Strategy >
External Environment
COVERS ALL MAJOR EXAM BOARDS
Teaching Business
Taxation
A clear guide to taxation, covering how different taxes affect costs, prices, demand, profit and business decisions.
9
Created by an experienced Head of Business and examiner
_edited.png){kind=small}
AQA | Edexcel | Cambridge | Eduqas | WJEC | OCR | GCSE
KEY POINTS
Taxation affects businesses through costs, prices, demand and retained profit.
Direct taxes include taxes on income or profit, such as corporation tax.
Indirect taxes such as VAT can affect prices and customer demand.
The impact depends on the tax type, price elasticity, margins and ability to pass costs on.
KEY DEFINITION
Taxation
Taxation is the money collected by government from individuals and businesses to fund public spending and influence economic activity.
Main Explanation
Taxation affects business decisions because it changes costs, prices, disposable income and profit after tax. It is important to distinguish between direct taxes, such as income tax, corporation tax and employer-related taxes, and indirect taxes, such as VAT, excise duties and import duties. A strong A Level answer should identify the specific tax and then explain the route through which it affects the business.
Corporation tax reduces profit after tax, which can limit retained profit available for reinvestment, dividends or debt repayment. This may affect expansion decisions, especially for businesses relying on internal finance. Income tax affects household disposable income, so it can influence demand for goods and services. If income tax rises, customers may reduce discretionary spending; if it falls, some businesses may benefit from stronger demand.
Employer-related taxes, such as National Insurance contributions, can increase the cost of employing staff. This is especially important for labour-intensive firms where wages form a large proportion of total costs. Businesses may respond by raising prices, accepting lower margins, improving productivity, reducing recruitment or changing staffing patterns. The effect depends on whether the business can absorb the cost or pass it on.
Indirect taxes affect spending and prices more directly. VAT can increase the final price paid by customers, while excise duties raise costs on specific products such as fuel, alcohol or tobacco. Import duties can increase the cost of imported inputs or finished goods. The impact on sales depends heavily on price elasticity of demand, competition and whether customers have alternatives.
Evaluation is essential because taxation does not affect all businesses equally. A profitable company may be more exposed to corporation tax, an importer may be more affected by customs duties, and a retailer may be sensitive to VAT changes. The strongest answer judges the tax type, the firm’s margins, customer price sensitivity and the ability to pass on costs without damaging demand.
✎ EXAMINER TIP
Name the type of tax and explain the route of impact. Corporation tax affects profit after tax; VAT affects prices and demand; employer taxes affect labour costs.
KEY FORMULAS(s)
Profit and Profitability Formulas
These key formulas help you calculate different profit measures and profitability ratios used in business.
Gross Profit
Gross profit = Revenue − Cost of sales
The profit made after deducting direct costs.
!
Remember: profit shows how much money has been made, while profitability shows how efficiently revenue is being turned into profit.
DATA TABLE
Income Statement for North Coast Coffee Ltd
This statement shows how revenue is converted into gross profit, operating profit and net profit.
Revenue
£250,000
Output
Fixed Costs
Variable Costs
Total Costs
Revenue
Profit / Loss
0 candles £1,200 £0 £1,200 £0 -£1,200
Net profit is the final profit remaining after all costs and expenses have been deducted from revenue.
WORKED EXAMPLE
Worked Example: North Coast Coffee
How many coffees must be sold to break even?
Fixed Costs
£1,800
equity + long-term debt
Break-even output = Fixed costs ÷ Contribution per unit
Contribution per unit = Selling price − Variable cost
£3.50 − £1.10 = £2.40
1
Step 1: Calculate contribution
£3.50 − £1.10 = £2.40
Contribution per unit is the amount each coffee contributes towards fixed costs.
BREAK-EVEN OUTPUT:
750 coffees per month
EXAM TIP
Always explain what the number means for the business. Do not just calculate the break-even point.
Taxation: How Taxes Affect Business Decisions
This diagram shows how different taxes affect profit, prices, demand, labour costs and investment decisions.
APPLICATION
Greggs
Greggs is a useful context for taxation because different taxes affect the business in different ways. Corporation tax affects profit after tax and therefore the amount available for reinvestment, dividends or building financial reserves. Employer-related taxes and National Insurance contributions affect labour costs, which matters for a business with many shops and a large workforce. Income tax affects customers' disposable income, which can influence demand for food-to-go purchases.
Indirect taxes can also matter. VAT affects the final price of some goods and services, depending on the type of product and tax treatment. If an indirect tax increases the price paid by customers, Greggs must decide whether to pass the cost on or absorb it through lower margins. The best option depends on price sensitivity, competitors' prices and the strength of Greggs' value-for-money positioning.
The judgement is that a strong answer should name the tax and identify the route of impact. Direct taxes such as corporation tax mainly affect income, profit or employment costs, while indirect taxes such as VAT affect prices and spending decisions. Taxation is therefore not one single effect; it can influence costs, demand, cash flow and retained profit.
