Call for Budget to 'review' flat rate VAT

The government has been urged to look at the issue of flat rate VAT charges in the forthcoming Budget.

According to research carried out by the Federation of Small Businesses (FSB), almost half of all business sectors (48 per cent) have experienced an increase in the level of flat rate VAT they pay.

The business group, in its submission to the Chancellor ahead of the Budget, has called for a review of the rates.

Using the flat rate scheme, firms pay the tax as a fixed percentage of their VAT inclusive turnover, with the actual percentage determined by the sector in which the businesses operate.

The scheme applies to smaller firms with a turnover of less than £150,000 and its purpose is to reduce the administrative burden of handling VAT.

However, the FSB's study revealed that businesses in the agricultural services sector have seen rates increase by a 2.5 per cent.

For grocers, newsagents, tobacconists and membership organisations rates have risen by 1.5 per cent as have those for businesses involved in social work.

As a result, the FSB wants the Chancellor to instigate a review of the scheme.

John Wright, the FSB's national chairman, 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."

Mr Wright added: "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 firm's overall profitability, and that there needs to be more openness in how these rates are calculated and when they rise. The Budget is the government's chance to put flat rates back to 2008-levels and remove the additional tax burden imposed on small businesses."

Also in its Budget submission, the FSB recommended a complete freeze on NIC rises and a reverse of government plans to increase employers' NICs in 2011.

In addition, the FSB's wish-list included raising the level at which businesses have to register for VAT; a standardising of personal allowances for all forms of NI and income tax; a cancellation of the planned 1 per cent rise in corporation tax in 2011, and better tax guidance for start-up businesses and new employers.