VAT was increased from 17.5% to 20% on January 4 2011.
35% of SMEs surveyed said that the VAT rise will strain their cashflow.
Aldermore explains that businesses usually have to pay VAT to HM Revenue & Customs before they have received payment from customers.** This means that the VAT rise will bite into their working capital, increasing the need for funding to SMEs.
Philip Monks, Chief Executive of Aldermore, comments: "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."
Aldermore says that many SMEs are already being forced to wait months for bigger clients to pay invoices. There is the risk that big businesses that purchase from SMEs may try to mitigate the impact of the VAT rise by delaying the payment of invoices even longer. So the VAT rise may hit SMEs hardest.
Aldermore says that this is particularly unfortunate as Bank of England surveys consistently show that smaller businesses are finding it far harder to obtain credit than larger companies.
Businesses will need to start paying their VAT bills at the new higher rate to HMRC at the end of February.
Philip Monks says: "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."
Aldermore 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.
Philip Monks adds: "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."
*Research conducted amongst 292 SMEs
** VAT is payable on invoices issued and not payments received from clients.
SMEs using standard VAT accounting must complete four VAT returns each year, even if a client has not paid its invoice for several months the VAT return to HMRC will still need to be paid.
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Nick Mattison or Sarah Forsey
Mattison Public Relations
Tel: 020 7645 3636
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