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In short
Law firm VAT and tax funding spreads a VAT quarter, partners’ self-assessment or corporation tax over the following months, so the firm pays HMRC on time while waiting for clients to settle bills. Most firms owe VAT when a bill is delivered, not when it is paid, which is the core problem. Lenders look at your HMRC payment record, tax reserving policy and whether repayments finish before the next liability.
Law firms hand HMRC VAT on bills their clients have not yet paid, and partners settle personal tax on profits that may still be sitting in WIP. Those two facts explain most of the tax-related cash pressure in legal practice. It is written for finance partners, COFAs and practice managers planning around a VAT quarter, a 31 January partners' tax bill or a corporation tax deadline. As a broker, we arrange short-term tax funding for firms and partners from around £10,000 to £500,000+, with larger facilities available in suitable cases, drawing on lenders across our panel. Other reasons firms borrow are set out in our solicitor practice loans hub.
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A lender pays the VAT or advances the funds, and the firm repays in instalments that should finish before the next return. Our page on VAT loans explains the mechanics. It suits a one-off spike, such as a quarter in which several large matters were billed at once. Its weakness is the next quarter: if the loan is still running when the next return falls due, the firm can end up stacking loans.
02
Funding partners' personal tax
There are two structures. The firm can borrow and pay each partner's tax, debiting their current accounts, or individual partners can borrow personally through an income tax loan. Firm borrowing keeps things simple where every partner is short; individual borrowing keeps a partner's liability off the firm's balance sheet and suits a partnership where only some partners need help.
03
Corporation tax for incorporated firms
Limited company practices and ABSs pay corporation tax on profits that include accrued income. A corporation tax loan spreads the payment over the following months, which suits firms whose profit jumped because WIP rose rather than because cash did.
04
A revolving facility for recurring liabilities
Where VAT, tax and PII each strain cash every year, a revolving credit facility drawn for each liability and repaid from billing is often tidier than a series of separate loans. It needs discipline: the balance should return close to zero between tax dates, or it has become permanent working capital. If the underlying issue is lock-up, our page on WIP and disbursement funding covers that separately.
Why solicitors pay VAT before their clients pay them
Most firms account for VAT under the standard method, which means VAT is due on the bill's tax point, usually the date the bill is delivered, not the date the client pays. A firm that issues a large batch of bills in the last week of a quarter owes the VAT on all of them at the next return, even though few will have been paid by then.
The pressure is sharpest for firms with private clients who pay slowly, with probate bills paid from estates, and with litigation bills disputed or assessed before payment. It is lighter for conveyancing, where fees and VAT are usually taken from completion funds.
Two points often reduce the problem:
Cash accounting. Smaller firms can use the VAT Cash Accounting Scheme, paying VAT only when clients pay. Eligibility depends on VAT taxable turnover, and a firm must leave once it grows past the exit threshold, which is why established practices usually cannot use it.
Disbursements. A genuine disbursement paid as the client's agent is outside the scope of VAT, but many costs solicitors pass on are treated by HMRC as part of their own supply and carry VAT. HMRC's VAT guide (Notice 700) sets out the tests. Getting this right avoids paying VAT that was never due, or under-declaring VAT and facing an assessment.
Illustration: VAT on unpaid bills
Illustration only, using round hypothetical figures. A firm bills £300,000 plus £60,000 VAT in a quarter. By the time the return is due, clients have paid 60% of those bills. The firm still owes HMRC the full £60,000, of which about £24,000 relates to bills it has not been paid for. If the pattern repeats every quarter, the firm is permanently funding tens of thousands of pounds of its clients' VAT.
Cheaper alternatives and the real risks
HMRC may agree a payment plan if you contact it before the deadline; see its guidance on Time to Pay arrangements for how to ask, and our comparison of Time to Pay and a tax loan sets the two side by side. HMRC charges interest on tax paid late under a plan, so compare total cost as well as convenience.
Other levers are often cheaper than borrowing: taking money on account for costs and disbursements at the start of each matter, interim billing on long files, claiming VAT bad debt relief on bills more than six months overdue that have been written off in your VAT records, and reviewing whether items billed as disbursements are genuinely outside the scope of VAT. The main risk in tax funding is habit. A firm that borrows every quarter is paying finance costs on its own tax, and lenders will eventually notice the pattern.
