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Unit 38 - Business and the Economic Environment - P4 M2 D2

Name: Unit 38 - Business and the Economic Environment - P4 M2 D2
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A well written, detailed assignment which meets the criteria for P4 M2 and D2- Unit 38 Business and the Economic Environment. BTEC Level 3 Extended Diploma in Business. P4 - Explain how both fiscal and monetary policy decisions have affected a selected business. M2 - Analyse the effects of fiscal ...

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Grade P4 m2 d2

btec
level 3 business
p4 m2 d2
business and the economic environment
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Conor Cunningham P4 M2 D2

Current Fiscal and Monetary Policy in the UK

P4 and M2

There are many different fiscal and monetary factors that impact on Tesco and these factors
as well as their implications will be looked at below. In addition to this, the effects of fiscal
and monetary policies on Tesco in terms of the market in which it operates in will also be
analysed.

Fiscal policy

Fiscal policy is the government’s policy towards controlling the economy through
government spending, taxation and government borrowing. Fiscal policy came about by
John Maynard Keynes who believed that by changing levels of taxation and government
spending, the government could influence productivity levels.

The government has since set up a fiscal policy which follows the approach of borrowing to
invest for future needs and that current needs should be met by tax revenues. Government
borrowing was always said to never be more than 40 percent of the national income.
However, due to the economic downturn, UK banks needed money and so borrowing
exceeded this figure for the economy to thrive. More recently, the government is using
expansionary fiscal policy which means that the government spends more or reduces taxes
to grow or expand the economy. Below will look at the implications fiscal policy has on a
business such as Tesco.

Direct and indirect taxation

Taxes are mainly used to finance the expenses incurred by government to manage an
economy. These expenses include: health care, education, garbage collection and operating
government business entities. There are principles of good taxation which include;

Equality – it must be fair to everyone.
Certainty – government must be certain of getting the money.
Convenience – it must be easy to collect and for people to pay.
Economy – it must not cost too much to administer and it should be effective in raising
money to help boost the economy.

To gain income, the government uses two different methods of taxation. Direct taxes are
those that are paid by individuals and businesses on their income or profit and include;

 Income tax. This is the tax paid on all income and is calculated in two ways. 20% of
income is taxed for lower earners (£0-£32,000) and 40% is taxed for higher earners
(£32,001-£150,000). Most people are also entitled to a personal allowance which is
the proportion of their income which is not taxable and this is currently £11,500. An
increase in income tax would impact on Tesco as this would increase their expenses
and reduce profits as a result. This may also have further implications such as
restricting Tesco’s ability to grow the company. An increase in income tax would also

,Conor Cunningham P4 M2 D2

impact Tesco through the consumer. If the consumer’s income tax increased, their
disposable income would decrease and they would have less money to spend in
places such as Tesco. This affects the market in which Tesco operates in as demand
for goods and services would fall and so Tesco’s sales and revenue would decline
which could cause failure in the business. This would be negative for the company as
they will have less capital to continue operations in the market which they lie within.

 Corporation tax. This is the tax on company profits. Many businesses try to reduce
the corporation tax they must pay by reinvesting back into the company. The current
corporation tax rate in the UK is set at 20% decreasing to 19% next month. If
corporation tax decreases, this would be positive for Tesco. This will mean there is a
smaller bill to pay in corporation tax and because Tesco is so huge, the company’s
expenses will be significantly reduced. This will impact on Tesco as they will be able
to maximise their profits and become larger. Furthermore, this will positively impact
on the market in which Tesco operates in as other business owners will be paying
less in corporation tax and their businesses will also have more capital. This will
allow for businesses and individuals to have more capital to spend in Tesco and so
demand for the products and services increase. This will allow Tesco to increase their
market share of the grocery market too. Corporation tax rate is currently set at 20%.
The first £300,000 of profit is taxed at the small company rate (20%). The next
£1,200,000 is taxed at the marginal rate (variable). Profits over £1,500,000 are taxed
at the main rate (24%). It must be noted that the corporation tax that Tesco have to
pay would be extremely high due to the large amount of profit the company
generates.

