THE THREE BURDENS OF BUSINESS

All businesses, big or small, established or start-up (but the small start-up disproportionately) must bear three burdens.

The first, and easily the most visible, is the burden of giving money directly to the government in the form of taxes, contributions, levies, fees or whatever other euphemisms they might use. Although it is the best known of the three burdens, it may also be the lightest.

The second burden is the ‘costs of compliance’ with laws and regulations. Although this involves no direct payments to the government, it is very much a result of demands by the government and can be just as expensive.

Yet the third burden of business may be the heaviest. It is the wholly unnecessary hassle, stress, irritation, distraction and frustration involved when one has to deal with unpleasant bureaucrats, read incomprehensible regulations, fill in badly designed forms, and ask the same basic question again and again to get the simplest information, when one could be thinking of and implementing new business ideas, marketing strategies and operations plans to improve profitability, provide goods and services other people want, increase national prosperity, generate employment for those who need it and generally make the world a better place for everyone.

TAX

Jean-Baptiste Colbert, Minister of Finance to French king Louis XIV, likened tax policy to plucking a goose: the ideal is to maximise the amount of feathers while minimising the amount of hissing.

Governments have become very good at this. Very few citizens realise how much tax they actually pay, directly or indirectly, because governments extract it surreptitiously via business. Yet it all comes out of the same pot in the end, and the taxpayer may be paying indirectly through more expensive goods and services what he is not paying directly through open deductions from his pay packet.

Experience of your own business will end the delusion of most taxpayers. It is one long succession of encounters with the taxman under different pretexts.

First of all, before the business has made a penny in sales or profits, there are a host of ‘above-the-line’ taxes that add to the cost of doing business. There may be taxes on the development of land, possibly through planning or zoning fees, and on the purchase of land, called ‘stamp duty’ in the UK. Once the business has acquired land, it may also have to pay an annual property tax on it, known as ‘business rates’ in the UK. There are also charges for a huge range of registrations and permits, which function as taxes by another name. Your initial purchases of stock and capital equipment may or may not be exempt from sales tax, called VAT in the UK; the system of exemptions is notoriously incomprehensible, as is the system of capital allowances for corporation tax purposes. You may also have to hand over a payroll tax, known as ‘employer’s contributions to national insurance’ in the UK, on employees’ salaries, in addition to what the employees pay themselves. Yes, there really is a tax on generating employment.

If a business manages to scrape together the money to get through all those preliminaries and actually begin selling things – but still before it makes a profit – it must hand over any sales taxes or VAT on what it sells. The theory is that the business does not pay this but only collects it from the customer on behalf of the government. What the theory ignores is the fact that it all comes from the same pot. In this case, the pot is the customer and the customer has finite resources, so to accommodate a sales tax, the business has to choose between passing it on entirely, which increases prices and therefore decreases sales, or absorbing all or part of it directly, which increases costs and therefore decreases profit margins. In practice, most businesses in a competitive environment are forced to find a balance which usually involves a bit of both. Either way, there is a cost to the business.

If, despite all this, the business finally makes a profit, that profit is taxed. A sole proprietor pays income tax. A company pays corporation tax.

When whatever is left of a company’s profits are transferred to the owner, income tax must be paid on what takes the form of salary and dividends (the latter being the most tax-efficient way to receive an income from business activities). Capital gains tax (CGT) is payable if or when shares in the business are sold at a profit. A complex system of allowances may mitigate ‘double taxation’, but there is always leakage in the taxman’s favour.

Then, when at last you have the well-deserved rewards of your efforts in your own pocket, you pay sales tax or VAT whenever you spend it, like anyone else. If you invest it instead, you pay tax on the return on investment. When you die, your children pay death duties or inheritance tax on your estate.

A Welsh industrialist once calculated that his business had to make £10,000 in sales for him to take home enough to pay for his wife’s haircut. Perhaps she was fussy about her hair.

The annoying thing is not just handing over to lazy bureaucrats a large slice of what you have earned through your own diligence, self-sacrifice and initiative with no help from them – indeed, often in the face of their active obstruction. No, the really annoying thing is that they expect you to manage the process for them. If you make any errors, they penalise you, but you cannot penalise them if they make a mistake – as they often do.

