Lesson 7.1.1.1

7.1.1.1 Taxation Quiz: NCFE Business & Enterprise, Unit 7

20 questions

Written by Revision Ninja · Last reviewed 11 October 2026

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This lesson looks at how taxes shape business decisions and consumer spending. It covers corporation tax on company profits, income tax for sole traders and employees, and VAT as a tax on spending, including rate changes, registration and the effect on prices, demand and dividends.

Key points

  • Corporation tax is paid by limited companies on their profits, and a cut leaves more profit to reinvest or pay out as dividends.
  • Sole traders have no separate legal identity, so their profit is taxed as the owner's income through Self Assessment.
  • A company that makes a trading loss pays no corporation tax and can usually carry the loss forward against future profits.
  • Income tax is deducted from earnings, so a rise lowers disposable income and hits demand for non-essentials such as luxury goods first.
  • VAT is an indirect tax added to prices, so a higher rate reaches shoppers as dearer goods and a cut can encourage spending in a recession.
  • A business must register for VAT once its taxable turnover passes the threshold, then charge VAT on sales and reclaim it on purchases.
  • Some essentials such as children's clothing are zero-rated, so no VAT is added to their price.

Key terms

Corporation tax
A tax charged on the profits of limited companies and other incorporated businesses.
Income tax
A tax on earnings, paid by employees through PAYE and by sole traders on their trading profit.
VAT
Value Added Tax, an indirect tax added to the selling price of most goods and services.
Disposable income
The money households have left to spend after tax has been taken from earnings.
HMRC
The government body that collects taxes in the UK.
Zero-rated
Goods on which VAT is charged at 0%, such as children's clothing.
Dividend
A share of company profit paid out to shareholders after tax.

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The 20 questions

  1. How does a rise in corporation tax affect a company?

    • Lower wage costs
    • Increased gross profit
    • Less retained profit
    • Higher sales revenue

  2. What is the main effect of rising income tax rates?

    • Dividends grow larger
    • Business profits increase
    • Disposable income falls
    • Gross wages rise

  3. Which business type pays corporation tax on its profits?

    • Partnership
    • Sole trader
    • Private limited company
    • Franchisee

  4. Why might a corporation tax cut enable a company to pay larger dividends?

    • Lower operating expenses
    • Increased gross revenue
    • Higher post-tax profit
    • Reduced share capital

  5. What is the typical consumer reaction to a VAT cut?

    • Savings decrease
    • Wages drop
    • Sales rise
    • Sales fall

  6. A sole trader makes £30,000 profit in a year from her hairdressing salon. Which tax is charged on that £30,000?

    • Income Tax
    • Value Added Tax
    • Corporation Tax
    • Business Rates

  7. How does a corporation tax cut help fund research?

    • Lower business rates
    • Higher bank loans
    • Increased share issues
    • More retained profit

  8. What happens when VAT rises on standard-rated goods?

    • Lower production costs
    • Higher shelf prices
    • Higher profit margins
    • Reduced business rates

  9. How does a basic rate income tax cut affect employees?

    • Lower weekly hours
    • Higher gross salary
    • Higher take-home pay
    • Increased pension contributions

  10. A shop sells 10 units at £10 each before VAT. VAT is charged at 20%. What total does the customer pay?

    • £102
    • £100
    • £120
    • £83.33

  11. What is the primary purpose of Value Added Tax (VAT) in the UK?

    • Raise government revenue
    • Regulate bank lending
    • Control wage inflation
    • Subsidise local transport

  12. Which of these goods has no VAT added to its price in the UK?

    • Restaurant meals
    • Adult footwear
    • Children's clothing
    • Electrical appliances

  13. What is the most likely effect of a sudden increase in the standard VAT rate?

    • Consumer spending falls
    • Imports cease entirely
    • Business profits double
    • Unemployment drops rapidly

  14. What must a sole trader do when taxable turnover exceeds the VAT threshold?

    • Form a plc
    • Liquidate assets
    • Register with HMRC
    • Cease trading

  15. Which tax does a sole trader pay on the profits earned by their business?

    • Capital Gains Tax
    • Income Tax
    • Corporation Tax
    • Stamp Duty

  16. What is the likely impact on luxury watch sales if Income Tax rates rise significantly?

    • Imports are banned
    • Prices become fixed
    • Sales double
    • Sales fall

  17. Why might the government reduce VAT during an economic recession?

    • Increasing tax revenue
    • Reducing business wages
    • Lowering import tariffs
    • Encouraging consumer spending

  18. Since April 2023, what is the main rate of UK Corporation Tax on profits over £250,000?

    • 30%
    • 20%
    • 19%
    • 25%

  19. What can a limited company usually do with a trading loss for tax purposes?

    • Claim higher dividends
    • Increase share capital
    • Carry loss forward
    • Avoid staff National Insurance

  20. How does a reduction in Corporation Tax typically affect company shareholders?

    • Higher dividends
    • Higher wages
    • Lower dividends
    • Fewer shares

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