VAT changes another kick in the teeth for many small startup businesses

VAT changes announced yesterday by the government will actually result in many small businesses being worse off, not better.

Thousands of small businesses on the VAT flat rate scheme (FRS) pay a fixed rate of VAT to the Inland Revenue. In many cases, these rates have not dropped by the full 2.5% reduction and result in small businesses being worse off. This is the opposite of what the government says it’s trying to do.

For example, an innovative business in the IT sector has a handful of employees - before 1st December they charged customers 17.5% and paid the Inland Revenue 13% on the flat rate scheme. This was a 4.5% saving that helped the service industry compete with low cost competition from countries such as India. After 1st December the same company will charge customers 15% and pay the Inland Revenue 11.5%. The saving is now 3.5%. This is a reduction of 1% for small businesses at a time that the government is saying that it’s actually helping small businesses.