You have little practical alternative but to hire an accountant to deal with it all. Accountancy itself has become something of a bluff because the tax system is now so complex that not even an accountant can master it all, but it does at least give you someone to blame if a mistake is made. Of course, the fact that it is not your fault will not make a bit of difference to the taxman, who will still come after you without mercy or restraint.

THE COSTS OF COMPLIANCE

This can cover a wide variety of punishing legal and financial obligations, from the need to hire an accountant to deal with an unnecessarily complex tax system to the need to draft employee handbooks and keep detailed employee records in case you are ever sued by someone you’ve asked to leave your business. The greatest of these costs of compliance is not the waste of money but the waste of a far more precious and finite business asset: your own time.

These are the ones to look out for:

PAYROLL

Payroll is a pain at the best of times. You can trust government to make it worse. As well as paying and administering their own taxes, businesses usually have to administer the income tax payments of any employees. In many countries this includes a form of additional income tax that is called something else, like ‘social insurance’, ‘national insurance’ or ‘social security’.

Most of these schemes are pure bluff. The theory is that the payments go into a separate fund that will later provide pensions for the employees’ retirement, or benefits during periods of unemployment or sickness. Yet these funds are an accounting fiction. The money paid into them is not invested for the future but paid out immediately to meet current obligations.

If a private sector pension or insurance fund did that, it would be called a Ponzi scheme and the managers would be put in prison. Since these schemes are underwritten by the government’s general funds, both the employers’ and employees’ contributions are essentially income taxes pretending not to be income taxes. Colbert would have loved them.

The greatest of the costs of compliance is not the waste of money but the waste of a far more precious and finite business asset: your own time.

PENSIONS

Many larger companies have long run pension schemes for their employees. Some are major players in the pensions sector in their own right and have built up considerable expertise. Most businesses, however, are in the business they are in and no other. Their knowledge is confined to the sector in which they earn their living. Unless this happens to be the financial services sector, they should not be expected to have any real knowledge of pensions.

This has not stopped the trend for Western governments to make it compulsory for businesses to make arrangements for their employees’ pensions. And since the real-time information rule was introduced in the UK, employers (or their accountant, bookkeeper or payroll bureau) now have to:

All this is another example of the great bluff pulled off by politicians in convincing the voters that they care about something – in this case, pensions – when all they are really doing is dumping the problem on business.

The same is true of...

HEALTHCARE INSURANCE

Once a perk offered by major employers, the provision of healthcare insurance is now increasingly compulsory in many countries, even for businesses – the vast majority – with no knowledge or experience of the sector.

Most small businesses end up using the biggest provider by default. The biggest is rarely the best or even the most cost-efficient, but using them provides a strong defence if employees complain about the quality: ‘I’m terribly sorry if you’re not happy with the quality of the healthcare on offer, but we did go with the market leader.’

INSURANCE

Many businesses are wary of insurance. Business is a risk and you must accept that. There is no insuring against many of the things that can happen, and where there is, it may not be worth the large premiums – especially when one has experience of how insurance companies try to wheedle their way out of their obligations when a payout is due.

Sometimes there is no option, especially where a third party is likely to be involved. Third-party insurance is compulsory in most jurisdictions if you are operating a vehicle on the highway. There is strict liability under English and Scots law for injuries on your property, so a proper public liability policy is essential. Product liability insurance is practically compulsory in the European Union. Employer’s liability insurance is mandatory in the UK, except on a nominal employee who happens to own the company. The US equivalent is ‘workers’ comp’. Some specialist sectors or professions require professional indemnity insurance if you are to be allowed to practise.

Your best bet is usually a combined policy. Take advice from independent brokers, but always remember that they have a vested interest in overinsuring you. Always check the small print; do not just read it – it is probably indecipherable anyway – but ask questions and get answers in plain English, ideally in writing.

