For the vast majority of business owners paying tax is a pain. Handing over a good wedge of your hard-earned cash seems to have a chilling effect on one’s emotional state.
Unlike those in employment, with tax deducted before the money is ever seen, this cash has been sat in your bank account for (hopefully) months.
It isn’t yours, you know that, but after a while it does start to feel like it. When you hand it over to the tax man it definitely feels like it is yours!
This process sets tax, and minimising it, apart in many business owners minds which can lead to some odd choices. While I would not suggest that having an efficient tax set up should be ignored, I urge you to make decisions relating to tax planning & structuring with your head and not your heart.
What is the cost? – Other opportunities!
Remember, any rearrangement of tax affairs come with the following:
a benefit (tax saved),
an investment (your time plus potentially a fee from your accountant),
a risk (not all tax positions are black and white – are you prepared to argue the point at a tribunal?).
Sounds like any other business opportunity, doesn’t it?
I agree. So why do we so often see large amounts of effort being invested, risky positions being taken, and all for modest tax savings?
Consider a sole trader making profits of around £20k; incorporating might well provide an opportunity to save a small amount of tax. It will come with additional accountancy fees and an increased level of administration. That effort and money invested in another opportunity might give a better overall return to the business.
What is the right choice?
For most businesses the choice that leaves the most profit to distribute after tax is the right one, even if the actual tax paid is higher. So when considering where to invest your time and effort make sure you consider what else you could be doing with your time and effort. What opportunities are you missing out on to pursue this one?
As an accountant I find it very common that people contact me asking about saving tax, maybe there is more mileage in asking your accountant to help improve your reporting, help you understand your finances and ultimately help you make more profitable choices.
Remember : It is what is left in your bank after you have settled the tax bill that counts.