The Federation of Small Businesses (FSB) is urging the Chancellor to review the VAT increase when the deficit has been significantly reduced and to return it to 17.5 per cent.
The Chancellor has said that this rise to 20% is here to stay as it a change to the tax system to deal with the structural deficit. VAT was introduced in the late 1970’s, to replace various sales taxes, at a standard rate of just 8%. By 1980 it rose to 15%, and then rates were increased again in 1991 to pay for John Major’s cuts in the the poll tax.
Barring a temporary one year cut to 15% under Gordon Brown, VAT rates have always gone up and never down. Under the current government the VAT rise is intended to raise money to cut the budget deficit, but history suggests it’ll never drop back below the 20% rate which came into effect today.
The FSB argue that 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.
The FSB has also been calling on the Government to help small businesses cash-flow by increasing the threshold at which they begin to pay VAT, from the current rate of £70,000 to £90,000. They claim that this has the potential to create up to 35,000 jobs and help small businesses when they need it most.
I would argue that regardless of the threshold for VAT, having a ceiling where VAT is collected on ALL sales once the threshold is reached is the biggest threat to small businesses growing. All raising the limit to £90,000 does is increase the pain when the threshold is exceeded. In my view a stepped approach to VAT similar to income tax would significantly lower the impact on small businesses and stop encouraging them to limit their growth by trading just below the VAT threshold.
The FSB point out that 52 per cent of businesses expect to increase prices, 45 per cent expect a fall in turnover, and 36 per cent expect a loss of customers as a result of the latest VAT increase. There is no chance that the public sector can expand to drag the country out of recession, as the FSB point out the government themselves are looking to the private sector to strengthen the economic recovery of the country.
The rise in VAT whilst unwelcome to consumers hits retailers especially hard compared to other small business. Whereas business to business transactions largely allow VAT to be reclaimed a retailer only has two choices – absorb the increase or pass it on to customers.
The VAT rise is in reality a 14% rise to the tax the government collects on every retail transaction in the country. Whilst it’s unarguable that the budget has to be balanced by one means or another, stifling the growth of small businesses will impact the economy for the next generation.