The Federation of Small Businesses has revealed that the flat rate VAT charged by HMRC to the smallest businesses has crept to higher levels in certain sectors, and has urged the Government to review the issue in a Budget submission to the Chancellor this week.

Flat rate VAT is available for businesses with a turnover of less than GBP150,000 and aims to minimise the red tape around administering VAT, by providing a slightly lower rate, which varies dependent on the sector the business operates in.

The FSB announced that a recent analysis of the rates has found that, following a reassessment of the rates which coincided with the return of the standard VAT rate to 17.5%, businesses operating within the agricultural services sector have seen their flat rate increase by 2.5%, a jump the Federation condemned as "huge".

For grocers, newsagents, tobacconists, clothing shops and membership organisations, rates have reportedly risen by 1.5%, as have those for businesses involved in social work.

At the other end of the scale, estate agency and property management services have apparently seen decreases, as have small businesses providing computer repair services.

In its Budget submission, sent to the Treasury this week, the FSB has called for the flat rate VAT system to be immediately reviewed.

Other key requests in the submission included:

• A complete freeze on National Insurance Contribution (NIC) rises, and a reverse on the Government's plan to increase employers' NICs in 2011;
• An immediate reform of the tax system: Raising the level at which businesses have to register for VAT; standardising personal allowances for all forms of NI and income tax; and improving tax guidance for start-up businesses and new employers; and
• Cancellation of the planned 1% rise in corporation tax in 2011

John Wright, National Chairman of the Federation of Small Businesses, argued that:

"When VAT was lowered in December 2008 many rates stayed the same and some were reduced by up to 2.5%. What has become apparent is that after VAT was put back to 17.5% in January this year, nearly half of the flat rate schemes have seen the VAT level rise above the pre-decrease level."

"While a few sectors have seen a decrease, the majority of businesses will see their rates rise, which is unacceptable at a time when cash-flow is limited."

He continued: "The FSB believes that this is a stealth tax, which will affect a firms overall profitability, deliberately directed at small businesses during the recession. The FSB believes there needs to be more openness in how these rates are calculated and when they rise."

"The Budget is the Government's chance to put flat rates back to 2008-levels and remove the additional tax burden imposed on small businesses."

Under the standard VAT system, the VAT amount payable to HMRC or claimed back from them is the difference between the VAT charged to customers and the VAT that the business pays on its purchases. Under the Flat Rate Scheme the small business pays VAT as a fixed percentage of VAT inclusive turnover, with the percentage payable varying according to the type of business.

The scheme, as previously stated, is available for businesses with estimated VAT taxable turnover of less than GBP150,000, although once participating in the scheme, companies can stay in it until their total business income is more than GBP225,000.

Generally, however, VAT paid on purchases cannot be reclaimed (with the possible exception of VAT on capital assets worth more than GBP2,000).