When it comes to running a business, it’s natural to focus on saving money—especially when it comes to reducing your tax bill. But sometimes, spending to save tax isn’t the smartest move. This week, I had a meeting with a construction client who had a fantastic year. They had solid profits and strong cash reserves. With their year-end approaching, we discussed how they might save on corporation tax before it was too late.
The Situation: Profits and Cash Reserves
My client, a construction business, had an impressive year. They were understandably concerned about their corporation tax liability and wanted to explore ways to reduce it. As their accountant, I was keen to help them explore all the options, but ultimately, we made an unconventional decision: they opted not to save on tax this year.
Potential Tax-Saving Strategies
During our meeting, we discussed a few tax-saving strategies that could have reduced their corporation tax bill:
- Purchasing Assets: We explored the option of buying assets needed for next year’s projects before the year-end. This would allow them to claim capital allowances sooner, effectively reducing their tax bill.
- Pension Contributions: We also considered investing in a pension scheme. Over time, this pension could be used to purchase commercial property as an investment—a tax-efficient strategy for growing the business.
Why We Chose Not to Save Tax
While both strategies made sense in isolation, we had to consider the bigger picture. Here’s why we decided not to go down the tax-saving route just yet:
- Future Projects Require Cash Flow: My client has several large and exciting construction projects lined up for next year. These projects will require significant funding, and by using their own cash reserves instead of external finance, they can avoid paying interest on borrowed money. This will save them a considerable amount in interest costs.
- Supplier Discounts: Another key reason to hold on to their cash was the ability to negotiate better terms with suppliers. By paying large deposits or purchasing in bulk, they were able to secure discounts of 10-15%. These discounts directly increase their margins, which will contribute to higher profits next year.
- Business Growth and Flexibility: By maintaining strong cash reserves, the business will have greater flexibility to grow. They’ll be able to invest in future opportunities without compromising cash flow. When they’re ready to invest in a pension scheme, it won’t put pressure on their working capital or slow down their projects.
- Less Financial Stress: Cash reserves also offer peace of mind. Running a business with healthy cash flow means less stress, allowing the owner to focus on long-term strategy rather than constantly worrying about how to finance their next project.
The Bigger Picture: It’s Not Always About Saving Tax
A common misconception is that accountants are solely focused on helping clients save on taxes. While tax planning is crucial, it’s not the only factor to consider when running a successful business. In this case, to save £25,000 in corporation tax, my client would have had to spend £100,000. But that £100,000 is better spent elsewhere, especially when it supports business growth, improves cash flow, and boosts profit margins.
Strategic Advice for Business Owners
If you’re a business owner, it’s important to think beyond just tax savings. Decisions should be made with the overall health and future of your business in mind. A strategy that works well today could hamper growth or create cash flow problems tomorrow. That’s why it’s essential to have a forward-looking plan that balances tax efficiency with business goals.
Final Thoughts
The decision to pay a higher tax bill this year was strategic. By holding onto their cash reserves, my client will be able to finance future projects, negotiate better supplier terms, and reduce financial stress. Ultimately, this will lead to higher profits in the long run, which will far outweigh the short-term tax savings.
So, the next time you’re faced with a choice between saving on tax or keeping cash in the business, remember: the right decision depends on your business goals, future projections, and overall financial health. It’s not always about saving tax—it’s about smart, strategic planning for the future.
Do you think we can help you? Book a discovery call here
Find out about how our Virtual Finance Office can help your construction business.
