The findings of last week’s Bank of England review suggest interest rates are likely to rise over the next 12 months which is particularly concerning for small business owners, still reeling from the recent increase in VAT.
Just weeks before the economic review, a study by Aldermore bank found almost 30% of small businesses will have to source additional funding to tackle the VAT hike.
The bank warned the tax rise will cause deficiencies in the working capital of most small businesses because they are obliged to pay HM Revenue & Customs (HMRC) before receiving payment from customers.
Chancellor of the Exchequer George Osborne’s VAT increase may be counter-productive because it will be a catalyst for growth in the alternative economy; the black market is going to swell.
In leisure companies such as nightclubs, pubs and wine bars, although most transactions are paid for with a credit or debit card, you’ll find that in order to reduce VAT liability, an increasing number of retailers will underreport cash sales.
Small business owners will be motivated to do more cash deals and many businesses whose income is predominantly cash-based will declare less to the taxman, so ultimately, it’s the taxman and Exchequer that lose out.
Shrinking the economy while simultaneously swelling the black market indirectly encourages dishonesty amongst small businesses, which can respond to the tax rise more easily than larger companies with shareholders and restrictive audit controls.
The net income of a small businesses owner and consequently their family can be greatly affected by a 2.5% increase in VAT, so they are the group most likely to find creative ways of avoiding the increase.
Although it remains unclear by how much interest rates will increase or whether Osborne’s tax hike will backfire, one thing is guaranteed: small business owners will have to be forward-thinking and innovative if they are going to survive.
*image via http://www.mirror.co.uk/