Up to 35,000 new jobs could be created if the threshold at which small companies start to pay VAT is increased, the Federation of Small Businesses (FSB) has claimed.
A report by the Centre for Economics and Business Research, commissioned by the FSB, revealed that increasing the VAT threshold to £90,000 from the current rate of £70,000 could save small firms up to £162m per year, as well as saving just over £700m in VAT payments.
This reduction in red tape compliance could be used to generate around 35,000 jobs in small companies on an average salary (around £25,000), says the Lobby group. However, while the increase will affect the amount of money the Treasury receives in VAT receipts, it will be offset by the £13bn which will come from the increase in VAT to 20%, due to come into force on January 4, 2011, as well as revenue from the jobs created.
John Walker, national chairman of the FSB, 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.
“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 £900m back into small firms, with the potential to create up to 35,000 jobs."
According to the FSB the changes to the threshold would help provide small businesses with much needed cashflow, allowing them to invest back into their business. However, the lobby group has warned that small firms will be hit hard by the 2.5% rise in VAT, because unlike big businesses, they cannot 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, which would potentially cost jobs and undermine the government’s private sector led recovery.
© Crimson Business Ltd. 2010