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VAT rise will be detrimental to small businesses

THE rise in VAT to 20% will have a negative impact on most small businesses is the result of a member survey by the Federation of Small Businesses (FSB).</P><p>According to the FSB's 'Voice of Small Business' panel survey, just under three-quarters (71%) of the 1,600 respondents expected the rise to be detrimental to their business. A further 52% expected to increase prices, 45% expected a fall in turnover, and 36% expected loss of custom as a result of the VAT rise.</p><p>The FSB believes that small firms will be hit harder by the rise in VAT because, 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

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THE rise in VAT to 20% will have a negative impact on most small businesses is the result of a member survey by the Federation of Small Businesses (FSB).

According to the FSB’s ‘Voice of Small Business’ panel survey, just under three-quarters (71%) of the 1,600 respondents expected the rise to be detrimental to their business. A further 52% expected to increase prices, 45% expected a fall in turnover, and 36% expected loss of custom as a result of the VAT rise.

The FSB believes that small firms will be hit harder by the rise in VAT because, 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 government’s private sector led recovery.

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However, the FSB suggests raising the VAT threshold from the current rate of £70,000 to £90,000.

John Walker, national chairman, Federation of Small Businesses, said: “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.”

However, Richard Lambert, director-general of the CBI, was more cautious about the VAT rise impact.

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“There are bumpy times ahead for businesses in Britain. Travelling around the country, I find that many people are positive about current trading conditions – but extremely uncertain about what the New Year might bring. And that’s understandable, because the economic and political outlook both seem volatile over the short term,” said Mr Lambert.

Mr Lambert continued: “For a start, the pace of economic recovery could slow quite markedly in the first few months of 2011. The VAT increase will be taking effect, and the construction sector will start to feel the pain of public spending cuts. The positive impact of the inventory cycle may also start to wane, with companies having gone some way to refilling the stock pipelines that had been run down so sharply in the recession. For all these reasons, we think that the quarterly growth rate in the next three months could be down to as little as 0.2%, compared with 0.7% in the third quarter of 2010.”

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While Mr Lambert acknowledged these figures would cause concern he added: “The latest CBI forecasts, which are pretty much in line with the consensus view, suggest that growth in private sector investment and trade will start to pick up in the second half of the year, and continue into 2012. That would bring GDP growth of 2% in 2011 and 2.4% the year after – not much to shout about, perhaps, at this stage of a recovery, but enough to keep unemployment under control and the public finances on track.”

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Increase to 20% will be harmful says FSB organisation survey

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