By Claire West
Up to 35,000 additional jobs could be created if the threshold at which small firms start to pay VAT was increased, said the Federation of Small Businesses (FSB) today.
An FSB commissioned 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 will affect the amount of money the Treasury receives in VAT receipts, it will be more than offset by the potential £13 billion which will come from the increase in VAT to 20 per cent, due to come into force on 4 January 2011 as well as revenue from the jobs created.
For a small firm, an increase in the threshold would help to provide much needed cash-flow, allowing them to invest back into the business through lower prices or taking on more staff. It would also help to kick-start a much needed Small Business Programme for Growth following Government spending cuts announced in the Comprehensive Spending Review.
Small firms will be hit hard by the 2.5 per cent rise in VAT as unlike big businesses, they can't absorb the increase. This will mean that small firms will have to pass the full cost on to customers, reduce stock levels or find cost savings elsewhere - potentially costing jobs and undermining the Governments private sector led recovery.
A Programme for Growth is even more important given that latest FSB research shows that 10.4 per cent of firms expect to decrease employment over the final quarter of the year, as business confidence in future prospects and revenue growth weakened over the July to September period.
John Walker, National Chairman, Federation of Small Businesses, 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, then it must implement a Small Business Programme for Growth to allow small firms to grow and invest - and this would be a great start.
"The potential loss to Government in VAT receipts by increasing the threshold to £90,000 would be more than outweighed by the VAT rise due to come into force in January and would help to put £900 million back into small firms with the potential to create up to 35,000 jobs."