Customs and Excise must create a fairer system of VAT to help small high street retailers compete with larger firms, according to a business pressure group.
The Forum of Private Business (FPB) is responding to an appeal by Customs and Excise against a high court case brought forward by Debenhams.
The retail heavyweight successfully argued that their card handling services should be exempt from VAT as they are classed as financial services.
Customs and Excise is challenging the decision, believing that the case amounts to tax avoidance and is unfair on smaller businesses unable to take advantages of similar loopholes.
Other examples of big firms having an advantage include supermarkets selling hot food without having to charge VAT, which can have a damaging effect on small high street restaurants and cafés.
Nick Goulding, FPB chief executive, said: "While FPB welcomes this move from Customs and Excise to get tough with big businesses over VAT, small firms are still operating at a competitive disadvantage when it comes to VAT enforcement.
“It is ludicrous, at a time when small high street businesses are finding it harder and harder to compete with supermarkets, that the tax system should actually favour the big chains."
The FPB would like to see an extension of an EU pilot scheme which gives reduced VAT commitments for 'labour intensive' industries, such as hairdressing, private home renovations and window cleaners.
The scheme has already been successful in encouraging businesses in member states out of the black economy and the FPB argues that an extension of the scheme to the UK would be good news for many small firms.
