By Max Clarke

January’s VAT increase is set to trigger interest rate rises and strengthen the pound according to foreign currency specialist, Currency UK, which will have a significant impact on businesses trading overseas.

In the emergency budget, the coalition Government announced that from the 4th January 2011, the standard rate of VAT will increase from 17.5% to 20%, in a bid to use spending cuts and tax rises to prevent Britain’s debt spiralling even more out of control.

This indirect tax is a cost that will likely be passed on to consumers via an increase in the price of goods and services and would see each of the UK’s 26.2m households paying an extra £1.16 per day or £425 a year in tax.

This rise is expected to create large inflationary pressures, which will in turn increase the probability of the MPC raising interest rates in order to stabilise the economy; with many economists predicting a rise in interest rates to 20 percent by the end of the decade.

Adrian Jacob from leading foreign exchange company Currency UK advises that “As investors are attracted by the higher sterling rate of interest, the amount of funds flowing into the UK will increase causing an appreciation in the value of the pound.”

“Over the last year, the low value of sterling has greatly reduced the purchasing power of importers and those who did not forward purchase currency could have lost out on over 20 percent of their profit if dealing with Euros and 15 percent if dealing in US Dollars.”

“It is therefore essential that importers and exporters take steps to reassess the ways in which they purchase their foreign currency in order to minimise risk and make the most of this opportunity.”

One option available is the Limit Order in which a business can set a target rate for trade of their currency and leave it to the experts to monitor. Should the desired rate be reached, the trade will automatically be executed.

Similarly another option is the Stop Order. In this scenario, the business sets a minimum acceptable price and if the market falls to that level, the currency trade will be executed automatically. This favours the more risk adverse business but still allows flexibility to benefit from positive market movements.

For many businesses, the strengthening pound will be the time to consider forward purchasing currency. This removes all the currency risk as a set price is agreed for all exchange transactions for a 12 or 24-month period. The business owner can then concentrate on running the company without the additional worry regarding the impact of the exchange rate.

Jacob warns that smaller businesses are already losing up to £1.5bn a year on foreign exchange transactions while they watch big businesses get preferential treatment from banks. SMEs are charged up to three percent of their transaction in fees by banks and the advice given is to compare the foreign exchange provider market.

Jacob explains: “For the sake of half an hour on the phone to compare prices between FSA regulated companies, such as Currency UK and the high street banks it could save a small business thousands of pounds, which is significant in today’s challenging economic times.”

Capturing a good exchange rate will enable your business to be more competitive when pricing goods and services, thereby securing profits and minimising risks. Currency UK was created to offer a bespoke service to SMEs to ensure that they can access the currency tools usually only offered to larger corporate bank clients.