Small businesses to feel the pinch of VAT increase

More than 70 per cent of small businesses expect this weeks VAT rise to have a negative impact on their business, according to a member survey by Federation of Small Businesses (FSB).

When the VAT rise to 20 per cent hits on January 4, an FSB ‘Voice of Small Business’ panel survey shows that just under three-quarters (71%) of the 1,600 respondents expect the rise to be unbeneficial to their business. A further 52 per cent expect to increase prices, 45 per cent expect a fall in turnover, and 36 per cent expect a loss of customers as a result.

The Chancellor has said that this rise is here to stay as it a change to the tax system to deal with the structural deficit. The FSB is urging the Chancellor to review the increase when the deficit has been significantly reduced and to return it to 17.5 per cent.

Small firms will be hit hard by the rise in VAT as unlike big businesses, they can’t absorb the increase. This will mean that small firms will have to pass the full cost on to customers, reduce stock levels or find cost savings elsewhere – potentially costing jobs and undermining the Governments private sector led recovery.

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The FSB has been calling on the Government to help alleviate the stresses and strains on hard hit firms’ cash-flow by increasing the threshold at which they begin to pay VAT, from the current rate of £70,000 to £90,000. This has the potential to create up to 35,000 jobs and help small businesses when they need it most.

John Walker, National Chairman, Federation of Small Businesses, said:

“Small businesses have had a tough time in 2010, especially towards the end of the year, when what should have been a very busy time as people make purchases before the VAT increase, but the busy Christmas period was hampered by heavy snowfall and severe weather.

“These figures show that almost half of respondents are going to have to increase prices as a result and 45 per cent think it’s going to decrease their turnover – neither of which will help small firms take on more staff.

“If the Government truly believes that the private sector is going to strengthen the recovery we need to see action. Increasing the threshold at which companies have to register for VAT will put almost £900 million back in the pockets of small businesses. Without this small firms will struggle to bounce back as the spending cuts start to bite.”