FSB News Release
PR 2010 11

Issue Date: Thursday 4 March 2010

Government stealth tax on small businesses discovered by FSB

The FSB has discovered that 48 per cent of business sectors have seen a rise in the level of flat rate VAT they pay

The Federation of Small Businesses (FSB) has discovered that the flat rate VAT charged by HMRC to the smallest of businesses has risen to a higher level and the FSB has urged the Government to review the issue in its Budget submission to the Chancellor this week.

Flat rate VAT is charged to the smallest businesses with a turnover of less than £150,000 and aims to minimise the red tape around administering VAT providing a slightly lower rate which varies dependent on the sector the business operates in.

FSB analysis of the rates has found that businesses operating within the agricultural services sector have seen rates increase by a huge 2.5 per cent. For grocers, newsagents, tobacconists, clothing shops and membership organisations rates have risen by 1.5 per cent as have those for businesses involved in social work.

At the other end of the scale, estate agency and property management services will see their rate decrease by 0.5 per cent and computer repair services by 1.5 per cent.

In its Budget submission, sent to the Treasury this week, the FSB has called for the flat rate VAT to be immediately reviewed.

Other key asks in the submission included:

• A complete freeze on National Insurance Contribution (NIC) rises, and a reverse on the Government's plan to increase employers' NICs in 2011

• An immediate reform of the tax system:

o Raising the level at which businesses have to register for VAT
o Standardising personal allowances for all forms of NI and income tax
o Improving tax guidance for start-up businesses and new employers

• Cancellation of the planned one per cent rise in corporation tax in 2011

John Wright, National Chairman of the Federation of Small Businesses, said:

"When VAT was lowered in December 2008 many rates stayed the same and some were reduced by up to 2.5 per cent. What has become apparent is that after VAT was put back to 17.5 per cent in January this year, nearly half of the flat rate schemes have seen the VAT level rise above the pre-decrease level. 

"While a few sectors have seen a decrease, the majority of businesses will see their rates rise, which is unacceptable at a time when cash-flow is limited. The FSB believes that this is a stealth tax, which will affect a firms overall profitability, deliberately directed at small businesses during the recession. The FSB believes there needs to be more openness in how these rates are calculated and when they rise.

"The Budget is the Governments chance to put flat rates back to 2008-levels and remove the additional tax burden imposed on small businesses."

Ends

Notes to Editors

1. The FSB is Britain's leading business organisation with over 213,000 members. It exists to protect and promote the interests of the self-employed, and all those who run their own business. More information is available at www.fsb.org.uk

2. Using standard VAT accounting, the VAT you pay to, or claim back from HM Revenue & Customs (HMRC) is the difference between the VAT you charge your customers and the VAT you pay on your purchases. Using the Flat Rate Scheme you pay VAT as a fixed percentage of your VAT inclusive turnover. The actual percentage you use depends on your type of business. For more visit http://www.hmrc.gov.uk/vat/start/schemes/flat-rate.htm

3. To read the FSB's full budget submission, and a summary of the FSB's top asks, visit www.fsb.org.uk

• Employers' National Insurance Contributions (NICs) are a tax on employment. The Chancellor's suggestion that a National Insurance rise is a fairer way to distribute taxes does not take into account the affect this has on employers' decisions about staffing levels. Fifty-eight per cent of FSB members already feel that the UK tax system has a negative impact on their ability to grow; increasing NI levels further will only exacerbate that effect.  Research undertaken by the FSB and the Centre for Economics and Business Research (CEBR) suggested that a one per cent rise in National Insurance would cost the UK 57,000 jobs. The FSB urges the Government not to go ahead with the planned increase of employers' NICS in 2011.

• The CEBR report commissioned by the FSB shows that corporation tax has a negative impact on small business investment; therefore corporation tax increases would have a strong negative impact on the economy.  The FSB therefore urges the Government not to go ahead with the proposed increase in April 2010.

• It is time for a radical overhaul of the UK's tax system. 75 per cent of respondents to an FSB-ICM survey said that simplifying the tax system would have a positive impact on their ability to grow. The current complexity in the UK tax system allows some businesses to exploit the system and use loopholes to avoid tax. For small businesses, the tax system demands expensive professional support in order to meet minimum requirements.   The Government should be looking at:

o Raising the level at which businesses have to register for VAT.
o Standardising Personal Allowances for all forms of NI and income tax.
o Improving the tax guidance for start-up businesses and new employers.

Media Contacts:

Stephen Alambritis: 020 7592 8112 / 07788 422155
Sophie Kummer: 020 7592 8128 / 07917 628998 sophie.kummer@fsb.org.uk 
Prue Watson: 020 7592 8121 / 07825 125695 prue.watson@fsb.org.uk  
Sara Lee: 020 7592 8113 / 07595 067068 sara.lee@fsb.org.uk  
 

Flat Rate Scheme percentage rates

*'Labour-only building or construction services' means building or construction services where the value of materials supplied is less than 10 per cent of relevant turnover from such services; any other building or construction services are 'general building or construction services'