VAT Loans HMRC – Case Study
We asked the Finance Director of a top client of ours….. “Why do you regularly use a short-term loan to pay your VAT bill?”
They are a mid sized firm of architects who have been trading since 2003. We starting working with them back in 2012 and on average we arrange four short term loans for them every year. Three to cover their quarterly VAT bill and one to cover their HMRC Corporation Tax. In all instances, the VAT repayment term has been three months, normally where we defer the first repayment for a month after when the bill was paid. With regards to the Corporation Tax loans, two were over a one-year period and one repayable over six months.
HMRC VAT loans compared to a bank loan
A bank loan would work out cheaper and this is an option that our client could take. Banks charge a one off administration fee, normally 1% of the loan amount. The same would apply for an overdraft. The key challenges are the paperwork and time it takes to organise this. Saying that, the real reason why our client would use WestWon to organise a VAT loan is because they can keep their bank line in place for other purposes. Also, going back to the Bank Manager every quarter can send out a very negative message. We are a third party unconnected to their main bank.
What about using a bank overdraft?
The FD’s concern is that if they had a regular increase in overdraft in place, they would use it all the time for other purposes and then still need the HMRC VAT loan. Also, the fear is they do not chase their clients hard enough when it comes to credit control. Whilst this is a solution, it is not always the best one.
Comparing invoice discounting or invoice factoring to a HMRC VAT loan
We explored this subject and arranged for one of our invoice discounting and factoring consultants to speak to the FD. Sadly, this was not an option for two key reason.
- Their business is split 60% commercial and 40% residential work. They could not fund the residential part
- Part payment of invoices. This firm of architects would normally take a deposit or stage payments. They were not invoicing for a specific task. The invoice finance company could not offer a facility on this basis.
Architects want to pay their VAT bill on time
One key thing we did learn from our conversations with this firm of architects is they do want to pay their VAT bills on time. They have a great business, its profitable and expanding. Their short-term needs for a VAT loan is due to their success as opposed to a loan term financial planning issue. Their view is it is significantly cheaper than getting a fine and much simpler and flexible compared to a bank overdraft or long term bank loan.
WestWon working with architects
WestWon already deal with over 150 firms of UK architects. Presently, every month we are taking in fifteen to twenty new firms onto our customer base. We are proactively calling a list of 7500 UK firms of architects promoting the benefits of HMRC VAT loans.
For more information, please give us a call on 01494 611 456 or email email@example.com