How will the VAT rise affect business?
In this summer's Budget announcement, the new coalition government announced that it had been left with no option but to increase VAT.
Confirming what many industry experts had long expected, the new Chancellor of the Exchequer George Osborne commented:
"On January 4th, the main rate of VAT will rise from 17.5 to 20 per cent. The years of debt and spending make this unavoidable. This single tax measure will, by the end of this parliament, generate over £13 billion a year of extra revenue. That is £13 billion we don't have to find from extra spending cuts or income tax rises."
The move was, as can be expected, met with disapproval from consumers and small business owners alike.
A report by uSwitch.com showed that 59 per cent of consumers would cut back on luxuries following the rise, with a further 55 per cent saying they will swap branded goods for cheaper alternatives.
The Federation of Small Business (FSB) recognised that the government needed to prioritise cutting the Budget deficit, but said any changes to the tax system should be coupled with measures designed to help small firms "innovate, grow and employ".
John Walker, the organisation's national chairman, said: "While the FSB does not want to see taxes increased we understand that reducing the budget deficit is a key priority.
"It is imperative that any changes to capital gains tax or VAT go hand-in-hand with an ambitious plan for helping economic growth through allowing small firms to employ, grow, invest and innovate."
A further report by uSwitch, which focused on small enterprises, showed that 87 per cent of respondents feel the VAT rise will be "bad for business".
Jake Ridge, small business energy expert at uSwitchforbusiness.com, said: "Small firms seem to be very clear about one thing - a VAT rise will be bad for business.
"They need support from the government to help safeguard their future - a VAT hike could be one blow too many for businesses who have faced the brunt of the recession and are now battling their way to recovery."
However, over the months since the announcement, while times have certainly remained challenging for small firms – with access to funding being a particular problem – reports show that the economy has expanded.
Despite a number of industry commentators fearing the start of a double-dip recession, the latest official GDP figures showed that the economy grew by 0.8 per cent in the third quarter of last year.
The Confederation of British Industry (CBI) said that the growth was "much stronger" than many people expected.
Ian McCafferty, CBI’s chief economic adviser, explained:"Growth was broad-based, with manufacturing activity remaining buoyant, and services continuing to grow firmly. The strength of production within the construction sector was the main surprise."
However, the expert said that January's VAT rise could put paid to such encouraging figures.
"The timing of the VAT rise will help to bolster spending over the fourth quarter, but this is also likely to slow growth more noticeably through the winter," he added.
On the 4th January Chancellor George Osbourne defended his decision to increase the rate of VAT.
"I think a higher income tax or higher national insurance... would have a greater impact on work incentives, on the competitiveness of the British economy, they would potentially cost more jobs. I think the measures we're taking will increase employment because they will install a confidence that Britain is on top of its deficit."
Economists, politicians, consumers and business owners will all be watching closely to see how the effects of the VAT increase play out.
Posted by Anthony Burns
How we can help
Unsure about how to prepare your business for the VAT increase?
If you would like more information on how to prepare for the VAT increase, or would like assistance with your returns, call us today.
Help and Advice
Contact us now so we can discuss your requirements; call us on: 0800 0523 555 Or fill in our Contact form and we will call you back.
