMRC late?

There is no universal answer. Compare HMRC interest and any penalties with the finance provider’s total cost, security, personal guarantee and default terms.

What is the main warning sign?

The business is unable to reserve tax every period and needs new debt to pay old liabilities. That usually points to a margin, trading or cash-management problem that funding alone will not fix.

Sources and further reading

Premium Credit — More than half of SMEs are currently struggling to pay tax bills. Commercial survey published 22 July 2026; source of the 52%, 22%, 12% and 20% figures.
GOV.UK — If you cannot pay your tax bill on time. Official HMRC guidance on payment plans and affordability checks.
GOV.UK — HMRC interest rates for late and early payments. Official rate table; late-payment interest is 7.75% from 9 January 2026.
GOV.UK — How late payment penalties work if you pay VAT late. Official explanation of VAT late-payment penalties.

This article reflects current Juno Funding editorial. Funding products, rates and lender appetite change frequently — figures are indicative only and should not be treated as advice.