Understanding tax finance

Managing tax can be a critical part of running a business but it can often be complex and overwhelming, especially for companies that face large tax bills or seasonal cash flow challenges.  Tax finance is an innovative solution that offers businesses the opportunity to better manage their tax liabilities, allowing them to maintain cash flow, meet deadlines, and avoid potential penalties.

We are going to explore more about tax finance, how it works and how a business can adopt it to improve financial health and operational efficiency. 

What is tax finance?

Also known as tax funding or tax loans, tax finance is a specialist product that enables a business to spread the cost of their tax liabilities over an agreed period rather than having to pay full amounts in one lump sum. This funding can be used to pay a range of business taxes include corporate tax, VAT (value added tax) and payroll taxes.

Using tax finance helps a business to improve cash flow, avoid late payment penalties and free up capital which can be reinvested back into the company to fulfil growth plans. It is also a very beneficial finance tool for businesses that experience seasonal fluctuations in revenue or that need flexibility when managing their working capital.

How does tax finance work?

Tax finance is the borrowing of money to cover a tax liability, and repayments are made in instalments typically ranging from 3 to 12 months. It is a very straightforward process but needs accurate financial planning to ensure the business can maintain the repayment terms. There are 4 key steps in the process:

1. The businesses tax liability is determined
2. An application for finance is made
3. Loan approval is agreed and the tax payment is fulfilled
4. Repayment plan is set-up

What taxes can be covered by tax finance?

There are four types of business tax that can be covered with this type of lending:

1. Corporation tax
2. VAT (value added tax)
3. PAYE (pay as you earn) and payroll taxes
4. Property tax

What are the benefits of tax finance?

• Improve cash flow management – A significant benefit of tax finance is the ability to preserve cash flow. Rather than having to make a large tax payment in one lump sum, a company can spread the cost over a longer period, allowing them to keep more working capital within the business.
• Avoid late payment penalties – being unable to pay a tax bill can bring substantial penalties for late payments along with extra charges for interest and overdue fees. Tax finance will ensure a business can meet their tax deadlines on time and without incurring penalties.
• Preserving capital – rather than tying up large amounts of capital in tax payments a business can use tax finance to free up funds for investing in growth initiatives. Whether it’s investing in new equipment, expanding operations, or launching a marketing campaign, tax finance gives businesses the flexibility to allocate resources across several activities.
• Flexible repayment – tax finance lenders can offer very flexible repayment terms tailored specifically to the needs of the business. A company can choose a repayment schedule which aligns with their cash flow cycles, making sure the loan is manageable to repay and does not cause extra financial strain.
• Quick access to funds – under normal circumstances a tax finance deal can be arranged quickly allowing a business to access funds over a very short period. This is very helpful when tax repayment deadlines are quickly approaching.

Businesses should consider tax finance when they experience seasonal revenue fluctuations, have cash flow challenges, must pay a large one-time tax bill, are undergoing expansion or looking for reinvestment.

Tax finance is a very valuable tool for managing tax liabilities, improving cash flow and avoiding the pitfalls of late payment penalties. 

The NGI Finance team have a wealth of knowledge in tax finance. For help please call us on 01993 706403 or e-mail enquiries@ngifinance.co.uk.