Met by a deafening crescendo from both government and opposition benches, the Chancellor has announced that VAT will rise to 20% from January 2011.
But if that was bad news for the retail sector, then the business community as a whole will welcome the heavily trailed decision to cut corporation tax and a more modest rise in capital gains tax than anticipated.
Corporation tax will be cut by 1p in the pound to 27%, the first stage in a projected 4p overall cut over the next four years. Meanwhile, the small companies tax rate will be cut to 20%.
There had been fears among the business community that the top rate of capital gains tax would be hiked to around the 40% mark, but Osborne dispelled those concerns by announcing a 28% top rate instead. The lower rate of 18%, hitherto a flat rate applied to all sales of shares or assets, will remain for lower and middle-income earners.
The VAT increase will raise £13bn a year annually, according to George Osborne, but will dismay a retail sector already worried that consumers will rein in their spending when they see the government doing the same.
Lee Mowle, CEO of garden products retailer The Stewart Company, fears the VAT hike for two reasons: “We are experiencing record highs on material prices and need to increase our costs. Add a VAT increase and we have a serious impact on RRPs.
“The second factor is retailer pressure to maintain their margins and existing RRPs so the supplier is likely to have to bear the VAT increase themselves, which would hit margins that are already being dragged down.”
A hike in the sales tax is widely seen by economists as a reliable way of generating extra revenue, because the wealthy cannot find ways to avoid paying it, unlike with taxes on income, profits and assets.
However, it is also seen as an unjust tax - and Harriet Harman made great play of this in her response to Osborne's budget - as it disproportionately harms the low paid, who spend a much higher proportion of their income on retail goods.
Retailers will obviously be concerned about the ramifications for consumer spending when the economic recovery is still very fragile and public sector workers are worried about their job security. For much of the downturn a temporary 2.5% VAT cut was in place, but now that cut now expired and a further 2.5% increase has been announced today, meaning consumers are paying a hefty 5% more on VAT now than they were two years ago. Retailers may wonder whether they'll suffer as much as when the recession was at its nadir.
Gina Krupski of Pink Camellia, which sells ladies’ nightwear, says: “As a retailer I'm sure that the VAT increase will be very damaging to sales. The retail sector has gone into a major downturn this year as we all are trying to save more and spend less.”
Every sector wants special protection from the government of course, but Krupski believes there were reasons to avoid a VAT rise beyond her own narrow interests. “With little manufacturing left in this country, as we would rather buy cheap products from abroad, and the financial sector taking a hammering, retail is pretty much all that's left.
“No doubt the new government will try to rebalance the economy, but this will take years. Meanwhile, we have to live with what we've got, so a VAT rise was disastrous.”
However, more positively for the business community, anyone that sets up a new business outside London, the South-East and East of England will be exempt from £5,000 of National Insurance contributions for each of the first 10 employees they hire.
Higher rate tax payers will be asked to pay CGT at 28% from midnight tonight, while entrepreneurs will only have to pay 10% CGT on the first £5m of their gains.
