Restaurant VAT funding to pay your VAT bill on time

Food and drink served for eating on the premises is always standard-rated, and so is hot takeaway food that meets HMRC's tests, while most cold takeaway food is zero-rated (HMRC, VAT Notice 709/1 on catering and takeaway food). The standard rate is 20%, so on a busy restaurant VAT is one of the largest bills of the year after wages and rent.

The timing makes it harder. The VAT return and the payment are usually due one calendar month and 7 days after the end of the VAT period (GOV.UK, sending a VAT return). For a quarter ending 31 December, that means paying the VAT on December's Christmas trade by 7 February, in the quietest weeks of the year. UKHospitality is still campaigning for a lower VAT rate for the sector (UKHospitality, VAT campaign), and the Autumn Budget left the rate unchanged, so restaurants need a plan for the bill as it stands. Our news posts on hospitality closures and the Budget and the business rates changes for pubs and restaurants cover the wider pressure on costs.

In short. Pay HMRC on time with short-term funding and repay it across the quiet weeks, finishing before the next quarter falls due. The bill is worked out on the Christmas quarter but has to be paid by 7 February, so the aim is to spread it over the year's trade rather than take it all out of February's. Paying late is not a cheap alternative, because late payment interest runs from the first day and penalties start from day 16.

There are four common routes, and the right one depends on how big the bill is, how steady your card takings are and whether this is a one-off or a pattern.

• A VAT loan. A short-term loan that pays the bill on time and is repaid in monthly instalments, ideally before the next quarter is due. See VAT loans and our wider HMRC loans page.
• Revenue-based funding. An advance repaid as a share of your card takings, so repayments fall when covers fall. See revenue-based loans and the merchant cash advance, with a quiet January worked through on our restaurant merchant cash advance page.
• A revolving credit facility. A limit you draw on for each VAT quarter and repay as trade picks up. See revolving credit facilities.
• Time to Pay with HMRC. An instalment plan agreed directly with HMRC. Interest still runs on the balance, and our comparison of Time to Pay versus a tax loan sets out when each makes sense.

If the VAT bill is one of several costs landing together, a working capital loan or an unsecured business loan can cover VAT, wages and suppliers in one facility. Corporation tax is funded the same way through corporation tax loans.

HMRC charges late payment penalties that grow the longer the bill is outstanding (GOV.UK, how late payment penalties work for VAT).

• Paid within 15 days of the due date, there is no penalty.
• From day 16, a first penalty of 3% of the VAT still owed at day 15.
• From day 31, a further 3% of what is still owed at day 30, plus a second penalty charged daily at 10% a year until the bill is paid.

Late payment interest is charged on top from the first day the payment is overdue, at the Bank of England base rate plus 4% (GOV.UK, late payment interest on VAT). Asking HMRC for Time to Pay by day 15 can stop the first penalty, but a broken arrangement brings the penalties back as if it had never existed. If you are already behind, our guide to a business loan with VAT or PAYE arrears explains how lenders view open arrears.

Two of our restaurant case studies began with a VAT bill. In one, a large VAT payment fell due when the bank balance was low, and we arranged revenue-based working capital so the restaurant could pay it without emptying its account, followed by smaller facilities later, £83,500 across four facilities. In the other, the first need was £25,000 to cover VAT and other bills, and later facilities paid for a refurbishment, £73,000 across three facilities. Card takings can also carry a case when other lenders hesitate, as with £42,000 for a restaurant other lenders were wary of and revenue-based funding for a takeaway.

• Move the VAT element of each week's takings into a separate account, so the quarter's bill is already put by.
• Choose a facility term that ends before the next VAT due date, so you are never repaying two quarters at once.
• Ask your accountant whether cash accounting, annual accounting or the Flat Rate Scheme would suit your restaurant better.
• Arrange funding before the quiet season starts, because lenders read your latest statements and a falling balance narrows the choice.

Our guide to seasonal business finance covers planning for quiet months, and the main restaurant business loans page covers refits, kitchen equipment and second sites. Pubs, hotels and takeaways face the same VAT timing; see pub and bar loans, hotel finance, takeaway business loans and the hospitality business loans hub.