More than 70% of SMEs expect yesterday's VAT rise to have a negative impact on their business, says a new member survey from the Federation of Small Businesses.
The 'Voice of Small Business' panel survey shows that 71% of the 1,600 respondents expect the rise to be unbeneficial to their business, while 52% expect to increase prices, 45% expect a fall in turnover and 36% expect a loss of customers as a result.

While the Chancellor has said the rise is here to stay, the FSB is urging the Government to review the increase when the deficit has been significantly reduced and to return it to 17.5%.

The organisation is also calling on the Government to help alleviate the strains on hard-hit firms' cash flow by increasing the threshold at which they begin to pay VAT from the current rate of £70,000 to £90,000.

According to the FSB, this has the potential to create up to 35,000 jobs and help small businesses that will struggle to absorb the increase.

FSB national chairman John Walker said: "If the Government truly believes that the private sector is going to strengthen the recovery we need to see action. Increasing the threshold at which companies have to register for VAT will put almost £900m back in the pockets of small businesses. Without this small firms will struggle to bounce back as the spending cuts start to bite."

Speaking ahead of the rise on January 4, the British Retail Consortium said that, while retailers may be able to absorb the extra cost for a time, the VAT increase would filter through to prices and play a part in undermining retail sales as the year continues.

British retail economist Richard Lim said: "With the weather and weak consumer confidence undermining the sector's performance in the run up to Christmas, retailers are discounting in a big way now to make up for missed sales. That may mean the impact of the VAT rise is lost among promotional price cuts. But retailers can't absorb the cost indefinitely. In time, the VAT increase will push inflation up and - along with National Insurance rises and public sector job losses - harm sales as the year continues."

In a statement released on December 31, the Confederation of British Industry's director-general Richard Lambert predicted that, while the pace of economic recovery could slow in the first few months of 2011, growth in private sector investment and trade would start to pick up in the second half of the year, and continue into 2012.

According to the latest CBI forecasts, this would bring GDP growth of 2% in 2011 and 2.4% the year after.

The CBI says it is not expecting a double-dip recession and forecasts that overall employment at the end of 2012 will be higher than it is today, with private sector growth offsetting public sector job losses.

Mr Lambert concluded: "It all comes down to confidence. Of course there are lots of risks and uncertainties ahead, especially in the next few months. But with company balance sheets in reasonable shape and interest rates staying low, 2011 could also be a year of opportunity."