Tax and its cost to the business

Purpose of tax

Taxes are compulsory contributions raised by governments and other central authorities for a number of important purposes.

These purposes include:

• enforcing law and public order
• public works and services
• military expenditure
• the operation of the government itself.

Structure and types of tax

Taxes can be classified as direct or indirect taxes.

Direct taxes

Direct taxes are charged on profits and income.

They include:

• corporation tax on company profits
• tax payable by individuals including income tax, employee’s national insurance contributions, capital gains tax and inheritance tax.

Indirect taxes

Indirect taxes are charged on spending and certain major transactions. They include:

• sales taxes, such as UK Value Added Tax (VAT)
• duty on transfers of land and buildings and transfers of shares
• excise duties on alcohol, tobacco and petrol.

Tax costs

The costs of tax include:

• tax paid to the tax authorities. For example, corporation tax payable as a fixed percentage of a company’s taxable profits
• money and time spent in order to comply with tax-related administration.