A report by the Centre for Economics and Business Research shows that increasing the VAT threshold to £90,000 from the current rate of £70,000, could save up to £162 million per year from the reduction in red tape surrounding VAT compliance, as well as saving just over £700 million in VAT payments.
This money could then be used to create up to 35,000 jobs if on an average wage. While this would affect the amount of money the Treasury receives in VAT receipts, it would be more than offset by the potential £13 billion which will come from the increase in VAT to 20% and revenue from the jobs created.
For a small firm, an increase in the threshold would help to provide much needed cashflow, allowing them to invest in the business through lower prices or taking on more staff. It would also help to kick-start a Small Business Programme for Growth following the government’s spending cuts.
Small firms will be hit hard by the 2.5% rise in VAT that takes effect from January 4. The Federation of Small Businesses, which commissioned the CEBR report, says small business owners will have to pass the full cost on to customers, reduce stock levels or find cost savings elsewhere.
A FSB spokesman said that a Programme for Growth was even more important given that latest FSB research shows that 10.4% of firms expect to decrease employment over the final quarter of the year, as business confidence in future prospects and revenue growth weakened in the third quarter of 2010.
FSB Luton & South Beds branch chairman Carole Hegley said: "The smaller the business, the higher the cost of VAT compliance; this is why the FSB is calling for the government to increase the threshold at which a business must register for VAT.
"If the government is truly committed to a private sector-led recovery, it must implement a Small Business Programme for Growth to allow small firms to grow and invest. This would be a great start.”