We have a funny relationship with tax. Publically it is now deemed not only uncouth but also unethical to worry about paying too much tax or trying to reduce your burden. But privately I do not know anyone who does not try to reduce it at every opportunity. This does not mean doing anything illegal, be it making your spouse a partner in your limited company or claiming the maximum amount of expenses. Everyone tries to bring their tax bill down. I want to go further to suggest it is your responsibility to be paying as little tax as possible, and not to do so is bad business.
I am talking specifically about SMEs here. We small business owners made up 51% of the pre-lockdown UK economy, with 234,000 permanently closing down so far. Who knows what that number will be going forward. We are the backbone of the economy but as a disparate group we often get squeezed by government policy because we don’t have collective power. I’m fine with that; I like small businesses because there is less comfort but more freedom and opportunity. This is why I believe it is our responsibility to pay less tax. No one else will do it for us. And with around 80% of UK companies failing within their first year, your tax strategy is a major variable you must work to your advantage.
Successive governments got cleverer on how to get the greatest tax yield from the people. The original strategy was a mix of jingoism and force, using the Napoleonic Wars as a nationalistic reason for the contribution, underpinned by the threat of imprisonment for not doing your bit. This worked so well as a revenue generator that the ‘reason and force’ model was deployed in different guises to create perpetual income streams.
A simple example is the toll bridge. You already pay road tax, so why the additional charge? The ‘reason’ is to pay for the additional cost of building the bridge and its maintenance. This sounds reasonable, and presumably the toll stops or falls when these costs are paid down. Wrong. The toll becomes a reliable sales line for the government, one it is not prepared to lose. As if to underline the fact that the fee is not linked to the bridge’s maintenance, it is drivers who use the bridge the most and do the most damage who get a discount. This fee structure would be normal in a free market entity interested in making profit, but it runs counter to the original ‘reason’ for the toll. The ‘force’ element comes in when you drive onto the bridge without paying: you are either physically stopped by a barrier that requires payment or, if there is no barrier, you receive a fine in the post, linked to your registration plate. Non-payment is registered as a civil debt with the County Court.
The ‘force’ element of the ‘reason and force’ model has remained consistent throughout the ages. However, the ‘reason’ has evolved. It is now something more like ‘purpose’. To explain, let me give an analogy. We are all familiar with the image of a mobster turning up at a small family owned store and collecting his protection money. When the shopkeeper says, “It’s been a slow month, I don’t have it,” the mobster gives a deadline and the shopkeeper asks, “How will I feed my kids?” The mobster draws in a deep breath and says, “Look, we wouldn’t want anything bad to happen to you”. Classic ‘reason and force’ in action. The neat trick the government has played, though, is to broaden it, giving it a community ‘purpose’. So when the shopkeeper says he will not be able to pay, the government’s response is, “We wouldn’t want anything bad to happen to your neighbours.” It is now no longer a private matter if you choose to suffer the potential harm of non-compliance: non-compliance harms the neighbourhood.
See the switch? We have moved from the welfare of you and your family to the welfare of everyone. In Machiavelli’s oft quoted yet seldom understood book The Prince he describes something akin to this: the art of holding political power deriving from “fraud and force” because leaders must display characteristics of the fox and the lion to survive. And I think that is how we find ourselves here, having uncomfortable conversations about tax. By trying to reduce your tax burden you are not reducing the government revenue stream extracted from you by force, you are harming your neighbour. But how about I turn the tables again: by paying too much tax you are harming your business, your customers and your family.
Imagine the government is a supplier, say a dental laboratory. It is your responsibility to your business to get the best possible rate for its work. If you don’t you can’t pass on savings to your customers, bonus your team members, or invest in your family’s future. Since this supplier does not have the “force” lever on its side it will have to “reason” and/or figure out how to create savings in its own supply chain.
The government does have that force lever. But it also has a complicated tax system within which strategic advantages are legal and legitimate means by which to pass savings to your business, team members and family. Do not be duped by the fog of faux altruism. You already bear the burden of government disproportionately. It is your responsibility to reduce your tax bill.