More than 70 per cent of small businesses expect last week’s VAT rise to have a negative impact on their business, according to a member survey by the Federation of Small Businesses (FSB).

As the VAT rise to 20 per cent hits, an FSB ‘Voice of Small Business’ panel survey showed that just under three quarters of the 1,600 respondents expect the rise to cause disbenefit to their business.

More than half expect to increase prices, 45 per cent expect a fall in turnover, and 36 per cent expect a loss of customers as a result.

FSB Huntingdonshire chairman Malcolm Lyons said: “Small businesses have had a tough time in 2010, especially towards the end of the year. What should have been a very busy time, as people made purchases for Christmas and before the VAT increase, was hampered by heavy snowfall and severe weather.

“These figures show that half of respondents are going to have to increase prices as a result and 45 per cent think it’s going to decrease their turnover – neither of which will help small firms take on more staff.

“If the Government truly believes that the private sector is going to strengthen the recovery, we need to see action. Increasing the threshold at which companies have to register for VAT will put almost £900million back in the pockets of small businesses. Without this small firms will struggle to bounce back as the spending cuts start to bite.”

The Chancellor, George Osborne, has said that this rise is here to stay as a change to the tax system to deal with the structural deficit. But the FSB is urging the Chancellor to review the increase when the deficit has been significantly reduced and to return it to 17.5 per cent.

Unlike big businesses, small firms cannot absorb the increase, Mr Lyons added, meaning they would have to pass the full cost on to customers, reduce stock levels or find cost savings elsewhere – potentially costing jobs and undermining the Governments private sector-led recovery.

The FSB has been calling on the Government to help alleviate the stresses and strains on hard hit firms’ cash-flow by increasing the threshold at which they begin to pay VAT, from the current rate of £70,000 to £90,000. This has the potential to create up to 35,000 jobs and help small businesses when they need it most, the FSB estimates.