Vat Cut - A Help Or A Hindrance?

The FPB is also warning that the tax cut – designed to boost high street trade – could backfire because it is unlikely to convince many retailers to slash their prices. “The reduction in VAT to 15% seems pointless, when, for example, a product that sells for £4.99 this week will retail for £4.89 next week after the VAT rate has been reduced,” said Nick Palin, the FPB’s director of finance. “This shows how ill thought-out this reduction has been. All it does is increase the amount of time smaller retailers have to spend wading through bureaucracy.”

He added, “At this crucial time of the year, small firms should not be forced to occupy themselves with the level of administration that this change will entail, but [should be concentrating on] running their business and trying to set themselves up for what could be a very difficult year ahead.”

One FPB member who wished to remain anonymous, is also disappointed by the Government’s Pre-Budget Report, particularly the VAT reduction. “While I am not legally obliged to pass on this VAT reduction to my customers, it could cause serious damage to customer relations if I don’t. Unfortunately because we are a small business and use the flat rate VAT scheme, our VAT liability has only been reduced by 0.5%. This will mean that I will lose two percent on each sale, at our busiest time of the year, with no opportunity to adjust our outgoings accordingly,” said the FPB member. “The Government has also simply advised me to contact my software provider or supplier for assistance in adjusting my accounting software.

“I think this shows a lack of understanding of how a small business works. It is going to take my time and most likely cost me more money, not to mention the time spent reprinting all my price lists and making adjustments to my website. All of these added expenses will equate to at least one month’s salary for one of my employees, which will mean that we will now be seriously considering reducing hours or making a redundancy.”

The FPB believes the Government could have taken more progressive measures to support small businesses in the Pre-Budget Report, including cutting the lower rate of corporation tax to 20%. Instead it has simply delayed its planned increase to 22% for a further year.

In addition, both business-owners and their staff will lose out when National Insurance (NI) is increased by 0.5%. This is likely to prove a disincentive to employment at a time when small businesses are recovering from recession and are in a position to take on staff again.

Small firms which have concerns about the VAT reduction can contact the FPB’s member helpline for advice and guidance on 0845 130 1722.