The FSB’s has called for VAT cuts in light of the latest survey of business confidence, 1,600 small firms across the UK took part, and revealed that business confidence has suffered a severe dent among smaller firms.

The Federation of Small Businesses (FSB) has called for specific cuts in VAT rates to support confidence in key areas of the economy. The FSB's latest survey of business confidence indicated that optimism about the future has suffered a severe dent among smaller firms, a situation not helped by the hike in VAT to 20 per cent.

Figures show that businesses were less confident in the second quarter of 2011 than they were at the start of the year, with the FSB 'Voice of Small Business' Index tumbling by 6.4 points in the first quarter from +6.7 to +0.3.

The survey took in the views of 1,600 small firms across the UK and revealed that confidence dipped in 13 of the 18 sectors monitored by the index. Evidence from other EU countries has demonstrated that any revenues lost to the public purse through VAT cuts are offset by earnings from additional demand, new jobs and the wider economic activity. 

John Walker, the FSB's National Chairman, said: "In an economy characterised by high unemployment and muted demand, more needs to be done to encourage businesses to take on staff and grow their business so that the recovery can really get back on track. Since the start of 2010, the FSB Index has proved to be a good barometer of the path that economic growth will take, so the news that it has fallen back to almost zero paints a very worrying picture for GDP. We now need the Government's actions to match its rhetoric, and it must finally deliver on actions in its growth strategy."

However, a Treasury spokesperson countered by saying that the advantages gained by specific business sectors would completely fail to balance the overall adverse effects of any large-scale reduction in the VAT take. The Treasury commented: "Reduced VAT rates of the kind suggested would make a significant impact on revenue.” The VAT rise from 17.5 per cent to 20 per cent forms a key pillar in the government's efforts to reduce the budget deficit.

The 20 per cent level of tax is expected to generate an extra £12 billion for the Treasury this year.