in Taxation

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External Influences on Business and Enterprise include taxes that businesses are required to pay. These taxes have a significant impact not only on the financial aspects of a business but also on its stakeholders.

Value-Added Tax (VAT)

VAT is a tax on spending. It is automatically collected by businesses on most
goods you buy in shops and the services you purchase and passed onto the government. However, there are exceptions to VAT on items such as food and children’s clothing. VAT impacts demand as the higher VAT charged, the more expensive the Product, resulting in fewer sales and revenue.

The government can also lower VAT to stimulate (encourage) sales, it recently reduced the VAT on hospitality from 20% to 5%. Remember a reduction in VAT means the customer is paying less tax. How will this reduction in VAT impact demand? Why did the government do this in response to the Coronavirus pandemic?

Check the latest VAT rates here.

Impact of Taxation Changes on Businesses:

  • Rise in VAT: An increase in VAT rates can lead to higher costs for businesses. They may need to adjust their pricing to reflect the higher tax, which could potentially result in reduced consumer spending. Businesses may experience a decline in sales as Consumers become more Price-sensitive due to higher prices. This could lead to reduced revenues and potentially lower profits.
  • Decrease in VAT: A decrease in VAT rates may stimulate consumer spending as products and services become more affordable. This can boost sales for businesses. Increased consumer spending can lead to improved revenues and potentially higher profits. Businesses in industries directly affected by the lower VAT rate may benefit the most.

Income Tax

Income tax is a tax on people’s earnings. Employees, sole traders and Partnerships pay income tax and limited companies pay corporation tax.

Impact of Taxation Changes on Businesses:

  • Rise in Income Tax: If income tax rates for individuals increase, customers, sole traders and partners may have less disposable income. This could lead to reduced consumer spending and demand for certain products and services. Businesses, especially those selling luxury goods, might experience lower sales and reduced profitability if consumers cut back on non-essential purchases.
  • Decrease in Income Tax: Lower income tax rates can potentially boost consumer disposable income, leading to increased spending on goods and services. Businesses that offer products or services aligned with increased consumer spending might see improved sales and higher revenues.

Corporation Tax

Corporation tax is placed on a company’s profits. Only limited companies pay corporation tax. Tax is calculated as a percentage of profit after taking away costs from revenues.

Companies with profits under £300,000 pay 20% on profits.

Companies with a profit of over £300,000 pay 21% on profits.

There are also other special rates that apply to other companies, such as a 30% tax on oil companies with profits over £300,000.

Companies that make a loss can carry over their losses to the next year, so they pay less tax regardless of is they make a profit.

Impact of Taxation Changes on Businesses:

  • Rise in Corporation Tax: An increase in Corporation Tax rates directly affects a company’s profits. Higher taxes mean reduced post-tax profits available for reinvestment or Distribution to shareholders. Businesses might have fewer funds for expansion, research, and development, potentially hindering growth prospects.
  • Decrease in Corporation Tax: Lower Corporation Tax rates can attract investment and encourage businesses to reinvest their profits. This can stimulate economic activity. Businesses might have more funds to invest in innovation, expansion, and hiring. Additionally, a competitive tax environment can attract foreign investors.

Impact on Stakeholders

  • Employees: Tax changes can affect employee income levels, impacting their purchasing power and overall job satisfaction.
  • Shareholders: Changes in Corporation Tax can influence dividend distributions and shareholder returns.
  • Consumers: VAT and Income Tax changes can influence consumer spending behaviour, affecting demand for products and services.
  • Business Owners: Changes in tax rates directly affect a business’s financial health, profitability, and long-term growth plans.

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