The FSB 'Voice of Small Business' panel surveyed 1,635 small business owners at the close of 2010 to find out how the VAT increase will affect SMEs. Just under three-quarters (71%) of respondents expect the rise to hamper their business. A further 52% expect to increase prices to cope with the rise, 45% expect a fall in turnover, and 36% expect a loss of customers as a result of the VAT hike.
Small firms will be hit hardest by the rise in VAT. Unlike big businesses, they are less able to absorb the increase. Many small firms will have to pass the full cost of the hike on to customers, reduce stock levels or find cost savings elsewhere - potentially costing jobs and undermining the Governments private-sector-led recovery.
But not everyone believes that the VAT increase will have the impact that SMEs fear. Stephen Archer, economics pundit and director of Spring Partnerships, says: "The practical reality is that a 2.5% increase in VAT translates to a relatively low increase on the price of products. People aren't going to walk into shops, look at price tags and go 'Wow, this product didn't cost this much in 2010.'
"If businesses run significant and sustained promotions - absorbing the extra cost, for example, there should be no decrease in spending," he continues. "Overall it will make no impact at all. The VAT increase is a non event."
John Walker, national chairman of Federation of Small Businesses, disagrees. He says: "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."
The FSB is calling on the Government to help alleviate strain 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.
Walker says: "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."
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