A few years before the global Covid 19 pandemic set in, began a financial crisis in the western parts of the globe. The ripples, however, could be felt throughout the world and led to subsequent recessions in various forms. The wide-ranging and complicated outcomes were hard to predict. However, as the global business leaders started to recover, there began another menacing convolution – the distrust of the customers in the product or service and in rebuilding the financial state of the respective nation.
People gradually took an interest in the companies’ revenues and started questioning where the tax revenue was coming from. Media reports made the situation more grievous. Finally, the customer’s threat to boycott Starbucks after a series of negative news on the tax arrangements made the company declare to pay more tax in the UK than it is obliged to.
Now, how should a company strategise its functions – should it pay more attention to the business revenues or the tax? What should come first?
Let’s take a look at a few more examples of the globe before divulging into more details.
VAT
Example 1
When Lisa started her business that offers taxation law assignment help, she decided she wouldn’t register for VAT after taking advice. It makes sense. If you want to compete with everyone else, you can’t charge 20% higher prices to include VAT.
But now she’s stuck. She can’t grow the business beyond the cusp of VAT because she would have to increase or margin her prices significantly. So now she is in two minds about separate companies to boost her earnings. It’s quickly going to get complicated — she can do without the distraction of doubling the admin work.
Example 2
Five years in to running his hair salon, Adam takes a day off a week and shuts early some days to limit his takings to keep them below the VAT entry point. But he’s living hand-to-mouth.
Which came first in these two situations: tax or business strategy? The result, of course, is that both businesses reduce their tax bill, but at what cost?
I’m sure this was not the intention when a VAT registration opening was included in the VAT legislation created in 1973.
Income Tax
Example 1
Johnson operates a sole-proprietorship business and withdraws money from the company when he needs it and, most significantly, when it’s available during the year. His accountant then uncovers the most tax-efficient way at the year-end to allocate his drawings between salary, expenses, and dividends.
Johnson does not manage cash flow proactively, so while he knows what’s in the bank, he doesn’t keep track of every due payment or receipt, so he sometimes withdraws excessively, leaving the business short of cash. It regularly causes him to have sleepless nights.
Example 2
Adelaide runs a limited company and runs it the same way. She takes no salary as such and reinvests most of the profits into the business to fund growth. She restricts his drawings to pay as little tax as possible.
She’s looking to close the doors of the business in 3–5 years. Unfortunately, because she’s not withdrawing any salary, let alone a market rate salary, she is a novice to her businesses’ profitability. As a result, she is complicating things for herself when she eventually comes to sell.
If you think these examples are rare, absolutely not. Many micro-businesses and SMEs operate in a way that lowers the tax liabilities. Their tax strategy defines the business strategy. In reality, it seems, tax strategy more often takes priority over business strategy.
And in each of the described situations, it is suppressing the growth potential of the business. However, where is it holding back? In any case, all companies, big or small, must look to grow at least a little to get around the effects of inflation!
So, what’s the solution? Some say that the government should bring a change to its tax laws to benefit SMEs even more. Others might highlight that it is the job of accountants to help business owners put business strategy before tax strategy. However, both of these “solutions” forsake responsibility. Governments will forever toy with tax rules, scraping a bit here and adding a bit there. The gross result is more complexity, confusion, and probably a smaller wallet. Tax advisers will emphasise lowering the tax bill because that’s their job and the tangible, immediate benefits show how good they are at it.
The solution then is for business owners to acknowledge that a successful business should pay taxes, that a successful person works for society by paying taxes. And to be successful means designing and executing a business strategy that will achieve their goals, not a lower tax.
With a business strategy in place, you can apply a tax strategy to diminish the tax liability of that strategy without throttling business growth.
How to create a business strategy?
You will find several books written on the subject, but here are the essentials:
- State what you want to achieve, or start with the end in mind as they speak. I don’t believe anyone expects a sub-£78,000 turnover business. Many settle for that, but few start with that ambition. Starting with the end in mind allows you to think beforehand about what the company needs to look like regarding turnover, profits, headcount, infrastructure, etc.
- Look at what’s already available in the market and come up with something unique. Of course, that might be a different target market or a different way of delivering what you offer. But to avoid competing on price (like Lisa), you must have something different to offer your target market, not just a little better, or smaller, or bigger, or faster, or whiter, but completely different.
- Figure out which people want to buy that difference and why they would buy it — why should they care enough to part with their hard-earned cash?
- Figure out how to tell people about it and how they can get hold of it most efficiently.
- Then, create a plan to help you understand how to generate the cash flow to achieve your goal. Too few business plans are written to aid in understanding the specific steps involved in completing a dream and the risks associated with those steps. Write yours with those two things in mind.
- Follow the plan step by step and adapt it regularly as you gather accurate world data to support or otherwise your business idea.
- Please discuss with your tax advisor/accountant how to minimise the tax liability of the plan and impress upon them that changing the procedure is not an option.
Penalties
Remember, you may have to pay the penalties unless you pay the taxes clearly or publish your strategy exclusive of the relevant information or if you make your taxation strategies is not freely available for the appropriate period. The government won’t spare you penalties even if you are the
- Head of the qualifying UK group
- Head of the UK sub-group
- Sister company in a foreign group
- Individual UK company or partnership
Final thoughts
If you’re already running a business, it is never too late to figure out a more productive strategy to attain your goals. So wait no more; the best time to start is today.