VAT: SMEs preparing to take a hit on profits despite strongest quarter for over three years
Sales up 20% on last year, but fears about consumer demand force SMEs to absorb VAT hike
With the Government’s deficit-busting 2.5% VAT hike now imminent, worries about consumer demand will force many SMEs to absorb the cost of the rise and take a hit on their profits, according to eBay, home to more than 160,000 businesses. The worrying finding comes despite new figures showing that online SMEs have experienced the strongest quarter in over three years, with sales up 20% compared to the same period in 2009.
eBay’s Online Business Index, a regular barometer of the attitudes and performance of more than 600 VAT-registered business, found that nearly a quarter (24%) of online businesses will absorb the whole cost of the VAT hike to avoid stunting consumer demand, while a further 39% will avoid passing on the whole cost. Only a quarter (23%) intend to pass on the full cost of the rise to their customers.
The digital economy plays an increasingly important contribution to the UK’s economic recovery. In the final quarter of 2010 (1st October to 21st December inclusive) eBay has seen an 11% increase in the number of registered businesses compared to the same period in 2009, itself a 6% increase on 2008. SMEs operating on the site have enjoyed the busiest quarter in more than 3 years, with sales up 20% on the final quarter of 2009.
However, despite buoyant sales, the timing of the VAT rise could be problematic for these thriving businesses as research shows that half of online SMEs believe that the VAT rise will harm their revenues next year. Businesses are also convinced that the VAT rise will damage the wider economy, with 63% harbouring fears that it will depress consumer demand.
Jody Ford, eBay UK’s Director of SME Businesses commented:
“Our latest figures reveal that online businesses are continuing to thrive. However, the VAT rise is set to hit at the busiest time of year for our businesses, with January on average 10% busier for online firms than a typical month. Every business owner, including the 160,000 who make their living on our site, face a difficult dilemma over whether to pass on the imminent VAT rise to their customers. The fact that more than 60% of businesses intend to absorb all or part of the VAT hike reveals the real concerns they have about its impact on consumer confidence.”
Commenting on the research, Martin Dane, Tax Principal at BDO, offers three top tips for SMEs to consider when preparing for the VAT rise:
- Watch your competitors closely – track your direct competitors activity and adapt your strategy according to the market
- Take into careful consideration that the cost of the goods you source may also fluctuate due to the increase and this needs to be built into your pricing strategy
- Be realistic – make a calculated decision on whether taking a profit hit would mean maintaining sales and therefore securing longevity, or whether passing the rise onto consumers would mean you sell less volume but maintain profits
Martin Dane said:
“The reality is that for a cash-strapped Government, the VAT hike is an easy win and for most consumers the additional VAT charge is actually very small, but from the point of view of SMEs it will lead to a significantly larger monthly or quarterly VAT bill and a potentially damaging loss of profit. It is essential that they act now and determine a strategy to protect their business”.
Methodology for Online Business Index
· The Online Business Index is eBay’s regular barometer tracking the performance of companies trading on the internet, mapping the attitudes of hundreds of online firms operating on eBay.
· It is based on a major survey of 605 online retailers.
· The survey was conducted by independent research consultancy FreshMinds, using seller information provided by eBay. Survey fieldwork was carried out online between 1th and 22nd September 2010.
· Previous surveys were conducted in January, April and September 2009 and January 2010
· On average, the businesses covered obtained 61% of their income from eBay, and 39% from other websites, including 7% from Amazon.
· All survey respondents are registered as businesses on the eBay site and have an annual turnover of at least £68,000 on eBay alone, excluding other sources of income. The largest group of respondents (33%) were small businesses with a turnover between £100,000 and £199,000. A quarter of the respondents have a turnover of over £500,000.
· All figures in this report have been rounded to the nearest percentage point. As a result, figures may not always add up to 100%.