VAT killing small businesses

The government’s shift towards collecting more taxes through VAT, rather than corporation tax, is creating significant cashflow difficulties for small businesses, according to research by independent finance provider Syscap report Harris & Co accountants Northampton, the specialist Northampton small business accountant.

Syscap’s research shows the tax taken through VAT has broken through the £100bn barrier for the first time, with HMRC"s revenue from VAT payments increasing by 6% in the year ending 30 November 2013, reaching a new high of £103.8bn, compared to £98.2bn a year earlier. It says that an increasing number of SMEs are getting into trouble with HMRC for late payment of VAT, because they themselves are kept waiting for payments from larger businesses.

Whilst the total amount of tax taken through corporation tax has fallen by 12% over the last five years to £41bn, tax paid through VAT has risen by 19% during the same period. Total tax taken over the same period is up by just 1.3%.

Philip White, CEO of Syscap said:

‘Small businesses run a tight ship. Having to find the money for substantial VAT payments whilst their clients have yet to pay them for their work is forcing many businesses into a tight corner. With the VAT rate at its highest level of 20% and banks unwilling to lend to SMEs, the funds they might need to pay a VAT shortfall has made the quarterly VAT payment deadline a real worry.’

The Professional Contractors Group (PCG) says the research shows big companies are taking advantage of smaller businesses because of what it calls late payment ‘double standards’.

Simon McVicker, PCG director of policy and public affairs, claimed there was ‘one rule for big business and another for the smallest’, saying that the cashflow issues for small business who had to pay VAT before receiving payment from the client are being made worse by a lack of control around bigger businesses paying late.

McVicker said:

‘The issue of late payment needs to be at the top of the political agenda, especially when small businesses are being put under so much added pressure. The government’s Prompt Payment Scheme is a step in the right direction, but in its current, voluntary form it is completely ineffectual.’

The PCG is calling for the scheme to be compulsory for all large organisations, including those in the public sector.

He continued:

‘The current situation is seeing small businesses squeezed from all sides for money. If we want them to thrive, we need to stop using them as an easy source of credit for big business who withhold payment for months at a time and start giving them the fair and equal standing they deserve.’

A HMRC spokesperson said:

‘HMRC aims to help small businesses in a variety of ways. Businesses with a turnover of up to £1.35m can use the VAT cash accounting scheme. Using cash accounting allows businesses to pay VAT on sales once they have been paid themselves.’