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Pushing up VAT threshold would boost employment

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Some 35,000 extra jobs could be created if the threshold at which small firms pay VAT is lifted, a leading business group has claimed.

A report from the Centre for Economics and Business Research, commissioned by the Federation of Small Businesses (FSB), has shown that increasing the VAT threshold to £90,000, from the current rate of £70,000, could save up to £162 million per year from the reduction in red tape surrounding VAT compliance.

It could also save just over £700 million in VAT payments.

The money, the FSB maintained, could help to establish 35,000 new jobs on an average wage of £25,400.

The business group argued that, while the Treasury would miss out on VAT income, the reduction would be more than compensated for by the potential £13 billion which will come from the increase in VAT to 20 per cent, due to come into force on 4 January 2011, and from the tax revenues generated by the additional jobs.

In the view of the FSB, an increase in the threshold would help to provide much needed cash-flow for small firms, allowing them to invest back into the business through lower prices or taking on more staff.

Unlike their larger counterparts, small firms are going to be hit hard by the 2.5 per cent rise in VAT because they will be unable to absorb the increase.

As a result, smaller businesses will have to pass the full cost on to customers, reduce stock levels or find savings elsewhere, potentially cutting employment, the FSB continued.

John Walker, the FSB’s national chairman, 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. 

“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.

“The potential loss to Government in VAT receipts by increasing the threshold to £90,000 would be more than outweighed by the VAT rise due to come into force in January and would help to put £900 million back into small firms with the potential to create up to 35,000 jobs.”