Small businesses are being hit harder following the increase in VAT from 17.5% to 20% as of the 4th of January 2011. The increase in VAT has damaging implications for smaller businesses as they are experiencing lower profit margins and are finding it increasingly harder to raise credit. In theory, the increase in 2.5% increase in VAT is paid by the customer however, given the current economic climate and the lack of consumer spending, businesses are reluctant to pass on this increase to their customers.
“Businesses have less power to negotiate with suppliers and make sure creditors pay. This has left them more exposed to the higher VAT,” says Frances Coulson, the president of R3, a trade body for insolvency practitioners.
Ernst & Young and KPMG have reported that the levels of small business administrations in early 2011 have increased by 20% from 2010. Small and medium-sized businesses employ 60% of the UK workforce, hence the implications of the VAT increase may be severely damaging to the UK economy.
Accountants have outlined that firms dependant on consumer spending such as retail, leisure and travel firms are amongst the worst affected, whilst construction businesses have also been severely affected.
Richard Fleming, the UK head of KPMGs restructuring department stated that the rise business administrations have also been affected by the tougher approach by the taxman. HM Revenue & Customs introduced a “time to pay” policy during the height of the recession which offered struggling businesses increased flexibility with their tax payments. However, Fleming states that “we are now seeing a stricter approach” as firms attempting to defer tax payments are not being treated as sympathetically, emphasised by the collapse of wine giant, Oddbins.