Small business expects to bear brunt of VAT rising to 20 per cent

Smaller companies facing a disproportionate hit from today's VAT increase are warning the Government to look elsewhere for the growth needed to pull the economy out of recession.

More than 70 per cent of firms surveyed by the Federation of Small Businesses (FSB) expect to be hurt when VAT rises by 2.5 per cent to 20 per cent today.

The measure will net the Treasury more than £12bn per year. But unless the Government raises the threshold at which companies have to register for VAT, private-sector growth cannot be relied upon to take up the slack from looming public spending cuts, they believe. "If the Government truly believes that the private sector is going to strengthen the recovery we need to see action," said John Walker, the national chairman of the FSB.

Economists are widely predicting that the new VAT rate will affect growth. Shops are particularly exposed. Retailers are already feeling the pinch from the pre-Christmas cold snap, with discounting set to continue into the new year as rivals fight to make up for lost ground. But price rises cannot be avoided forever.

One high street bellwether, John Lewis, has pledged to keep prices down for the duration of its sales, but some increases must come. Nat Wakely, the director of selling operations, said: "We have seen a previous VAT rise as well as import prices going up. So although we have absorbed a great deal of these costs, some prices will increase."

Among car retailers, the "pull forward" as customers rushed to buy before the VAT rise was felt only at the top end of the market, said Trevor Finn, chief executive of Pendragon, which owns Stratstone and Evans Halshaw. And makers of mass-market cars are likely to hold prices flat, offsetting the costs against currency fluctuations.

"If you're buying an Aston Martin the impact will be visible, but if you're spending £10,000 on a Ford Focus, the price will be the same because of discounting," he said.