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What Comes First: Business Strategy or Tax Strategy?
Any business advisor will tell you the answer, but what's happening in the real world?
Here are a few examples:
When Jeanne started her exercise class business, she decided after taking advice that she wouldn't register for VAT. It makes sense. If you want to compete with everyone else then you can't charge 20% higher prices to include VAT. But now she's stuck. She can't grow the business beyond the VAT threshold because she would have to increase her prices or take a significant reduction in margin. Now she's contemplating setting up separate businesses to boost her earnings.
Five years in to running his hair salon, Scott takes a day off a week and shuts early some days just to limit his takings to keep them below the VAT threshold. But he's living hand-to-mouth. Which came first in these two cases: tax strategy or business strategy? The payoff of course is that both businesses reduce their tax bill, but at what cost?.
John runs a sole-tradership and draws money from the business as he needs it and, more importantly, when it's available during the year. His accountant then finds the most tax efficient way at the year-end to distribute his drawings between salary, expenses and dividends. Cashflow is not managed proactively, so while John knows what's in the bank he doesn't keep track of every due payment or receipt so he sometimes draws too much and leaves the business short of cash. This regularly causes him to have sleepless nights.
Which came first in these cases - business strategy or tax strategy? Again, the payoff is a lower tax bill, but at what cost in terms of business growth and equity? These examples are not rare. Many micro-businesses and SMEs are operated in a way that minimises tax liabilities. Their business strategy is defined by their tax strategy. In the real world, it seems, tax strategy more often takes priority over business strategy.
And in every case described it is stunting the growth potential of the business. That may be OK in some cases, where the owner doesn't want to grow. However, where they do it is holding them back. In any case, all businesses should be looking to grow at least a little just to overcome the effects of inflation!
Governments will forever tinker with tax rules, shaving a bit here and adding a bit there. The overall result is added complexity, confusion and probably a ligher wallet. Tax advisers will prioritise minimising the tax bill because that's their job and the tangible, immediate benefits show how good they are at it.
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