Earlier this year, the British Chambers of Commerce (BCC) predicted 2011 to be a 'Year of Growth'. But the Bank of England's latest inflation report suggests that the future of the economy is still 'highly uncertain', despite statistics showing that it had grown twice the rate expected by analysts (0.8% in the third quarter).
The Centre for Economics and Business Research (CEBR) also found that small business lending has dipped by as much as 4.5% over the past year. It seems that lender confidence in the small business market has decreased at a sharper rate than that for larger businesses, further adding to the uncertainties.
The increase in VAT to 20% on 4th January 2011 hasn't exactly strengthened the relationship between small businesses and the Government either.
Chancellor George Osbourne stresses that the hike is a 'tough but fair' measure, although recent research by the Institute of Chartered Accounts in England and Wales (ICAEW) suggests business owners think otherwise. The results show that a whopping six out of 10 small businesses feel that the increase will affect their cash-flow; something which will be a concern for small businesses that are already running hand to mouth.
But how exactly will the VAT increase affect small business?
Business software and service provider Sage UK suggests that as we have already experienced a VAT rise in January this year, a further rise won't be 'as daunting' as it perhaps was a year ago. However, this does also mean that the HMRC is unlikely to be as lenient with accounting errors which could be potentially problematic for the one in five small businesses who admit to not being fully prepared for the rise.
Similarly, there is undoubted anxiety among small businesses who are aware that the VAT increase will hit them harder than larger firms. This anxiety largely stems from the uncertainty surrounding consumer spending in the New Year.
Most consumers are being advised to buy large purchases before the New Year, implying that spending will dip in January as consumers attempt to avoid the rise. However, the impending winter sales and a stable demand for 'every day' necessities could render this fear null and void. It's hard to predict, but in all likelihood, consumer demand in smaller businesses will remain unaffected by the increase.
If anything, the rise is more an inconvenience to small businesses rather than a major financial concern. The time taken to implement product price changes and conduct independent research on competitors temporarily detracts the focus away from staying in business to managing the VAT rise; valuable time that could be better spent running and improving the business.
Similarly, costs will be incurred through the organisation of business accounts with an established accountant. Small inconveniences like these will be the main concern for businesses.
It won't only be VAT-registered businesses that will be affected by the rise. Micro-businesses and other non-VAT registered businesses will suddenly find purchases more expensive. Do they pass this onto their customers?
It's not all doom and gloom for UK small businesses though. Due to the record low base rate of 0.5% set by the Bank of England, owners can reap the benefits of low interest rates. This level shows no signs shifting in the near future, so small businesses are able to take advantage of attractive mortgage and refinance deals as they see fit.
However, analysts warn that a degree of cautiousness should be adopted to minimise the risk of a nasty surprise when the rates do inevitably rise.
So, will 2011 be the year for small businesses?
Well, if small businesses have survived a three-year recession, a 2.5% VAT increase in January this year AND continuous competition from larger chains, then why wouldn't 2011 be a good year for small businesses?! They have shown incredible strength and resilience against the problems of the recession and should enter the New Year with their heads held high.
David Kern, Chief Economist at the BCC stresses that 'a slump seems unlikely' in the next year, although businesses are advised to fully plan and prepare for future hurdles, such as the VAT increase.
Ultimately, planning, preparation and organisation is the key to small business success in 2011.