Cash is king but when you’re struggling with cash flow and have a VAT bill, Corporation Tax bill, PAYE bill, or SDLT bill – how can you raise the finance you need quickly?

Bridging loans are short-term financial solutions that can help businesses settle time-critical payments. This article discusses the types of tax that can be owed by a UK company, be it a sole trader or incorporated entity such as a limited company, and whether a bridging loan is the most appropriate financing option.

What types of businesses are there in the UK?

In the UK, there are many types of businesses including

Public limited companies (PLCs): A PLC is a company that has stock shares available to the general public. As a result of their limited liability, the purchasers of those shares are not liable for any business losses that exceed the price they paid for the shares. PLCs pay corporation tax on their taxable profits, which currently reside at 20%.
Private limited companies (LTDs): An LTD has a separate legal entity, where shareholders are able to enter the business through means of private sales. Even though revenue belongs solely to the business, this also means all taxes are owned by them. The director of the company would only be liable for the debt owed in specific instances, this includes; signing a personal guarantee, accumulated debts after knowing the company cannot afford to pay, and overdrawn loan accounts.

Unlimited companies: Unlimited liability companies, although they have similarities to a PLC and LTD, don’t have a separate legal identity and are therefore personally liable for any debt accumulated by the business. The most common form of unlimited companies includes sole traders that are taxed based on their profits. Therefore, the tax obligations of an unlimited company include income tax and national insurance contributions.
Limited Liability Partnerships (LLPs): An LLP, provides the same legal security as a limited company, where the company is treated as a separate legal entity. This type of company also has the same tax obligations as any limited company, which include corporation tax, Value Added Tax (VAT) on any goods and services at the applicable rate, and National Insurance contributions.

There are a number of business types in the UK with the main types listed above, however, there are also Community Interest Companies, Industrial and Provident Society (IPS), and Royal Charter (RC). Each with its own specific tax obligations and requirements.

Finbri, a bridge loan specialist, comments “With the massive economic headwinds now facing all UK businesses, from an impending recession, low consumer sentiment, disrupted global supply chains, an energy crisis and a recently changed government which could mean significant tax changes – it’s not surprising businesses of all sizes across all markets are struggling to survive, let alone make tax payments on time.”

As the date on which tax is paid varies, some businesses may find that they don’t have the financial resources available at the time payment is due. Bridging loans may be the appropriate solution to this problem, however, a successful loan application will rely on a viable exit strategy, ie. how will the loan, interest, and fees be repaid.

For all bridging loans, the business would need to ensure that they have the relevant assets to use as security and have an appropriate proposed exit strategy, whether this be income or the sale of an asset.

What are the types of tax owed by a business in the UK?

Companies in the UK must adhere to paying any tax owed on time to avoid any financial penalties or legal action. Failure to pay HMRC typically results in additional interest costs, and fines, however depending on how long the debt is overdue there’s the possibility of legal proceedings against directors and compulsory liquidation. Such severe implications encourage businesses to be aware of their tax obligations; however, this can sometimes be forgotten, and companies may not have the financial means at that given time to settle the debt. There are some different types of tax a business may be liable for, and these are as follows:

Corporation tax: Corporation tax is levied on the profits of a business over the annual financial period. The amount payable will again depend on the level of profit made and is typically required nine months after the business accounting period ends. This tax must only be paid by limited companies (LTDs), foreign countries with a UK branch, or co-operatives. This tax is typically charged on trading profits, chargeable gains, and investments. This needs to be paid as the company begins to make a profit, and within the last two years has been charged at 19%.

Income tax: In terms of sole traders, the income tax paid is based on the overall profit and is included in the self-assessment tax return, and spans over the entire calendar year. This increases simultaneously with the gain; therefore, the percentage of how much is owed in income tax will increase. Income tax is most frequently variable based on specific tax brackets.

Capital gains tax (CGT): Capital gains tax is the tax on the profit earned from the sale or transfer of any assets. The amount of capital gains tax that a business owes will depend on the level of profit and the rate at which it is taxed, and is owed during the tax year in which the investment is sold or disposed of. Overall, higher rates of income tax are paid on the residential property compared to other chargeable assets. There is an annual allowance of around £12,300, before the tax is applied, if the overall gains are below this amount then there is no liability.

