The iron triangle of tax, cash & HMRC By Ross Martin. April 24, 2017.
I really liked this blog by Ross Martin, accountancy director at Hive Business, where I help with strategy. Ross has kindly agreed to let me share it here and I hope you find it useful. JJF.
It’s impossible to get something good at an impossibly cheap price. We know this, but we forget it, so we have sayings to remind us, like “buy cheap buy twice”. Another old saying goes, “Fast, good, cheap. Pick two.” Known as the iron triangle, this concept will be familiar to anyone who has felt the pressure of managing the opposing forces of quality, speed and cost. The sentiment is the same: you can’t have it all, you have to figure out what matters least to you and then compromise. Money or quality. Or time.
The iron triangle crops up in various guises and it might be an inescapable feature of what it means to be human. We are nothing if not decision making machines, and decisions are hard, they mean giving up things we want, which is painful. Yet we have to make decisions to move forward and so we get better and better at judging where to make compromises. At least one would hope we do, but often we prefer to begin by living in denial.
You will have seen this happen on Location, Location, Location where Phil and Kirsty show a couple a flat in Fulham, where they really want to live, and they say they could not possibly live in a flat so small. Then they go down the road to a property that’s big enough, but they don’t really like the area. When Kirsty asks them what they want to do they say, “Well, we wish the bigger flat was located where the one-bed flat was, and for the same price — that would be just perfect.” Inevitably, after much handwringing, they admit they are prepared to pay another 20 per cent to live where they actually want to live, in a flat of the size they really want. They knew this all along but pretended otherwise.
There’s a version of the iron triangle when it comes to your taxes as a business owner.
Here are the constraints: low tax, access to cash, a happy HMRC. Which one, or two, is least important to you? Or would you like to sacrifice a little on each one equally? The ways to split it are almost endless, but there’s always a compromise. For instance, you can make a pension contribution which has a low tax burden, and which HMRC are OK with, but your cash will be locked away. Or you can take all the cash out of your company, which HMRC will like because you’ll have a high tax exposure. Then there are many innovative techniques that may pique HMRC’s interest in you, for example sale of goodwill and incorporation (that is until they closed that down a year ago) — but can you withstand the gaze of HMRC? It may not bother you in the slightest, or it may keep you up at night, in which case maybe not.
These are difficult questions and require a lot of thought and discussion. I talk to practice owners who begin by saying they most definitely want to keep HMRC happy and be tax efficient. OK, I say, do you want a pension or an investment? Oh no, they say, they want to be able to spend their money now. Then they begin to change their thinking; perhaps they are more prepared than they thought they were to approach the boundaries of tax law. With HMRC on a land grab, people need to be aware that even when you’re within the boundaries of the law you may be too close to them if you don’t want any attention, because that’s the kind of area they target.
We spend all day building bespoke tax solutions just for dentists, minimising the compromises as much as possible, so if you can’t get what you want, at least with us you’ll get what you need.
“Low tax, access to cash, a happy HMRC. Which one, or two, is least important to you?”
Ross Martin, accountancy director, Hive Business