New research from Premium Credit has found that 52% of UK SMEs are currently struggling to pay tax bills, with Corporation Tax creating the greatest pressure. The findings provide further evidence that tax payments are becoming a central cash-flow challenge for otherwise viable businesses.
Corporation Tax is causing difficulties for 22% of the SMEs questioned, while 12% are struggling with VAT and 20% report problems paying both. The pressure is affecting decisions across recruitment, investment, borrowing and business development, making tax planning increasingly important to the wider financial strategy of an SME.
The research also contains an important distinction. Although more than half of SMEs report difficulty paying tax, 81% still describe their finances as “very” or “quite” healthy. Tax-payment pressure therefore cannot automatically be treated as evidence that a company is failing. In a significant proportion of cases, it reflects a mismatch between when cash enters the business and when a substantial liability must leave it.
What Premium Credit’s SME tax research found
Premium Credit’s research shows that businesses are responding to tax pressure in several different ways. The most common strategy is to increase revenue, with 32% planning to take on more work so they can meet their liabilities. A further 23% expect to approach existing investors for additional funds, while 21% intend to borrow money.
The most concerning response is the 13% of SMEs that say they may need to lay off staff. Higher tax and employment costs are already influencing workforce decisions, with 36% of respondents reporting reduced profits and 34% saying they have cut recruitment. A further 19% say recent taxation changes have made trading more difficult and reduced revenue.
These difficulties are not confined to one accounting period. Around 53% of SMEs say they have struggled to pay tax bills at some point during the past three years. Among businesses that encountered problems, 37% faced a bill exceeding £50,000 and 12% struggled with a liability worth more than £100,000.
The amounts involved explain why ordinary cash reserves may be insufficient, even when a business remains profitable. A £50,000 Corporation Tax or VAT payment can absorb money that had been intended for payroll, stock, equipment, marketing or the mobilisation of a new contract.
Why businesses are struggling to pay Corporation Tax and VAT
Corporation Tax is calculated on profit, but accounting profit does not necessarily mean the same amount is immediately available in the company’s bank account. Money may be held in unpaid customer invoices, stock, work in progress, recently purchased equipment or deposits required for new contracts.
Companies with taxable profits of up to £1.5 million will normally pay Corporation Tax nine months and one day after the end of their accounting period. This provides time to plan, but it can also create a false sense of distance between generating the profit and paying the resulting liability.
A company may use the cash generated during that period to recruit employees, buy materials or fulfil orders before the Corporation Tax deadline arrives. The expenditure may be commercially sensible, but the business can still face a temporary shortfall when HMRC requires payment.
VAT creates a different timing challenge. Depending on the accounting method used, an SME may be required to pay VAT relating to sales before every customer invoice has been converted into cash. Late-paying customers can therefore place pressure on a business even when its order book and reported revenue appear strong.
The scale of these obligations has also increased. HMRC recorded £97.2 billion in total corporate tax receipts during 2024/25, an increase of 4% from the previous year. VAT receipts reached £171 billion during the same financial year,
net domestic VAT liabilities increased to £177 billion.
Employment costs have increased the pressure on business cash flow
Premium Credit linked its findings to the effect of higher employment costs. From April 2025, the main employer National Insurance rate increased from 13.8% to 15%, while the annual secondary threshold was reduced to £5,000. The maximum Employment Allowance was increased at the same time, providing some protection for eligible smaller employers, but labour-intensive businesses still faced a material change in their cost base.
The National Living Wage increased from £11.44 to £12.21 an hour in April 2025 and rose again to £12.71 in April 2026. The cumulative increase has been particularly relevant to hospitality, retail, care, logistics, construction and other sectors that employ substantial numbers of hourly paid workers.
A business can therefore experience pressure from several directions at the same time. Payroll rises permanently, customers continue to request extended payment terms and a VAT or Corporation Tax deadline creates a concentrated demand for cash.
The result may be a healthy company with adequate demand and a profitable operating model, but insufficient liquidity at a specific point in its financial cycle.
Struggling to pay tax does not always mean a business is financially unhealthy
The finding that 81% of respondents consider their finances healthy is central to understanding the role of tax finance.
A financially distressed company is one that lacks a viable route to meeting its obligations over the longer term. A company facing a timing shortfall may have confirmed orders, dependable customers and sufficient future income, but need to bridge the period between an immediate tax deadline and later cash receipts.
Those situations require different responses as additional borrowing will not correct a business model that consistently loses money. It can, however, help a viable business preserve working capital while converting existing invoices, contracts or seasonal trading into cash.
The growing acceptance of instalment-based tax funding supports this distinction. Premium Credit reports that nearly three-quarters of SMEs would consider spreading the cost of tax payments, including businesses that do not currently describe themselves as struggling. Use of its tax and VAT finance proposition has more than doubled over the past two years.
