More than 57,000 small businesses are facing higher bills under the flat rate VAT scheme, prompting calls for the Government to conduct an ‘immediate review’ of the tax.

In its Budget submission to the Chancellor, the Federation of Small Businesses (FSB) has revealed that HM Revenue and Customs (HMRC) ‘covertly’ increased the flat rate VAT charge on 48% of business sectors.

Flat rate VAT is charged to small firms with a turnover of less than £150,000 and aims to minimise the red tape around administering VAT. It provides a slightly lower rate which varies dependent on the sector the business operates in.

When the standard rate of VAT reverted to 17.5%, HMRC ‘recalculated’ the sector rates under the scheme. However, the FSB claims that this has left nearly half of enterprises paying more VAT than the pre-decrease level.   

Among those hardest hit by the changes are corner shops, children's clothing stores and firms providing social services.

The FSB is now urging the Government to use the 2010 Budget Report to put flat rates back to their 2008 levels.

John Wright, FSB national chairman, said: ‘The FSB believes that this is a stealth tax, which will affect a firm’s 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.’

Other key requests in the group’s submission include: a complete freeze on national insurance contribution rises; an increase in the level at which businesses must register to pay VAT; and an abolishment of the 1% rise in corporation tax planned for 2011.