Up to 35,000 new jobs could be created if the threshold at which small firms start to pay VAT was increased, according to the Federation of Small Businesses (FSB).
An FSB-commissioned report by the Centre for Economics and Business Research shows 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, as well as saving just over 700m in VAT payments.
This money could then be used to create up to 35,000 jobs if on an average wage, said the FSB.
While this will affect the amount of money the Treasury receives in VAT receipts, it will be more than offset by the potential 13bn which will come from the increase in VAT to 20 per cent, due to come into force on January 4 as well as revenue from the jobs created, according to the group.
For a small firm, the FSB said an increase in the threshold would help to provide much needed cash-flow, allowing them to invest back into the business through lower prices or taking on more staff.
Small firms will be hit hard by the 2.5 per cent rise in VAT as unlike big businesses, they can't absorb the increase, said the FSB. This will mean that small firms will have to pass the full cost on to customers, reduce stock levels or find cost savings elsewhere – potentially costing jobs and undermining the Government's private sector-led recovery.
Gordon Millward, regional 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 programme to allow small firms to grow and invest – and this would be a great start." He said the potential loss to HMRC in VAT receipts would be more than offset by the incoming VAT rise.
The FSB has more than 210,000 members across the UK.