Who wants to pay One Million in tax?

Imagine you have walked into some sort of business seminar, and the presenter starts with the question:

“Who wants to pay One Million in tax?”

And before anybody can reply, immediately answers the question by saying:

“I do!”

What’s going on?

Well, think about it. How much money would you need to earn in order to have a tax bill of one million? And if you were earning that much, do you think you would be troubled by your one million tax bill? Probably not. You’d probably be able to survive on the money that you have left over after the tax is paid. If not, you might in any case have sufficient drive to go out and earn some more money. So that (at some point) you’ll find yourself in the fortunate position of not having to worry about a scarcity of money in spite of your big tax bills.

That’s where you want to be. And how are you going to get there?

What you want to be doing is generating more sales and more profit. You’ll be wasting your time if your primary focus is on getting your tax bill down.

Instead, get your profit up, and face the fact that we all have to pay tax.

How will you increase your sales and your profits? You need a business plan. Here’s some revelationary early thinking on business plans, originally written in antiquated French by Henri Fayol, and translated into equally amusing old fashioned English by Constance Storrs. It’s worth a read both for the advice is gives, and for the way that it gives it.

Fayol recommends that you rewrite your plan annually. His advice still holds good today.

a generic picture of a Frenchman from the early 1900s

Compiling the annual plan is always a delicate operation and especially lengthy and laborious when done for the first time, but each repetition brings some simplification, and when the plan has become a habit, the toil and difficulties are largely reduced. Conversely the interest it offers increases. The attention demanded for executing the plan, the indispensable comparison between predicted and actual facts, the recognition of mistakes made, and successes attained, the search for means of repeating the one and avoiding the other, all go to make the new plan of work of increasing interest and increasing usefulness.

Also by doing this work, the personnel increases in usefulness from year to year, and at the end is considerably superior to what it was in the beginning. In truth, this is not due solely to the use of planning, but everything goes together. A well thought out plan is rarely found apart from sound, organisational, command, coordination, and control practices. This management element exerts an influence on all the rest.

Lack of sequence in activity and unwarranted changes of course are dangers constantly threatening businesses without a plan. The slightest contrary wind can turn from its course a boat which is unfitted to resist. When serious happenings occur, regrettable changes of course may be decided upon under the influence of profound but transitory disturbance. Only a program carefully pondered at an undisturbed time permits of maintaining a clear view of the future and of concentrating maximum possible intellectual ability and material resources upon the danger.

It is in these difficult moments above all that a plan is necessary. The best of plans cannot anticipate all unexpected occurrences which may arise, but it does include a place for these events and prepare the weapons which may be needed at the moment of being surprised. The plan protects the business not only against undesirable changes of course which may be produced by grave events, but also against those arising simply from changes on the part of higher authority. Also, it protects against deviations, imperceptible at first, which end by deflecting it from its objective.

The timid are tempted to suppress the plan or else whittle it down to nothing in order not to expose themselves to criticism, but it is a bad policy even from the point of view of self interest. Lack of plan, which comprises smooth running, also exposes the manager to infinitely graver charges than that of having to explain away imperfectly executed forecasts.

What does your business plan say? You don’t have a plan?

How does not having a plan help you?

If your focus is on tax reduction, then you’re trying to make the tail wag the dog. The General Anti-Abuse Rule (the GAAR) was introduced more than 10 years ago to counter anything which is not based on sound business principles. Whatever clever wheeze you’re thinking of won’t work. Sound business principles do work.

Artificially manipulating things to get your tax bill down will fall foul of s.207(1) & (2) Finance Act 2013. And the penalties under the GAAR can be as much as 60% of the missing tax, on top of  paying the missing tax itself. If you’re a 40% taxpayer that’s like asking to pay 64% instead. For example:

tax on hidden income 100 x 40% = 40.00
penalty on missing tax 40 x 60% = 24.00
total 64.00

So, rather than waste time on measures to antagonise the tax man, please spend some time on something which will really make a difference. Would you like to have enough income to not worry about paying tax of one million?