Underwriting
How lenders assess a tax funding request from a law firm
01
HMRC position
Whether previous VAT returns and tax bills were paid on time, and whether there are arrears or an existing Time to Pay arrangement. Existing arrears make many lenders cautious.
02
Tax reserving policy
Whether the partnership retains a proportion of each partner's drawings for tax. A firm that reserves properly but borrows once for an unusual year is a different risk from a firm that never reserves.
03
Repayment against the next liability
Lenders map instalments against the next VAT quarter and payment on account to check the firm is not borrowing to repay borrowing.
04
Collection strength
Debtor days and the age of unpaid bills, since collections are the real source of repayment.
05
Partners' personal credit
Guarantees are usual, so partners' own credit files and any personal tax arrears matter.
Checklist
Documents for a VAT or tax application
The VAT return, corporation tax computation or partners' tax calculations showing the amount and due date
The most recent filed accounts and a management accounts pack for the year to date
Recent office account statements, so a lender can see billing receipts against outgoings
Aged debtor report and a cash flow forecast covering the repayment term
HMRC statement or letter confirming any existing arrangement
Partnership or members' agreement, including the clause on tax retentions
Side by side
Compare your options
How the main business finance structures work. Lenders set their own terms, so treat this as a guide to the questions to ask.
Partners in firms with year ends other than 31 March or 5 April were moved onto a tax-year basis from 2024-25. The extra "transition profit" that arose is by default spread over five tax years, so many partners are still paying tax on a slice of it until 2027-28, on top of tax on current profits. HMRC explains the rules in its guidance on changes to reporting income from self-employment and partnerships. Firms with a 30 April year end, once common in the profession, saw the largest transition profits, and partners who did not reserve for them are the ones most likely to need to spread a January bill.
The broker’s view
How we arrange VAT and tax funding
Tell us the liability, the amount and the due date, and share your latest figures. We check whether the need is one-off or recurring, suggest the structure that fits, and put the request to lenders on our panel that are comfortable funding tax for professional firms. You compare the offers with us, and the lender makes the credit decision. Start early: an application made weeks before a deadline gives more choice than one made days before. It is free to enquire; any broker fee is disclosed separately before you proceed.
What our clients say
I’d like to say a big thank you to Simon and the team for successfully assisting with the sourcing and placing of our most recent funding. Simon was able to secure a lend when others appeared to have run out of appetite to place business or source viable options. I would highly recommend Simon should you need to raise capital or finance for your business needs.
Solicitors’ practiceManagement teamGoogle review
I contacted them to apply for a VAT funding loan. Simon responded within half an hour of my request and was able to confirm funding within a 24 hour period. It was the first time I have had to apply for funding owing to a short-term cash flow problem, and he made the journey so easy. Kind and highly efficient: I would highly recommend them for a fast, professional service.
Company directorVAT fundingGoogle review
01/02
FAQs
Questions clients ask
Can a law firm borrow to pay a VAT bill that is already overdue?
Some lenders will consider it, but overdue VAT narrows the choice and HMRC late payment penalties and interest may already be running. It is usually better to contact HMRC about the arrears while a funding application is in progress, and to be open with lenders about the position.
Should the firm or each partner borrow for partners' tax?
It depends on how many partners need help and what the partnership agreement says about tax retentions. Firm borrowing is simpler administratively; personal borrowing keeps one partner's shortfall from becoming a firm liability. New partners short of funds after their first tax bills may also be looking at partner capital loans at the same time, so it helps to plan both together.
Does a VAT loan affect our VAT registration or returns?
No. The loan is a commercial agreement with a lender; HMRC simply receives payment on time. Your return is prepared in the usual way, and our VAT calculator can help check the figures on individual bills.
Is a VAT loan better than an HMRC Time to Pay arrangement for a law firm?
It depends on whether HMRC will agree terms and how much certainty the firm needs. A Time to Pay arrangement can cost less, but HMRC decides whether to agree and on what terms, and lenders may ask about it later. A VAT loan pays HMRC on time and spreads the cost with a lender instead. Our guide to Time to Pay versus a tax loan compares the two in more detail.
How quickly can a law firm get VAT funding before a quarter deadline?
In straightforward cases, a VAT loan for a law firm can be arranged within a few working days once the lender has the VAT return or calculation, recent accounts, management figures and bank statements. Leaving it until the week of the deadline narrows the choice, so it helps to plan ahead when a large batch of bills is going out. Our VAT loans page explains how these facilities generally work.
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