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20 per cent VAT rise to squeeze profits

Small businesses are focusing on ramping up sales and marketing rather than raising prices in preparation for next year's VAT hike.

On January 4th, the UK's VAT rate will rise from 17.5 per cent to 20 per cent, bringing the UK more in line with other European nations such as France (19.6 per cent), and Italy (20 per cent).

Jat Mann, managing director of computer repair company PC Pal, will not be increasing prices to compensate for the hike.

He says, 'Businesses should swallow the rise themselves and not increase the cost to end users. We're going to overcome the effect of the rise simply by focusing on increasing sales.'

Stuart Burlton, COO of organic beauty products retailer So Organic, comments: 'Because it's a rise nationwide this will affect all companies equally. People have known about this for quite some time so they'll accept when the prices do go up across the board. We are looking at ramping up our marketing to counter the situation.'

However, David Hunter of business advisory firm The Bowden Group warns that not passing on costs to customers could be dangerous.

He says: 'People feel that increasing their prices by a penny or two appears mean in the eyes of customers so they simply do not do it. That might work one year, but if they adopt the same attitude year on year it will chip away at profits and make their business unsustainable.' 

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