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The government is gearing up for an increase in VAT, experts warn.

Steve Hughes, economist at the British Chambers of Commerce (BCC), says a rise in VAT is inevitable: He adds: ‘Any tax increase will feed through into negative consequences, and a VAT rise could well dampen consumer spending. But if the alternative is higher National Insurance, which will increase the cost of employment, then this is preferable.’

Stephen Alambritis, spokesperson for the Federation of Small Businesses, says the hike will hit SMEs the hardest. ‘This will be a disincentive for consumers buying small tickets items and will have an adverse impact on small business sales, especially if the larger supermarkets say they will absorb any cost increases.’

The increase will raise an extra £12 billion in tax revenue, says Mark Welby, VAT partner at financial services firm BDO. ‘The received wisdom is that the government will announce a 2.5 per cent increase in its emergency budget. The only question is when it will come into effect. ’

Some 61 per cent of online firms would prefer a rise in National Insurance as opposed to a VAT increase, claims a poll from eBay.

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