Too little too late for many small and medium sized enterprises
(SMEs)
The Chancellor's announcement on initiatives to help small and
medium enterprises (SMEs) by putting in place measures to tide
businesses over during the forthcoming recession comes at a time
when many business owners have no other viable option, says leading
business and financial adviser, Grant Thornton.
Recent Government insolvency statistics has shown that 1007
companies in England and Wales were put into administration in the
last quarter from July to the end of September*. Receivership
appointments went up a staggering 238 per cent compared with the
same period last year, jumping from 80 in Q3 2007 to 270 in Q3
2008.
Stephen Quest, corporate tax partner at Grant Thornton says,
"Having failed to bind the banks into supporting UK business as a
condition of the recent bailout, Alistair Darling had no choice but
to provide SMEs with some tax give-aways in the Pre-Budget
Report. Unfortunately, for many the help is too little too
late and may not prevent banks from enforcing debt obligations in a
dismal market."
Reduction in VAT will have winners and losers
Lorraine Parkin, head of VAT at Grant Thornton says, "The
Chancellor's decision to reduce the current standard rate of VAT ,
aimed at kick starting the economy, will have winners and losers
amongst small to medium businesses."
"The winners will be those businesses that cannot fully reclaim
VAT, such as the Independent Financial Advisor, who should see a
reduction in the costs of running his business."
"However, for many a reduction in the current rate of 17.5 per
cent to 15 per cent could create a cash flow disadvantage for
businesses who collect their debts promptly. They will have less
money on deposit in their accounts to use as working capital before
the VAT is paid over to HMRC on a quarterly basis."
"As the change takes effect on 1 December 2008, this could be a
horrendous weekend for retailers, as consumers delay buying
goods. Furthermore, the new VAT rate leaves businesses with
little time to amend accounting systems and to re-price goods and
services. This could be particularly problematic in the
hospitality sector restaurants, for example, will have to update
their menus to reflect the change and customers will be able to ask
for a refund of 2.5% where deposits may have been taken for
Christmas events, prior to the rate change, but the service
will be provided post the rate change."
"In summary the reduction in VAT, could certainly provide a
quick boost to the economy –if it is passed on to the consumer
(like the base rate changes, it doesn’t work otherwise) but it is
more likely to be a significant administrative cost and cashflow
disadvantage for many businesses, out weighing the benefit it was
designed to provide," says Parkin.