Half of Small Businesses Forced to Absorb VAT Rise

Nearly half of small firms have been forced to absorb the costs of the VAT increase to remain competitive, research from the Federation of Small Businesses (FSB) has found.

The FSB survey of 1,600 small businesses revealed that 48 per cent would be absorbing the costs of the January VAT rise with the remainder passing it onto their customers.

FSB spokeswoman, Prue Watson, said that SME which try to absorb the cost will have to look at their books and see where they can cut back elsewhere.

“For example, they might reduce their marketing or try to do it more cheaply.”

“However, many small firms don’t have the leeway to do this. More than half are adding the extra VAT to their prices, which could put consumers off buying from them, and ultimately that will hit their cashflow, too. It’s a difficult decision for them.”

Small-business owner, Rebecca Kimber, founder of e-commerce firm, Create, said that consumer-facing firms would be especially badly affected if they have to pass the cost on to customers.

“For many B2B firms, their customers are VAT-registered and so can claim it back, but consumer-facing businesses will find it difficult to make a profit as their customers are likely to go to cheaper businesses that have absorbed the cost. A lot of our customers are too small to be VAT-registered, so we decided to absorb the increase, although we are losing money.”

Kimber added that changing prices to reflect the VAT rise could be time-consuming, as well as potentially damaging sales.

“If we changed our prices, we would have to inform our existing customers, of which there are thousands, and change all their payment agreements. We need to retain our price points to be attractive to customers. We are launching new products to boost our revenue and cope with the extra costs.”

Half of Small Businesses Forced to Absorb VAT Rise

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