Will the increase in VAT affect SME’s input on the economic recovery?
With the increase of VAT raised yesterday (04/01/2011) by 2.5% to 20%, the Federation of Small Businesses (FSB) conducted a survey on 1,600 business owners, finding that 71% believe the rise will be detrimental to their company.
The increase in VAT is measured to generate £13billion a year of extra revenue in order to tackle Britain’s record level debts however will the increase on SME’s in the private sector affect the economic recovery?
The government stress that SME’s in the private sector are vital to strengthen the economic recovery however the following statistics recorded by the FSE show that the rise in VAT will restrict the input and pace of the recovery. The survey conducted by the FSB found that 52% of SME’s expect to increase their prices, 45% expect a fall in turnover and 36% expect a loss of customers as a result.
Additionally the internet giant Ebay conducted a survey of online businesses finding that only 24% of SME’s will absorb the entire costs of the VAT however 39% will avoid passing on the whole cost, yet most won’t increase prices in fear that an increase in price may scare off customers.
To help lighten the stress on SME’s the FSB want to increase the threshold at which they begin to pay VAT from £70,000 to £90,000, this is estimated to put back almost £900 million in the pockets of small businesses.
Further to the VAT increase, National Insurance will be increased by 1% in April which will no doubt put more strain upon SME’s. Despite the increase in VAT and national insurance the government are positive that SME’s are capable of playing a definitive role in the recovery of the economy albeit at a slower pace than expected in 2010.
