A "dramatic" fall in business confidence has prompted the Federation of Small Businesses (FSB) to call for a five percentage point cut in the rate of VAT for certain sectors of the economy, including hospitality.
The FSB said it wanted the Government to follow the lead of other European countries and cut VAT in tourism and construction to 5% for a year to give the economy a boost.
The Federation said consumer demand was a "large barrier" to economic growth, so a VAT cut would encourage people to spend.
The call comes after FSB figures showed that businesses were less confident in the second quarter of 2011 than they were at the start of the year, according to the FSB's "Voice of Small Business" index. The index fell sharply over the period from +6.7 at the start of the year to +0.3 now.
Worringly, the FSB also found that confidence among hotels, restaurants and bars, key to economic growth, fell by nine points from +13 to +4 in the first quarter and construction only rose by one point to +3 in the second quarter.
The FSB said evidence from other EU countries showed that any lost revenue to the Exchequer by making VAT cuts will be met by earnings from additional demand, jobs, and wider economic activity.
John Walker, national chairman of the Federation of Small Businesses, said: "The economy is still in a fragile state and these figures clearly show that the Government's growth strategy is just not working. 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. We must see a cut in VAT to 5% in the construction and tourism sectors to boost consumer demand. It is tangible measures like this that will actually help small businesses to be able to grow their businesses and grow the economy."
UFI IBRAHIM BACKS ‘SLASH VAT, BOOST BUSINESS' CAMPAIGN
British Hospitality Association chief executive Ufi Ibrahim has added her voice to the growing calls for a reduction in VAT for hospitality. Speaking in support of Caterer's Slash VAT campaign she said:
"The BHA welcomes Caterer's campaign to reduce VAT on accommodation. This media campaign will benefit us all by raising awareness of the uncompetitive rates of UK accommodation, attractions and restaurant establishments compared with our main European rivals. Caterer
"These ongoing discussions with Treasury are underpinned by a comprehensive study commissioned by the Bourne Leisure Group and Merlin Entertainments, and produced by Deloitte. This research, which includes case studies and comparatives with our EU rivals, provides the BHA and our members with the firm evidence needed to champion a VAT rate reduction.
"We look forward to the outputs of the Caterer campaign and we welcome the potential impact it will have on enhancing our efforts at the BHA.
We urge everyone to play an active role with the Caterer and the BHA in order to ensure that we have a level playing field on VAT, so that UK tourism can compete effectively with other EU member states."
THE CASE FOR 5%
Research in France, where VAT on tourism businesses was cut in July 2010 from 19.6% to 5.5%, showed a positive impact on the French economy. According to a recent study, the French experiment was found to have boosted the tourism and leisure sector and cut VAT fraud by 74%, increasing tax receipts from the black economy.
<span class="Á"noindexÁ"">By Neil Gerrard
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