ENVIRONMENTAL REGULATION

As a rule, it is not a good idea to initiate contact with bureaucrats until you have no choice. The local environmental authorities might be an exception. You need to know in advance what counts as standard commercial waste and what is potentially hazardous; you might be surprised by how wide the definitions can be. This applies even to businesses that do not think of themselves as ‘industrial’.

Needless to say, the bluffer must present an image to these people as being green in every sense of the word. Contrary to some anti-business propaganda, the vast majority of businesses these days tend to accept the need for environmental regulation. They ask only that it be enforced equally so that they can compete on a level playing field.

The same applies to...

HEALTH AND SAFETY

No one wants to return to the days of children being sent up chimneys and miners relying on canaries to warn about gas, but there is a growing feeling that some of the things being done in the once-honourable name of health and safety are absurd.

There are two different traditions of ‘elf’n’safety’ at work. The European tradition emphasises regulation in advance. The US tradition relies more on litigation after the event. The two approaches reflect different cultures: Europeans are used to governments legislating in detail to control their lives; Americans demand more freedom of choice but enforce responsibility for that choice through massive claims for damages.

The two approaches are coming together, so you can now expect both excessive regulation and excessive litigation. It is worth noting that some of the most notorious examples of overcaution that are giving health and safety an unnecessarily bad name tend to be the result of paranoid fear of litigation rather than direct regulation.

TRAINING

Businesses need qualified and trained employees. The problem is that no one wants to pay for their training or carry them while they are learning on the job – especially since they tend to leave for better-paid jobs as soon as they become really useful.

Some jurisdictions try to counter this by making it compulsory for all businesses to contribute to training, or training levies – yet another word for taxes – but small business, having less to offer the newly qualified, usually loses as a result of these measures.

LITIGATION

It seems that employees will sue their employers or former employers over anything these days. To be fair, if you want to act like Captain Bligh, you have only yourself to blame if some latter-day Fletcher Christian launches the highly lucrative modern equivalent of a mutiny, but most smaller business types tend to be friendly, easygoing people, possibly only in business in the first place because they enjoy interacting with others. They can be as much victims of a bullying employee as the other way round. If you think you may have a trouble-maker on your hands, start keeping a written record of all incidents, however trivial. It might sound excessive but you might need it.

In general, litigation is rarely worth the stress, the distraction and the waste of time and money involved, even if you win. Avoid it if you can. Settle if you must. You may feel strongly on a point of principle, but you will find that the legal system has changed little since Dickens’s time and cares little about points of principle. Unhappily, any barrack-room lawyer with whom you fall out will be only too aware of that.

Businesses need qualified and trained employees. The problem is that no one wants to pay for their training.

ADMINISTRATION

Business is supposed to be serious, so the bluffer in business must appear serious about it. This may take quite a bit of bluff because there is no denying that, for people who enjoy a challenge, there is a lot of fun to be had in business – until recently, that is.

For neither can it be denied that there is one aspect of business that sucks the joy out of it. Administration – bluffer-speak for paperwork – is tedious to discuss but even more tedious to do. The mere mention of the subject is so depressing that the first edition of this guide in 1992 omitted it altogether in the hope that, if we ignored it, it would go away.

Unsurprisingly, this has not happened. On the contrary, the last 20 years have seen an exponential growth in bureaucracy and red tape in most countries. This can be seen physically, in the increase in the size of tax codes and volumes of new laws. A fairly well-educated person, reading during standard working hours at normal speed and stopping to cross-reference points in order to understand them fully, could not read the UK or US tax codes in the year before a new one comes out. It’s not unlike painting the Forth Bridge. Yet the law works on the assumption that we have memorised them all, and it will penalise any error without mercy. In the same way, it is almost certain that no one human being has ever read all the laws and by-laws passed in most ‘developed’ jurisdictions in a year, but they all apply to us nonetheless.

So there is no avoiding it, and therefore no avoiding discussing it. Nor is there much scope for bluffing our way out of it. If anything, the whole business world is the victim of a giant bluff, as the politicians and bureaucrats have hidden the extent to which they get us to do their work for them and make us pay for the privilege.