Value-added tax (VAT): This is a tax on the sale of goods and services. Businesses that are not exempt, such as those in financial services, have to register for VAT if their VAT taxable turnover is more than £85,000. They can also choose to register if their turnover is less than £85,000. The amount of VAT that a company owes will depend on the level of taxable turnover and the rate at which the services or goods are taxed. A business that is registered for VAT must charge VAT on taxable products or services. VAT is applied to the majority of goods and services, however, this isn’t charged if they are considered zero-rated, including food and children’s clothing, etc.

National Insurance contributions (NICs): Employers and employees pay NICs, which helps with funding the NHS. Businesses must also make contributions for each employee and the rate differs depending on whether the business is classed as small or large. Businesses contribute to national insurance based on the wages and benefits of the employees. Additionally, they are in charge of using the PAYE system to collect the Class 1 National Insurance contributions and income tax withholdings from employees.

Business rates: Business rates tax is dependent on the value of the commercial property. The number of business rates that a business owes will depend on the value of the property and the rate at which it is taxed. Similar to how council tax is a tax on residential property, business rates are local taxes that are paid by the owners of all non-residential/commercial properties. The majority of commercial properties, including stores, offices, bars, warehouses, and factories, are subject to business rates, however, there is currently relief for small businesses.

A bridging loan can be used to settle any of the above taxes that a business owes, allowing any existing debt to be settled and the bridging loan can be repaid once the finance becomes available. This allows businesses to settle an urgent HMRC tax debt quickly by raising the needed money, which is secured against the property asset, in only a few days. Bridging loans are typically repaid over a period of 12 months or less.

Is a bridging loan a viable option for settling tax?

Yes, a bridging loan is a short-term financing option that is flexible and can provide a quick turnaround for those needing the finance immediately to settle any tax-related issues. The biggest advantage of a bridging loan is that it can be approved in a very short amount of time, which is ideal for businesses that need to pay an outstanding tax bill urgently and are waiting for the finances to become available. There are many reasons why a bridging loan may be appropriate for given circumstances:

The loan can be approved quickly, often within 3 to 10 business days depending on the amount required.
Bridging loans are typically repaid over a period of 12 months or less.
The loan is secured against the property asset but can also be secured against multiple assets in some cases.
The interest payments on bridging loans are usually rolled up and paid at the end of the loan term.
A bridging loan can be a viable option for businesses that need to settle an outstanding tax bill quickly.

Disadvantages of using a bridging loan:

Bridging loans can be expensive, with high-interest rates.
The loan must be repaid within a short period of time, typically 12 months or less.
There is a risk of defaulting if the loan is not repaid on time and in the case of default the asset used as security will be at risk of repossession.

What businesses are able to get bridging finance?

Any sole trader or entity that is commercially incorporated can apply for a bridging loan, this includes startups, SMEs, large corporations, and real estate investors using a special purpose vehicle such as a limited company.

What are the alternative financial methods used to settle any tax owed?

There are also a few alternatives to using a bridging loan to pay off any tax debt owed by a business, this includes;

Bank overdrafts: This can provide extra funding to cover any unexpected costs, such as any outstanding tax owed. However, overdrafts can take a long time to set up, be expensive with high-interest rates, and must be repaid within a set period of time. The overdraft would also likely need to be approved based on the company’s credit score and financial statements such as its company accounts or bank statements.
Another option is to apply for a business loan from a bank or other financial institution. This can provide the needed funding to cover any outstanding tax debt. However, business loans can take a long time to be approved and may have strict repayment terms.

Is this appropriate for your business?

If your business has assets to use as security, with enough equity remaining in those assets, and a robust method of repaying the loan then it’s likely that a bridging loan to settle your tax bill will be a viable option for your business. The flexibility of a bridging loan allows businesses to use multiple assets to be used as security and can provide loans at a quick turnaround rate.

Is a bridge loan the right option for you? If yes, the next step would be to contact a broker to discuss your options and find a loan that meets your business needs.