SMEs count cost of VAT hangover

We know businesses weren't looking forward to the VAT rise - but how are they coping now the big day has passed?

by Emma Haslett
Last Updated: 06 Nov 2012
Given the effect of the cold snap on retailers, the timing of Tuesday’s 2.5% VAT rise left a lot to be desired. And businesses weren’t happy: indeed, a survey by the Federation of Small Businesses showed that more than 70% were expecting the rise to have a ‘negative impact’ on their business, while just over half said they’re going to have to increase prices.

It’s not just consumers who are going to be absorbing the cost of the rise, though: 45% of businesses said they’re expecting a drop in turnover, and just over a third said they are expecting to see a drop in customer numbers. Ouch. But while the eggheads at small business organisations compile the stats, how’s it affecting businesses at ground-level?

Jo Behari, who runs Home Jane, a professional handywomen service which includes plumbers, carpenters and builders, is one of the entrepreneurs feeling the pinch. As a VAT-registered business dealing with domestic customers, Home Jane is finding it tough to compete with one-man-bands who aren’t big enough to charge the extra VAT. ‘We were already 17.5% more expensive than competitors – but the effect of the rise will be that we’ll have to increase our level of customer service to justify a price rise which isn’t even our fault. Our domestic customers don’t get that, though – they just see us as having raised prices.’ The result? ‘We’re either going to have to grow, or shrink.’

The other cost for Behari and her team is time. Because some of the work Home Jane has done has spanned the two VAT levels, invoicing is likely to prove more complicated – and thus, slower. And, as they say in the movies, time is money – so while Behari attempts to figure our which work was carried out before January 4 and price it accordingly, the money that should be accumulating interest in her bank account lies determinedly out of her reach.

Other entrepreneurs are taking a different approach. David Hathiramani, of online tailoring firm, says his company has chosen to absorb the increased costs, and instead focus on adding value. ‘We’ve kept our prices exactly the same, but we’re using the opportunity of the rise to broaden our range, adding luxury fabrics and things like that.’ Hathiramani says that hopefully, the extra profits generated by a premium line should help the company to absorb the cost without raising the prices of any existing products.

But despite their qualms, both entrepreneurs recognise that something had to give. ‘There’s nothing we can do about it,’ says Behari. ‘We’re in a bad situation, but wherever the Government tries to raise money – whether it’s taxing the rich or raising university fees – nobody likes it. So in a way, it’s a fair tax in the sense that everyone gets a share of it’. Hathiramani agrees: ‘I think everyone recognises that something needs to change. What businesses need to do is concentrate on the value of their own offering and maximising their presence in the marketplace.’

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