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VAT increase will be detrimental to the wealth of SMEs

VAT increase will be detrimental to the wealth of SMEs

VAT rose to 20% on Tuesday and over 70% of small firms think this will impact negatively on their business.

The FSB conducted a survey of its members and 71% of the 1,600 respondents said the increase will not be beneficial to their business. 52% said they would have to increase prices, 45% expect turnover to decrease and 36% believe the rise will result in a loss of customers.

George Osborne says the increase is here to stay but the FSB is urging him to return VAT to 17.5% once the fiscal deficit has been reduced significantly.

SMEs will be hardest hit by the VAT increase as they are unable to absorb it in the way larger organisations can. The majority of small businesses will have to pass on the full rise to their customers, reduce their level of stocks or look to implement alternate cost saving measures.

The Federation has also called on the coalition to raise the threshold at which firms start to pay VAT to £90,000 from the current £70,000 rate. It says this move would help SMEs and could generate up to 35,000 additional jobs.

The chancellor has defended the rise, saying it shows the government is determined to tackle the budget deficit and this should lead to increased employment. Ed Milliband, on the other hand, believes the increase will cost 250,000 jobs.

Meanwhile, Jason Collins, a partner at law firm McGrigors, has warned that carousel fraud may make a comeback due to the VAT increase.

Carousel fraud occurs when a business purchases VAT-free products from one country, sells them on in a different country and then vanishes before settling the VAT liability. This type of fraud had died down in the UK but Collins warns that the increase could see VAT fraud doubling to £4bn this year.

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Image: Glum Face by bixentro

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