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Who's really Afraid of Higher Corporation Tax?

Updated: Oct 28, 2023


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“Maximise profits” has been the business mantra from the moment someone realised how to sell something for more than it cost them. It seems somehow hardwired in us all. Just as our cavemen ancestors were driven to gather resources for sustenance, businesses are fuelled by a primal urge to accumulate wealth as a way to secure their survival in the competitive corporate jungle.

And so, it is a testament to the power of our instincts that we would turn to such a mantra when news came out that as of 1 April 2023, Corporation Tax rates would increase from 19% to 25% depending on company profits. Companies across the board were left to figure out how such a change would affect their businesses and they did so almost entirely with a singular mindset.

THE PROFIT CHASING MINDSET


From the entirety of our clients that we held numerous discussions with, we would approximate that 85% of them reacted to the news of the tax hike in one of 3 types of profit-chasing mindsets:

1. "Surely we need to make more profits” a.k.a. the Profit Enhancement Mindset

These clients eagerly implored us to focus on boosting profitability, in order to offset the increased tax burden. And in essence, it is simple to see why; increase sales, slash costs, streamline operations and squeeze out every ounce of efficiency. Who said accounting cannot be thrilling?

2. "Let's Expand" a.k.a. the Expansion Mindset

At this stage, ambition begins to take over with clients urging us to explore new strategic investments and ways to expand their businesses to stimulate new types of revenue. We found ourselves answering questions in relation to Research and Development, Cutting-edge Technologies, and conquering Uncharted Markets.

3. "It's time to relocate, like the big boys do" a.k.a. the Corporate Mindset

At this level we have fully entered the realm of adrenaline-infused panic and boarder-line desperation. Some of our clients began contemplating relocating their businesses to lands where more favourable tax rates beckoned. This is more of a knee-jerk reaction than a carefully constructed response. It is similar to playing an exhilarating game of “Tax Rate Hopping,” but with considerably more paperwork.

THE REALITIES FACED BY SMALL BUSINESSES


These three profit-chasing mindsets all sound credible, as we witness them being carried out by big players in the corporate world (and in the movies). However, at times, it becomes crucial to face certain realities. Small businesses operated with Profit-chasing Mindsets, often come with a side dish of despair, as they face many familiar obstacles:

1. Limited Resources

The ever-present nemesis! Small businesses typically possess limited financial resources that make allocating substantial funds to enhance profits, invest, or expand, feel like squeezing blood from a stone.

2. Tight Profit Margins

Picture a tightrope walker teetering on the edge. Small businesses often operate with razor-thin profit margins, due to fierce competition and market conditions. They are experts at balancing affordability and competitiveness, leaving little room for extravagant profitability leaps.

3. Local Market Focus

Unlike global corporate behemoths, small businesses often focus on serving their local communities. Their customer base and revenue streams rely heavily on immediate surroundings. This local market focus can limit the potential for expansion and relocation strategies.

4. Operational Constraints

Size matters! Small businesses face operational constraints, often lacking the resources to embark on grandiose investments or expand into new markets. The complexities and costs of relocation or international expansion can feel like a cosmic riddle—challenging, daunting and perhaps a tad bit maddening.

5. Regulatory and Legal Complexities

Expanding or relocating a business comes with a good dose of red tape and legal headaches. Navigating foreign regulations, securing permits and wrestling with legal contracts, can leave even the bravest souls yearning for simpler times.

6. Burnouts

Here's a reality check for the profit-chasing enthusiasts — burnout is lurking around the corner. Small business owners already work tirelessly to achieve their goals, often at the expense of personal ambitions and family time. Piling on more challenges can transform their entrepreneurial dreams into nightmares, affecting their health and well-being.

SHIFTING MINDSETS & THE POWER OF TAX PLANNING


As an accountant and tax planner, I hold nothing against companies chasing and hoarding their profits like squirrels before a long winter. This is something us accountants pester our clients about, seemingly the most. Yet, with the change in corporation tax rates, the game has surely changed.

Companies no longer only pay more tax on more profits; they pay higher tax rates at higher profit thresholds. The first £50,000 of profits remain at 19%. However, the full wrath of the higher 25% corporation tax, are felt by businesses generating profits in excess of £250,000 (profits between £50k - £250k are calculated using a system of marginal relief).

Does this mean that the old mantra of “more profits = good business” is outdated? No, not at all. Profits are and always will be a good thing. It just means that holding a profit-chasing mentality is no longer enough. We need a change in mindset and a new relationship to profit-making - one that ultimately leads us to actively set and target our profits in advance, enabling us to remain sustainable and attain good credit worthiness, but also where we pay the least amount of corporation tax.


For this to occur, we would need to shift our mindset from chasing profits for profits-sake, to a more realistic and feasible approach for small businesses, that embraces proper tax planning.

A Tax Planning mindset offers strategies to optimise tax positions within a business’ existing operations and financial capabilities, without the need for strenuous cost-cutting, investments or expansions. A Tax Planning approach utilises and optimises government tax incentives such as allowances, reliefs, deductions, credits and exemptions to reduce the overall tax liability.

There are three types of tax incentives:

1. Directly reduces Tax Obligations

Some tax incentives directly defer, reduce or completely remove tax liabilities on certain sales, disposals, transfers, investments or gains - that is money coming in, with no tax bill.

2. Acts as an Expense

Some tax incentives act like business expenses or enhances specific expenses incurred, with the aim to lower corporate profits, resulting in a corporate tax liability reduction. However, these “expenses” only appear as expenses and do not cause a business to lose more money.

3. Wealth Extraction

Some tax incentives act as vehicles in which households can release money from their businesses at a tax-free or reduced tax rate. This serves the purpose of reducing your business profits so that your company pays less corporation tax, whilst making your household wealthier.

HERE TO HELP YOU


At IJB Strategia, we stand alongside business owners, guiding them towards the path of better tax planning. As business owners, we understand the unique position our clients hold in utilising tax incentives that bridge their household and business finances for greater overall financial gains.

Our flagship service, Tax Life, offers a proactive management to our clients’ personal and corporate finances, individually tailored to meet personal ambitions and familial responsibilities over the next 30 years. We help unravel each client’s intricate web of tax incentives, reducing overall tax liabilities with the aim of making their households wealthier.

So, let's embark on a journey of effective tax planning, where existing laws and regulations become your secret allies.


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