Wednesday, 5 January 2011

VAT do they think they are doing?

The recent decision to increase VAT from 17.5% to 20% is going to hit some sections of the social enterprise world harder than others - most likely those who can withstand it the least.

For example, those social enterprises who operate below the VAT threshold.  Most of what they buy is VATable, so they end up paying extra to deliver.  Okay, it's only 2.5% extra but think about it for a moment....if they are below the £70k turnover threshold then they may well be running on a shoestring to start with and they can't pass the extra VAT cost onto their customers.  Typically those social enterprises operating below the threshold often rely upon volunteer labour to subsidise (in-kind) the delivery of the social outcomes because they cannot afford to meet the full cost of delivery.    Some in the sector will say they don't deserve to survive but I believe some of these volunteer-led social enterprises deliver the most social benefit and are truer to the ethos that many who have grown so much that they seem to the outside onlooker a vehicle for self interest (e.g. job protection) above meeting declared social interest.  At times some in the sector focus so much on the "enterprise" element at all costs that the social element gets thrown out - like the baby thrown out with the bathwater, the cost that is cut is the reason the social enterprise started.

Then there are those micro-enterprises who are VAT registered but whose market is predominantly individuals - who are not VAT registered.  The enterprise's suppliers pass on the increase in VAT.  The enterprise's customers cannot reclaim the VAT increase, and as a small enterprise with already low margins they cannot afford to soak up the rise themselves (a strategy publicly adopted by the large high street players).  So their price goes up.  They are no longer able to compete and they lose trade, or they manage to compete but at the expense of the social outcomes....The logical conclusion is a "Survival of the Biggest Margins" or social enterprises becoming mainstream enterprises because they had to cut social impact to survive.

For the "big society" to work (that's another subject entirely!) there needs to be a third sector still standing to deliver when all the public services have disappeared.  This VAT increase could be the death knell for some of the sector who have been hanging on by their finger nails (following public spending cut backs resulting in greater competition for grants and public contracts or decimation of their customer base).  Business to business services may survive but that is only a small section of the economy.

This is all a bit grim. I'm not even proposing a solution, just venting my spleen.  A lot of people get paid a lot more than I do to solve these big solutions but it doesn't take away my right to comment while I focus on delivering the small solutions.

*This blog is a personal opinion and does not in any way reflect on any organisation with whom I am associated.