VAT increase will hit small businesses hardest

The increase in VAT announced in this week's emergency budget will hit smaller businesses especially hard, according to Devizes and Pewsey-based chartered accountants Charlton Baker.

Scott Sartin, a director in the firm, said smaller companies selling goods and services to the public would have to think hard about whether to pass on the increase to customers, making their tariffs less competitive than larger rivals who could more easily absorb the rise, or to swallow the increase into their own operating margins. 

He said the rise in VAT from 17.5 percent to 20 percent on January 4, 2011 could "create casualties in the new year", and for many firms might offset any gains made in personal and business tax incentives. 

Plumbing and heating company Moore of Devizes Ltd was one of the firms being helped to understand the implications of the budget announcement by Charlton Baker's team of specialists on Tuesday. 

Les Moore, who employs five engineers, said: "Between 35 and 40 percent of my customers have to pay VAT on materials and labour, and this increase might make them think twice about having a new bathroom or heating system installed.

"Margins are tight and it would be difficult for us to absorb the increase - we are going to have to pass it on to the customer. It might create a rush of orders before Christmas, but January is always a quiet time for us, and this won't help."

Meanwhile in Pewsey, Charlton Baker were helping Andy Watson, a financial advisor whose business is VAT exempt, make sense of the budget announcement. 

"The reduction in corporation tax to 20 percent and the raising of the income tax threshold will both make me better off," said Andy.

But the increase in VAT, which I can't claim back, means I'll be paying more on my office rent, mobile phone bills and equipment costs. I'll probably lose most of the gains to VAT."

Aside from the VAT increases, there were pieces of good news for the business community, although large companies stood to gain more than smaller firms.

The increase by £21 a week from April 2011 in the secondary threshold of National Insurance - the point at which businesses start to contribute - will result in a saving per employee earning above £20,000 per annum of £151 each year.

However, the budget announcement did not include a full reversal of the national insurance increases initiated by the previous administration, the so-called 'tax on jobs'. 

Employees considering or already making personal pension contributions, advised Mr Sartin, should contact Charlton Baker's financial planning experts to discuss the advantages of a salary sacrifice scheme.

And whilst the reduction in the rate of corporation tax was welcomed, big business once again stands to benefit most, said Mr Sartin.

The main rate of corporation tax will be reduced to 27 percent in the year commencing April 1, 2011, coming down again to 24 percent over the following three years in a bid to attract foreign companies to UK soil.

The small profits rate of corporation tax, meanwhile, will be 20 percent from 2011. The previous government had proposed an increase from the current 21 percent to 22 percent.

"I am sure that most small business owners will agree that there is not a large enough disparity between the rate of tax set to be paid by large corporates and the rate payable by small businesses," said Mr Sartin.

"And while corporation tax might be coming down, any benefit might be offset by the reduction in capital allowances, the set rates that a business can claim against profits for wear and tear on fixed assets like plant and machinery."

One piece of good news for the county was the announcement of a national insurance contribution holiday of up to £50,000 for new businesses starting up outside the south east of England.

Charlton Baker's business and corporate advisory director, Philip Evans, commented, "People who have considered starting businesses in Hampshire or Berkshire, which are in the south east, might be better off setting up in neighbouring Wiltshire, which will form part of the south west region for this scheme".

Proprietors and directors of businesses who require advice on efficient profit extraction and wealth management can contact Charlton Baker on 01672 563061, or via the website at www.charltonbaker.co.uk