VAT rise will tighten screw on SMEs

Almost a third of small firms (30 per cent) will need extra funding to cope with the increase in VAT, according to research by British bank.

Some 35 per cent of small and medium-sized enterprises (SMEs) surveyed by the bank said that the VAT rise will strain their cashflow in 2011.

The bank said businesses usually have to pay VAT to HM Revenue & Customs before they have received payment from customers, meaning that the VAT rise will bite into their working capital, increasing the need for funding.

A spokesperson for the bank said: “The VAT rise will only add to the financial squeeze faced by many SMEs.

“A worryingly high percentage of SMEs say they will require additional funding but, with many of the big banks still reluctant to extend credit, the VAT rise could strain working capital to breaking point.”

The bank, which surveyed 292 SMEs for its study, stated that many firms are already being forced to wait months for bigger clients to pay invoices. The bank believes there is a risk that big businesses that buy services from small firms may try to mitigate the impact of the VAT rise by delaying the payment of invoices even longer. The VAT rise, therefore, may hit SMEs hardest.

Businesses will need to start paying their VAT bills at the new higher rate to HMRC at the end of February.

The spokesperson added: “Late payment of invoices is already a serious concern for many SMEs and the prime cause of their cashflow problems. The temptation for clients of SMEs to sit on invoices longer to shore up their own cashflow in response to the VAT rise will be difficult to resist.

“The public sector has made enormous efforts to keep payment days to its suppliers to an absolute minimum. Big businesses could do a lot more to alleviate pressure on their smaller suppliers by reducing the amount of time it takes to pay invoices.”

The bank says that the VAT rise comes at a time when many high street banks still have in place credit crunch era restrictions on lending – such as restrictions on unused overdraft facilities.

HMRC is also reported to have become more reluctant to allow businesses to roll over agreements to defer tax under its Time to Pay scheme.

The bank added: “The Time to Pay scheme has been a vital lifeline for struggling SMEs over the last two years but statistics suggest that HMRC has been refusing a slightly higher proportion of requests from businesses to defer tax payments.

“HMRC should consider whether its eligibility criteria for Time to Pay should temporarily be loosened in light of the VAT rise.”