Do businesses actually pay any tax at all?

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It looks like a silly question. Look at the accounts of any business, and you’ll certainly see tax payments being recorded. And money actually passes from the business’s accounts into the government’s accounts. But who is really paying those taxes? From a business perspective, tax is just another operating cost and, at its simplest, profit is simply revenue earned by selling goods and services less the cost of production of those goods and services. It follows that (again, at its simplest) price is simply cost of production plus profit, and the financial success of a business depends on the price being sufficiently high to generate an acceptable level of profit. If an extra tax were being paid by the owners/ shareholders of the business, then profits would fall; if profits don’t fall, then it’s because the extra tax is being paid by the customers of the business, through rising prices.

It isn’t always as immediate or obvious as this story about Halfords might suggest. It’s usually more subtle and gradual, but when any business considers its pricing, it inevitably takes account of any increases in its costs. It obviously also considers what its competitors are doing and how much of an increase it thinks it can introduce at a given point in time without losing customers and revenue, but ultimately the dominance of return on capital asserts itself, and increased taxes invariably work through into increased prices. A company threatening an immediate price increase in response to a tax increase looks to be more about politics than accounting, but that’s about presentation.

None of that is to argue that businesses shouldn’t pay taxes. They depend on the infrastructure and services provided by public expenditure, and it is entirely appropriate that those costs should be reflected in the costs of doing business, and thus in the prices of goods and services. We just shouldn’t delude ourselves into believing that ‘taxes on business’ are somehow a free source of money which don’t impact us as individuals. The Chancellor’s mantra that she isn’t increasing taxes on working people is ‘true’ in the sense that they’re not directly paying those taxes – they’re simply facing price increases. Theoretically it’s entirely different; in practice the impact ends up being much the same in aggregate. One of the key differences, though, is that a direct tax on income is related to ability to pay, whilst an increase in the price of everyday goods is not: those on lower incomes are hit hardest.