VAT rise unnerving small companies

The increase in VAT to 20 per cent will have a bigger adverse impact on limited companies and other micro firms than any other measure announced in the Budget.

Due to take effect from January 2011, the 2.5 per cent increase is a problem for up to a third of the 503 small companies questioned by YouGov at the end of last month.

Commissioned by storage provider SafeStore, the research found that almost a fifth of the firms plan to freeze or cut any salary payments on the company's payroll.

"The rise in VAT is going to make things harder," reflected a Forum of Private Business member company.

"I have not increased my prices for two years and this will prevent me being able to raise them yet again. All my suppliers however have increased theirs."

In line with the FPB, the Federation of Small Businesses has welcomed the government's decision to postpone the VAT increase until into the new year.

But the government ignored the FSB's appeal that a VAT rate of 20%, which will help cut the deficit by £11bn, should not be applicable to all sectors, such as construction.

"Evidence from parts of the EU that have done this suggests that this cut in VAT can result in greater revenue from the tax, due to increased trade," the FSB said.

"The construction industry accounts for 10 per cent of Britain's GDP and so it is essential to the economy that this vital sector is supported through the recovery."

Refusing the idea of a sector specific VAT rate raises the prospect that the smallest firms, for whom cashflow is crucial, will have to pass the increase on to their clients.

According to the firms polled last month, a handful are considering relocating, while slightly more said they could only meet the costs of the tax increase by downsizing.

As well as the business community, pensioners are also pushing the government to rethink, claiming yesterday that the higher VAT rate will leave them £8bn worse off over the next five years.