 National Insurance contributions. This is a further form of tax based on income. The
money generated from people paying National Insurance enables people to claim
benefits if they need to and form a state pension for when they retire. Both
employees and employers now must pay National Insurance to the government. If
National Insurance increases for people, they will see less of their earned income
and so have less to spend. This will impact on Tesco as they will notice a decrease in
their sales due to the populations disposable income decreasing. This will further
impact on the market which Tesco operates in as the demand for their goods and
services will decrease. This will also be the case for competitors such as ASDA and
Sainsbury’s as their customers will be impacted in the same way. National Insurance
contributions increasing would be bad for Tesco as they rely heavily on their
customers spending money with them and this would only mean they have less to
spend. This would be detrimental to the entire market in which Tesco operates in as
the demand for the goods and services within this industry would decline.

Indirect taxes are also used by the government to generate income and these are taxes
taken indirectly from individuals by being added by businesses to the prices charged to the
customer. Indirect taxes include;

 Value added tax. This is the tax charged on most goods and services that VAT
registered businesses sell. VAT is charged on most goods and services such as
food, groceries, fuel and cars. In 2017, the standard rate for VAT is 20%. If
VAT was to increase to 25% for example, consumers would be affected which

, Conor Cunningham P4 M2 D2

would impact on Tesco. This is because VAT payed on Tescos products would
increase and so the product will become more expensive for the consumer. This will
cause consumers to be more aware of what they can and cant afford and will cause
some – more expensive – products to go into decline. This impacts negatively on
Tescos sales and profits and will cause the business to decline. In addition to this, an
increase in VAT will affect the market which Tesco operates within. For example, the
demand for goods and services will decrease due to this added price and so all goods
and services within this market will begin to decline when it comes to sales. This will
be negative for the entire market as sales decline across many different companies
and if this is large enough, it can cause detrimental effects to the economy.

 Excise duty. This is the tax paid on particular goods such as alcohol, tobacco and fuel.
This excise duty is often added to goods that are luxuries or harmful to people or the
environment. The duty is set by the government in a bid to reduce the sales of these
products and services as well as reduce the demand for them. If Tax is increased on
cigarettes, Tesco will have to increase their prices so that they can remain profitable.
So, excise duty can affect the business operations of Tesco including the prices they
set for some products and services. If these prices are set too high, it can affect the
number of customers they have. The market which Tesco operates within would
also be affected here as sales in alcohol, tobacco and fuel may begin to decline
because people simply cannot afford them. If excise duty increases, Tesco may see
their ability to continue as a market leader to be a lot harder. This is because sales
will stiffen in those areas and so the demand for these products and services will
soon fall as people struggle to afford them.

 Air passenger duty. This is the tax paid by airlines per flight operated. The
government increased this which meant that flight prices went up. This increase was
done to raise extra funds as well as for environmental reasons due to the harmful
CO2 emissions which airlines give out to the environment. Air passenger duty can
range from £13-£450. This will impact on Tesco’s costs for employees to go on
business trips for example. If Tesco were paying £15 in air passenger duty for one of
their employees to attend a meeting abroad, this may now increase to over £50 for
example. This impacts Tesco’s profits as their expenses increase. Tesco may also pass
on this charge to the employee instead of the company in an attempt to save this
increasing cost for the company.

Capital allowances

Tax-free allowances help to reduce the income tax paid by individuals and as a result of this,
they have a higher disposable income. As outlined above, the tax-free allowance in the UK
as of February 2017 is £11,000.

Capital allowances also enable businesses to claim tax allowance on things that they have
purchased or investments they have made. These claims are made against taxable profits
made by the business and help the business to reduce the tax payments they must make at
the end of the year. This allows businesses to continue to reinvest in themselves for the
future. As of February 2017, businesses can claim up to £200,000 in capital allowances.

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