This suggests that specialist tax finance is increasingly being considered as a planned liquidity tool rather than a last-minute response to arrears.
Why taking on more work may not solve a tax shortfall
The most common response identified by Premium Credit was to take on more work. Increasing revenue can improve the long-term position, but additional orders do not always create immediate cash.
A new contract may require a business to pay for wages, materials, transport and mobilisation before receiving the first customer payment. If the customer is then given 30, 60 or 90-day payment terms, the additional work can increase the company’s short-term funding requirement.
The quality of the work also matters. Low-margin orders secured primarily to generate cash can absorb management time and working capital without producing enough profit to justify the pressure they create.
Additional work is most valuable when it is properly priced, operationally manageable and supported by an appropriate source of working capital. Tax funding can form part of that structure by preventing a historic liability from consuming the cash required to deliver profitable future orders.
Tax finance compared with HMRC Time to Pay
Time to Pay can provide valuable support, but it is intended to address a tax debt or an inability to meet the full payment by its deadline. It is not designed to be used as a growth tool or a form of working capital. HMRC generally expects business arrangements to be as short as possible and normally under 12 months, although longer periods can be considered in exceptional circumstances. Interest continues to apply when payments are received after the original due date.
At the time of writing, HMRC’s standard late-payment interest rate is 7.75%. Businesses should also consider the potential effect of missed deadlines, penalties and ongoing HMRC engagement when comparing their options. HMRC may also take a stricter view of businesses that repeatedly rely on Time to Pay arrangements, particularly where it appears to be used as a revolving credit facility rather than a last-resort solution.
Specialist tax finance is generally arranged before the payment deadline. The lender provides the funds required to pay HMRC, and the business repays the facility through agreed instalments. Unlike Time to Pay, lenders typically expect and support businesses using these facilities as part of their wider working capital strategy, including as a form of revolving credit to support growth.
Neither route is automatically preferable in every case. The decision should consider the total cost, required repayment period, certainty of approval, effect on future borrowing capacity and whether the business needs to remain free to invest in growth.
Why raising equity is rarely the first choice for a tax bill
Almost a quarter of the SMEs questioned said they would approach existing investors for additional capital. While an investor may be willing to support a company through a temporary shortfall, particularly when the business is preparing for rapid expansion. Equity is nevertheless a permanent form of capital. Issuing additional shares to meet a short-duration tax liability can dilute the founders’ ownership and give away a portion of future value to solve a temporary timing problem.
Debt finance may be more proportionate when the company has a clear repayment source. Equity is generally better suited to financing long-term development, acquisitions, technology, market entry or other projects where returns will be generated over several years.
Before approaching shareholders, a business should compare the value of the ownership it may surrender with the total cost of a short-term tax or working-capital facility.
Tax funding can protect recruitment and productive investment
The 13% of businesses considering redundancies demonstrate how tax pressure can affect decisions beyond the payment itself.
Reducing staff may create an immediate saving, but it can also lower capacity, weaken customer service and make it harder to fulfil new orders. Recruitment freezes can have a similar effect by preventing a company from adding the people required to grow.
Using external finance to pay tax should not become an automatic annual habit without examining the underlying cause. However, where the shortfall results from growth, seasonality, delayed invoices or a temporary concentration of expenditure, spreading the liability may be more commercially rational than cutting productive capacity.
The central question is whether the value preserved or created by retaining the cash exceeds the cost of the facility. A business that can use £50,000 to fulfil a profitable contract, maintain essential staff or avoid selling assets at the wrong time may gain more from preserving liquidity than it pays in interest and fees.
Tax finance is becoming part of mainstream business planning
Premium Credit’s research shows that tax-payment pressure is widespread, but it also shows that businesses remain focused on growth. SMEs are taking on work, approaching investors and considering borrowing rather than immediately withdrawing from the market.
That creates an opportunity to improve how tax liabilities are managed. Corporation Tax and VAT are predictable obligations, and predictable obligations can be incorporated into cash-flow forecasts, funding plans and investment decisions.
The most resilient businesses will assess their position before the deadline, preserve communication with HMRC and compare finance according to its total commercial effect. A tax facility should support a viable plan, protect productive cash and provide a realistic route back to normal trading liquidity.
How Finspire can help
Finspire helps UK businesses assess tax funding alongside a broad range of working-capital solutions. This allows a business to compare specialist Corporation Tax and VAT finance with alternatives such as revolving credit, invoice finance, unsecured business loans and asset-backed facilities.
The appropriate solution will depend on the size and timing of the liability, the company’s trading history, its available cash and the reason the shortfall has arisen.
Businesses expecting a Corporation Tax, VAT or Self Assessment payment should review their options before the due date. Early planning can create a wider choice of lenders, reduce pressure on management and protect the cash needed to pay employees, suppliers and growth costs.
