Ethical Issues in Finance (AQA A Level Business): Revision Note
Syllabus Edition
First teaching 2026
First exams 2028
Exam code: 7132
Tax avoidance
Tax avoidance is the legal use of tax rules to reduce the amount of tax a business pays
Common tax avoidance strategies
Strategy | Explanation |
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Profit shifting |
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Transfer pricing |
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Complex corporate structures |
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Why is it an ethical issue?
Whilst tax avoidance is technically legal, many argue it is unethical
It deprives governments of revenue that would otherwise fund public services such as schools, hospitals and roads
It creates an uneven playing field
Smaller businesses without the resources to set up complex international structures pay their full tax liability, while large multinationals reduce theirs significantly, distorting competition
It shifts the burden onto others
When large businesses pay less tax, governments must either cut public spending or increase tax on individuals and smaller businesses to compensate
It undermines trust
Consumers and employees increasingly expect businesses to act as responsible members of society
Tax avoidance is considered incompatible with that expectation
In response to widespread avoidance by large technology companies, the UK government introduced the Diverted Profits Tax in 2015
It was specifically designed to tax profits that multinationals had shifted out of the UK using artificial arrangements
Real-life examples
Starbucks
Starbucks paid £8.6 million in UK corporation tax between 1998 and 2012 despite generating over £3 billion in UK revenue during that period
The company used a combination of royalty payments, inter-company loans, and coffee bean purchases from subsidiaries in the Netherlands and Switzerland to reduce its UK taxable profit
Following public outrage, Starbucks voluntarily paid £20 million in additional tax, acknowledging that, even though its tax arrangements were legal, the damage to its reputation had become too great to ignore
Apple
Apple was found to have received illegal state aid from Ireland through a tax arrangement that allowed it to pay an effective corporate tax rate of as little as 0.005% on European profits in some years
Apple was ordered to repay €13 billion in back taxes - one of the largest tax rulings in history
Case Study
Solaris Digital plc
Solaris Digital plc is a UK-based software company that sells cloud-based productivity tools to businesses across Europe.
Over several years, the company restructured its operations so that its intellectual property - the software code that generates most of its value - was held by a subsidiary based in a low-tax European country. UK customers paid licence fees to that subsidiary rather than to the UK parent, meaning the majority of profits were recorded abroad and taxed at a fraction of the UK rate.
Solaris paid just £1.2 million in UK corporation tax in a year when it generated £48 million in UK revenue. A newspaper investigation brought the arrangement to public attention, triggering a boycott campaign among some business customers who felt the company was not contributing fairly to UK public finances.
Several large clients reviewed their contracts, and two publicly switched to rival suppliers.
Solaris's board of directors eventually announced a review of the group's tax structure, acknowledging that its legal tax position had become incompatible with its stated values around corporate social responsibility.
Payment terms for customers and suppliers
Payment terms are the conditions agreed between a business and those it buys from or sells to, determining when invoices must be paid
A supplier offering 30-day payment terms expects to be paid within 30 days of the invoice date
A business offering 60-day terms to customers is giving them two months before payment is due
Ethical issues with supplier payment terms
Large businesses often have significant bargaining power over their smaller suppliers
This can lead to practices that are technically legal but widely regarded as exploitative
Imposing excessively long payment terms | Retrospectively changing terms |
|---|---|
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Delaying payments beyond agreed terms | Using the threat of delisting |
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These practices can push small suppliers, who may lack access to credit, into serious financial difficulty and can drive them out of business
Ethical issues with customer payment terms
Businesses can also behave unethically in how they structure payment terms for customers, particularly smaller or less powerful ones
Short payment terms
Imposing very short payment terms on smaller customers who lack the cash flow to comply, causing financial pressure
Charging disproportionately high penalty interest on late payments
Using restrictive contract terms that make it difficult for customers to dispute invoices or withhold payment when goods or services are substandard
Example
Tesco was investigated by the Groceries Code Adjudicator in 2015–2016.
It was found to have delayed payments to suppliers and required suppliers to make payments to fund its own promotions.
The adjudicator found that Tesco had acted in a way that was likely to disadvantage many suppliers.
The UK government introduced the Prompt Payment Code - a voluntary commitment for businesses to pay suppliers within 30 days - in response to concern about large businesses' payment practices
However, a 2023 government report found that thousands of businesses signed up to the code were still regularly paying late
In 2023, the UK's Small Business Commissioner published data showing that large businesses owed small suppliers a combined total of over £23 billion in overdue payments
Case Study
Colton Retail Group plc
Colton Retail Group plc operates a chain of 140 homeware stores across the UK and sources products from over 300 suppliers, the majority of which are small and medium-sized businesses.
To improve its own working capital position, Colton's finance team extended standard supplier payment terms from 45 days to 90 days without consultation — informing suppliers of the change by letter with 30 days' notice.
Several small suppliers, including a family-run ceramics manufacturer employing 18 people, found the change unsustainable. Unable to wait three months for payment while still paying their own staff and material costs, and unable to secure affordable short-term credit, two suppliers were forced to reduce their workforces. One ceased trading entirely.
The story was picked up by the national media. Colton faced criticism from business groups, MPs and consumers. Three months later, the board reversed the decision and returned to 45-day terms — acknowledging that the short-term benefit to Colton's cash position had not been worth the reputational and ethical cost.
Examiner Tips and Tricks
When evaluating ethical issues in finance, always distinguish clearly between what is legal and what is ethical — and explain why the gap between the two matters. The strongest answers consider the impact on multiple stakeholders: HMRC and the public in the case of tax avoidance; small suppliers, their employees and local communities in the case of payment terms. Businesses that act legally but unethically often face reputational damage that ultimately affects their financial performance anyway
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