Taxation

Taxation is a charge imposed by the government on individuals and businesses to raise money for government spending, such as schools, hospitals and roads. A change in tax rates is an external influence: the business does not decide it, but it can change how much customers have to spend and how much profit a business keeps.

The main taxes

Income tax and VAT both affect customers. If income tax rises, a worker's pay packet shrinks, so their disposable income – the money left after tax and other deductions – falls. A rise in VAT works differently: it pushes up prices in shops, so the same disposable income buys less. Either way, customers have less to spend and demand for businesses' products can fall.

For example, a scooter shop selling models at about £150 may find that customers whose pay has dropped by £25 a month put off buying a new scooter until later.

Effects on the business

Rising corporation tax works differently. It takes a bigger share of profit, so the business keeps less retained profit – the profit left inside the business after tax. A print firm earning £70,000 profit might lose an extra £2,100 if the rate rises by 3p in the pound, which could mean delaying a new printer. Less money for investment can slow growth.

Falling taxation does the opposite. Lower income tax leaves customers with more disposable income, and lower VAT means that income buys more, so demand may rise. Lower corporation tax leaves more retained profit, which can pay for equipment, staff or new premises, allowing the business to grow.

Whether a tax change helps or harms a business depends on which tax has changed and on its customers, its costs and how much profit it makes.