The FSB said that increasing the VAT threshold to £90,000 from the current rate of £70,000 could save small firms up to £162m a year in VAT compliance and over £700m in VAT payments.
It said the move had the potential to create up to 35,000 jobs.
The FSB acknowledged that increasing the VAT threshold would affect the amount of money the Treasury received in VAT receipts, but maintained it would be offset by the potential £13bn coming from the increase in VAT to 20%. This is due to come into force on 4 January 2011.
John Walker, national chairman of the FSB, said: “The smaller the business, the higher the cost of VAT compliance; this is why the FSB is calling for the government to increase the threshold at which a business must register for VAT.”
Walker suggested that an increase in threshold would help small businesses’ cash flow and allow them to invest back into the business through lower prices or taking on more staff.
The FSB said that small firms will be hit hardest by the 2.5% rise in VAT and are expected to make up additional funds by passing the full cost on to customers, reducing stock levels or cutting jobs.
The FSB report showed that 10.4% of firms expect to cut employment over the final quarter of the year, as business confidence in future prospects and revenue growth weakened over the July to September period.
Walker called for the government to introduce a Small Business Programme to help smaller firms when the VAT hike comes into force.
He said: “If the government is truly committed to a private sector led recovery, then it must implement a Small Business Programme for Growth to allow small firms to grow and invest – and this would be a great start.”
