A common misconception in business is the perception of business performance. A profitable year “on paper” may not always mean you have vast reserves in the bank. For property investors, developers, and businesses with capital tied up, paying Corporation tax bills can be challenging.
Could a bridging loan be used to pay corporation tax?
Yes, a bridging loan can be used in specific cases. Our detailed guide explains how a business can make bridging finance work to their advantage to pay off their taxes.
The cash pressures from Corporation Tax
Every business must pay their Corporation Tax. The tax is calculated on profits, not cash in bank.
One of the main problems with paying off Corporation tax is that a business may not have the cash on hand to make the payment in time. Any profits felt in the year might have already been reinvested, you may be waiting on payment terms to be fulfilled, or the monies may be held in assets or stocks that cannot be touched without a severe financial impact in the long-term.
HMRC expect your payment 9 months and one day after the end of every accounting period. Flexibility is often a luxury unless you have arranged a formal ‘Time to Pay’ agreement.
This is where short-term finance enters the conversation and where bridging loans are useful.
How does bridging finance work to pay the corporation tax?
Bridging loans can cover corporation tax payments if the lender is satisfied that the loan is supported by a realistic repayment plan.
It is important to understand – the loan is not funding the tax bill itself. The bridging loan is funding a short term cash boost, which you can use towards making your payment.
A bridging loan is contingent on the exit strategy being acceptable to warrant the lender granting of the loan. What would fit as acceptable exits would be: a sale of property already in completion stage, an already agreed refinance, or a confirmed release of cash (such as retained earnings becoming liquid).
What lenders do not want is hypotheticals or promises – with no defined route to them being repaid.
How lenders assess tax-driven bridging loan applications
When it comes to bridging loans that are tax-driven, lenders are a little more cautious than they would be for other purposes such as purchases or refurbishment schemes. You will notice a more critical focus in three key areas.
First, the exit strategy – Should be clear and time-specific. General references to future earnings or growth potential are not sufficient.
Second, the asset in question – All lenders will require a first or second charge on the property being offered as security. Their interest is in the value of the asset, the loan to value, and the ease of sale (if applicable) or refinance of the asset – not the tax liability itself.
Third, the overall financial situation – Lenders will determine if the business is fundamentally solvent. A one-off cash flow timing problem is very different from a regular problem with tax payments.
If the loan application appears to indicate underlying financial difficulties, it is unlikely to be approved.
Scenarios where bridging would be the smart choice
A property-intensive business has seen profits in their accounting entries, but cannot yet access them until a sale is completed. Or, a deal for refinance is already agreed, but will not be completed until the HMRC deadline has lapsed.
When paying now prevents a penalty or enforcement, then bridging can work as cash is on hand soon after approval – however as this type of credit is intended to be short term, this could end up being more costly if you are unable to fulfil that obligation on your end with the lender.
For every good situation there is always a bad to consider
If you cannot convince lenders of a sound exit, or if the business needs to rely on future trade to pay off the loan, bridging loans may not be best suited.
If your tax liabilities are on-going and subsequently increasing, this will raise alarms too – simply put, it suggests to a lender that there are serious cash management issues.
Another situation when using bridging finance is not a good idea is if the company borrows money, but avoids dealing with the HMRC debt. HMRC have the ‘Time to Pay’ scheme, and although this may not grant you as much flexibility, it may be more affordable and safer.
If being granted a loan means the business will create a cycle of debt, the lender is likely to decline the application.
Final thoughts
A bridging loan can be used to help pay corporation tax, but it is not a default solution and not suitable for every business. When used correctly, it can protect cash flow and buy time to settle up down the line. When used poorly, it can increase financial pressure.
If you’re unable to pay your tax bill because of a short-term timing issue, and there is a clear path to repay any lending, bridging finance can avoid future penalties or action from HMRC.
Used with thought and discipline, bridging finance loans can be a solution to a time critical solution. Used without careful planning, it can be just one more liability on the company.
