Coalition fires off its biggest weapon in fight to tackle the deficit.
Retailers and shoppers faced up to the new VAT rate of 20 percent this morning, after several days of frantic sale activity to beat the 2.5 percent tax rise.
The Federation of Small Businesses has said that the rise will hit small firms the hardest, citing a survey which shows that 70 percent of small businesses believe it will have a negative impact, with 52 percent expecting to have to increase prices, 45 percent expecting a fall in turnover and 36 percent a fall in footfall.
The change is more significant for smaller shops like independent jewellers as they will be unable to absorb the increase in the way larger businesses can. On the high street, major retailers such as John Lewis, Marks and Spencer and Tesco are generally holding off passing on the tax rise – or at least the full 2.5 percent – as they wait to see what their competitors will do. Online retailer Amazon, meanwhile, added the full 2.5 percent increase with immediate effect.
The FSB has called on the chancellor to increase the threshold at which businesses pay VAT from £70,000 to £90,000 in order to alleviate the pressure on small firms, and also to commit to lowering the tax back to 17.5 percent once the deficit has been reduced.
John Walker, national chairman of the FSB, said: “Small businesses have had a tough time in 2010, especially towards the end of the year, when what should have been a very busy time as people make purchases before the VAT increase, but the busy Christmas period was hampered by heavy snowfall and severe weather.”
However, the government looks unlikely to heed the FSB’s call to make the tax rise temporary. Chancellor George Osborne told the Spectator magazine in December last year that: “The VAT rise is not temporary. It can’t be. We are talking about a totally different scale of revenue and the VAT rise is a structural change to the tax system to deal with a structural deficit.”