Should tax be included in your business plan? Definitly! Taxation is not optional but increase your costs and reduce your profits, so it has a real impact on cashflow, profitand company valuation.
When you work on a business plan, there are 3 forms of tax that you need to be aware of:
- corporate income tax, paid by the corporation on its profit.
- other tax on salaries – some of them might not really be tax at all but insurance, including health, retirement and unemployment insurance; but there might be other costs on salaries that are more like tax e.g. ‘re-unification tax’ and ‘church-tax’ in Germany.
- Value Added Tax (VAT) or Sales Tax (e.g. in the USA).
The corporate income tax rate can be anything between 0% (e.g. you have a 5-year tax break) and 50%. In some countries, the tax rate is cut into pieces; for instance ‘Körperschaftsteuer’ in Germany is only 15%, but you need to add on top the ‘re-unification tax’, currently 5.5%, as well as ‘Gewerbesteuer’, a local tax typically between 12% and 15%. So the aggregate rate is actually around 30%.
Tax on salaries are relevant to the business plan as the costs might be shared one way or another between the employer and the employee, and they do increase the cost of doing business. These tax do also vary widly by country so they raise the question of location: where should the business employees be based?
Regarding VAT, business entities act as collection agents for the state so that VAT is mostly irrelevant to your business plan and should not be included (i.e. revenues are net of VAT; costs are also net of VAT). VAT is only relevant as far as it adds a bit of admin (invoicing, collection, declaration, payment etc); but the bigger problem is that VAT might create liquidity issues for your business if there is a difference in timing between the moment you pay VAT to the state (e.g. shortly following invoicing) and the moment your customers pay you (e.g. 90 days later, or never in case of ‘bad debt’).