VAT loan vs HMRC Time-to-Pay: which costs less?
Your VAT bill is due. Cash is short. You have two routes: ask HMRC for a Time-to-Pay arrangement at 7.75% per year, or take a commercial VAT loan at 1.5% to 3.5% per month. On rate alone, HMRC wins. On certainty of approval, speed, and clean future-borrowing record, the commercial loan often wins. This page lays out both side by side with a worked example, so you can decide.
Side by side
| Factor | HMRC Time-to-Pay | VAT loan (FundBiz panel) |
|---|---|---|
| Cost of borrowing | 7.75% per year (Bank of England base rate + 4%, from 9 January 2026) | 1.5% to 3.5% per month (panel lenders, 3-6 month terms) |
| Approval | HMRC discretion, varies by trading history with them | Commercial underwriting, 24 to 72 hours, contractual |
| Term | Typically 6 to 12 months, longer rare | 3 to 6 months (one VAT cycle) |
| Penalties for late payment | If TTP agreed before day 15, late-payment penalty regime suspended; otherwise penalties accrue alongside interest | No HMRC penalty exposure, the lender pays HMRC on or before the due date |
| Effect on future borrowing | Active TTP is a flag at most UK SMB lenders, can affect commercial-finance applications | Treated as a normal short-term facility; cleared loan does not affect future applications |
| Security | None at agreement; HMRC retains enforcement powers | Usually unsecured plus director personal guarantee |
| Repeat use | HMRC discourages repeat TTP requests; evidence of recurring stress | Rolling VAT loans are common; lenders price risk into the rate |
Worked example, £10,000 VAT bill, 6-month repayment
HMRC Time-to-Pay route:
- VAT due: £10,000
- HMRC interest at 7.75% per year, charged daily on the reducing balance, repaying £1,667 a month for 6 months
- Approximate total interest: £225 to £230 over the 6 months
- Total repaid: approximately £10,225 to £10,230
- Caveat: HMRC may set a shorter term, may charge a penalty if the arrangement is agreed after day 15, and the active TTP will be flagged on any commercial-finance application during the period
VAT loan route, panel lender at 2.5% per month:
- VAT funded: £10,000, paid to HMRC on the due date by the lender
- Repayment: 6 equal monthly instalments
- Approximate total cost: £1,500 (2.5% per month over 6 months on the original principal, lender-dependent calculation method)
- Total repaid: approximately £11,500
- No HMRC penalty exposure; no active TTP flag on future applications
The TTP route is roughly £1,270 cheaper on this example. The VAT loan route is faster, certain, and cleaner on your future-borrowing record. Pick the one that fits the situation, not the one that looks cheapest in isolation.
Numbers are illustrative. Real VAT loan rates from FundBiz panel lenders range from 1.5% to 3.5% per month and are quoted post-application; HMRC interest is fixed at the official rate.
When HMRC TTP fits
- You have a clean prior trading history with HMRC and no recent TTP.
- You can agree the arrangement before day 15 of the VAT being overdue, suspending the penalty regime.
- You do not anticipate needing commercial finance during the TTP period.
- The cashflow gap is genuinely a one-off rather than a structural shortfall.
When a VAT loan fits
- HMRC has refused or restricted the TTP arrangement, or you have prior TTP history that makes a fresh agreement uncertain.
- You need certainty of approval inside 24 to 72 hours.
- You expect to apply for commercial finance during the VAT period and want the application clean.
- The bill is recurring (seasonal VAT spike) and you want to manage it as a planned working-capital product rather than as an HMRC arrearement each quarter.
When neither fits
If the same gap appears every quarter, both routes treat the symptom. The right answer is restructured working capital: a term loan, an MCA against ongoing card flow, or invoice finance against B2B receivables. Sister site MarketInvoice covers the invoice route.
FAQs
What is HMRC Time-to-Pay?
A formal arrangement with HMRC to pay a tax bill in instalments rather than in one lump sum at the due date. Available for VAT, PAYE, Corporation Tax and Self Assessment. Interest is charged at HMRC's published late-payment rate, currently 7.75% per year from 9 January 2026.
How much does HMRC charge on a Time-to-Pay arrangement?
HMRC charges interest at the official rate, set as Bank of England base rate plus 4 percentage points. The rate is 7.75% per year from 9 January 2026. Interest accrues daily on the outstanding balance until the arrangement is settled in full.
Are there penalties on top of the HMRC interest?
For VAT, HMRC operates a points-based late-submission penalty regime separately from interest. Late-payment penalties for VAT under the regime that started 1 January 2023 are 2% of the unpaid VAT at day 15, a further 2% at day 30, and a daily penalty at 4% per year from day 31. A Time-to-Pay arrangement agreed before day 15 prevents these penalties from accruing further.
What is a VAT loan?
A short-term commercial loan from a UK SMB lender, structured to pay your VAT bill on the due date. The lender either pays HMRC directly or transfers cash to your business account, and you repay over 3 to 6 months. Typical rates from FundBiz panel lenders are 1.5% to 3.5% per month.
Which is cheaper: VAT loan or HMRC Time-to-Pay?
On headline rate, HMRC Time-to-Pay at 7.75% per year is cheaper than a VAT loan at 1.5% to 3.5% per month. The catch is HMRC's discretion: TTP is granted at HMRC's discretion based on your trading history with them, and arrangements can be refused or set at terms shorter than you need. A VAT loan is a contractual product with a fixed approval and term.
When does a VAT loan fit better than TTP?
When HMRC has refused or restricted the TTP arrangement, when your business has prior TTP history that makes a fresh agreement uncertain, when you need certainty of approval inside 24 to 72 hours, or when the speed and cleanliness of a commercial product outweighs the rate difference for your situation.
Will a Time-to-Pay arrangement affect my credit?
A TTP arrangement is between you and HMRC and does not directly appear on your business or director credit file. It does however affect future commercial-finance applications: many UK SMB lenders ask whether you have an active HMRC TTP and treat an active arrangement as a material risk indicator on the application.
Can I have both a TTP and a VAT loan?
In principle, yes. In practice, lenders are reluctant to fund a VAT loan against a business that already has an active HMRC TTP arrangement, because it suggests cashflow pressure beyond a single bill. A typical FundBiz panel lender will decline if there is an active arrangement, though a recently-cleared TTP is acceptable.
Run the matcher
Tell us your VAT bill amount, sector and trading time. We surface the panel lenders most likely to approve and at what rate band, and we flag whether TTP is likely to be the better route.
Open VAT loan matcher →Last reviewed: 7 May 2026. By Oliver Mackman.