How businesses are impacted differently by tax

Managing payroll can present quite the headache for UK-based businesses.

Businesses can be affected by tax in different ways, depending on the particular industry that each business operates in.

It’s important to comply with tax obligations and understand how your company may be impacted.

What’s the difference between direct and indirect tax?

Most business taxes are referred to as direct or indirect taxes.

Direct tax is the taxation on income, which is typically deducted from an employee’s salary and paid directly to the government. In the UK, the higher your income, the more taxes you have to pay. Examples of this type of tax include income tax, national insurance and corporation tax.

Indirect tax is the taxation on spending. This is where businesses collect taxes on behalf of the government simply by adding these to the price of various products and services. Everyone will have to pay the same amount of tax on goods, regardless of how much they earn. The most common type of indirect tax is VAT (Value Added Tax).

Importance of business tax

Tax can have a serious impact on businesses if not understood correctly, so it’s important to be as accurate as possible when it comes to managing your taxes. Tax determination can help improve accuracy particularly for mid-sized and large enterprise businesses which can provide accurate VAT calculations that adhere to the applicable tax rates and laws.

Any tax changes can have a significant impact on your business. For instance, increases in income tax will reduce a consumer’s disposable income, meaning people won’t have as much money to spend on goods and services. Ultimately, this would result in both lower demand and revenue for your business.

Corporation tax

Since 1st April 2023, the rate of corporation tax increased from 19% to 25%. The original 19% rate applied to all companies and has now been replaced by a variable rate ranging from 19% to 25%, depending on how much profit the company has made.

Therefore, the higher rate only affects companies making a profit of £250,000 and over, however, all companies who are subject to corporation tax should be aware of the changes and how they could impact them.

What about VAT?

VAT (Value Added Tax) is another area that will have an impact on businesses depending on the product or service they are providing. An increase in VAT can increase the overall cost of goods, which increases prices for consumers and may lead to lower demand.

Whether the government increases taxes to raise more money, or reduces taxes to encourage spending in the economy, the implications for the individual and on business functions are huge. Understanding the impacts of business taxes is crucial for companies to manage operations and inform financial strategy.