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Government spending can influence the economic climate. However, governments have no money of their own. In order to spend money, a government must either borrow it or raise it from taxation.

Types of taxes

The UK has a range of different types of taxes. These include:

• Income tax is charged on income, such as wages that have been earned.
• Corporation tax is a charge on a company’s profits.
• National Insurance contributions (NICs) are charges to cover healthcare, state pensions and employment-related benefits such as Jobseeker’s Allowance. Both employers and employees pay it.
• Value-added tax (VAT) is a charge on sales of goods and services based on the value of the item sold. It is collected by businesses, which then pass it on to the government.
• Council tax is a charge on property by local councils based on the property’s value and the number of people in a household. It is used to pay for local services, such as refuse collection and street lighting.

The impact of taxation on businesses

Either local or central government sets the amount of tax that must be paid. Some taxes, eg income tax, are paid directly to the government. Others, eg VAT, are collected on behalf of the government by businesses.

The impact that taxation has on a business will depend upon whether the tax is paid directly to the government or indirectly through businesses.

An increase in income tax means that workers have to pay more tax on their income. As a result:

• consumers have less money left over to spend on goods and services
• businesses expect to sell less so will reduce the level of their investment

An increase in VAT will mean that consumers have to pay more for the goods and services this tax is charged on. This will mean:

• consumers pay higher prices, which reduces their purchasing power
• inflation occurs, which affects businesses’ costs