This independent educational case study is not affiliated with, endorsed by or sponsored by Greggs plc. Any financial figures used alongside this example should be treated as simplified or hypothetical estimates created for teaching purposes.
_edited.png)
ANALYSIS
EXAM FOCUS
Analysis questions require you to examine a business concept or issue in detail, breaking it down into its component parts. You should explain how and why something happens and consider its impact on the business.
How to Approach Analysis Questions
1
Identify the key issue or concept
2
Break it down
3
Explain how and why
4
Reach a reasoned conclusion
Read the question carefully and highlight the focus of the analysis.
Consider the different factors, causes or impacts related to the issue.
Provide clear explanations using business terms and links points to context.
Evaluate the overall implications for the business.
Example Analysis Question
North Coast Coffee is considering using break-even analysis before opening a second café.
Advantages
• Sales forecasts may be inaccurate.
• Assumes costs and revenue remain constant.
• External factors may reduce reliability.
• Ignores qualitative business factors.
Disadvantages
• Sales forecasts may be inaccurate.
• Assumes costs and revenue remain constant.
• External factors may reduce reliability.
• Ignores qualitative business factors.
Key Exam Tip
If you find it difficult to expand your answer and show the type of depth that an examiner is looking for in a top response, consider using the 'so what' approach.
Tesco carry out market research - so what? - this allows them to better understand customer needs - so what? as a result Tesco can provide goods more likely to sell - so what? - this will increase Tesco profit and ensure higher levels of customer satisfaction - so what? this means that customers are likely to become more loyal to Tesco.
Avoid These Exam Traps
Students often lose marks on calculation and analysis questions by making these mistakes. Watch out for them in your exam!
1
Helvetica Light is an easy-to-read font, with tall and narrow letters, that works well on almost every site.
Helvetica Light is an easy-to-read font, with tall and narrow letters, that works well on almost every site.
Tip:
Helvetica Light is an easy-to-read font, with tall and narrow letters, that works well on almost every site.
2
Helvetica Light is an easy-to-read font, with tall and narrow letters, that works well on almost every site.
Helvetica Light is an easy-to-read font, with tall and narrow letters, that works well on almost every site.
Tip:
Helvetica Light is an easy-to-read font, with tall and narrow letters, that works well on almost every site.
3
Helvetica Light is an easy-to-read font, with tall and narrow letters, that works well on almost every site.
Helvetica Light is an easy-to-read font, with tall and narrow letters, that works well on almost every site.
Tip:
Helvetica Light is an easy-to-read font, with tall and narrow letters, that works well on almost every site.
Be precise. Read the question carefully. Show your working.
Small mistakes can cost big marks.
EXAM PRACTICE
Practice Question
Apply your knowledge of profit and profitability to answer this exam-style question.
1
MINI CASE STUDY
North Coast Coffee Ltd is a premium coffee business which sells freshly roasted coffee beans through its online store and a small chain of independent cafés. The business has experienced strong sales growth due to increasing demand for high-quality speciality coffee products.
The business generates annual revenue of £250,000. Its cost of sales, including coffee beans, packaging and direct production costs, totals £100,000. North Coast Coffee Ltd also faces operating expenses of £80,000, including marketing, employee wages, rent and administration costs. In addition, the business pays £20,000 in interest and taxation each year.
The owner, Mia Thompson, is reviewing the company’s profitability because rising wage costs and increased competition in the premium coffee market have started to place pressure on operating profit margins. She is considering increasing prices slightly in order to protect profitability while still maintaining customer demand.
.jpg)
2
EXAM QUESTION
Analyse the possible reasons for BrightBite’s falling profit margins and evaluate strategies it could use to improve profitability.
3
HOW TO ANSWER
P
Point
E
Explain
A
Apply
C
Consequence
H
However...
4
MODEL ANSWER
P
Point
Increasing prices could improve the profitability of North Coast Coffee Ltd because each sale would generate a larger amount of revenue and potentially increase profit margins.
5
EXAMINER TIP
For full marks, make sure you analyse causes rather than just listing them, and evaluate realistic strategies with clear judgement. THINK: Which strategy would have the biggest impact and why?
CALCULATOR
THIS TOPIC · POWERPOINT RESOURCE
Taxation
CHOOSE YOUR EXAM BOARD:
Product Title
Instant download — school site licence included
-
Fully editable PowerPoint lesson
-
Relevant activities and practice questions
-
School site licence — share with your department
Helvetica Light is an easy-to-read font, with tall and narrow letters, that works well on almost every site.
£3.00
RELATED TOPICS
Continue Learning
Build your understanding by exploring other topics that connect closely with this one.
Profit and Profitability
Learn how to calculate profit and analyse profitability to measure the financial performance of a business.