VAT Rises from 17.5% to 20% – Small firms will be hit hard by the rise in VAT

The standard rate of VAT has risen from 17.5% to 20% as the government looks to boost tax revenues to cut its deficit.

Business groups have warned that retailers will be hit by the increase, while opponents of the rise have said the poorest will be hit hardest. The government says the rise is necessary to help bring down the UK’s high budget deficit.

One Credit Management expert commented that “While businesses which are VAT registered claim it back, smaller SMEs which are under the VAT threshold will have to find another 2.5% to pay the tax man from today, 4 January 2011. This means that keeping outstanding debts under control to reduce the cost of bank borrowing will become even more critical for these small enterprises’ financial health.”

The Chancellor has said that this rise is here to stay as it a change to the tax system to deal with the structural deficit. The FSB is urging the Chancellor to review the increase when the deficit has been significantly reduced and to return it to 17.5 per cent.

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.

According to the FSB, more than 70 per cent of small businesses expect today’s VAT rise to have a negative impact on their business.

Please comment bellow and tell us what your thoughts are.