The government has announced a rise in VAT from the previous 17.5%

George Osborne has said the VAT increase to 20% is “unavoidable” and that it would generate £13bn a year of extra revenue.

The rise will come into effect from 4 Janary 2011.

Corporation Tax will be cut next year to 27%, and by 1% annually for the next three years, until it reaches 24%.

The small companies’ tax rate will be cut to 20%.

Capital Gains Tax remains at 18% for low and middle-income savers but from midnight, higher rate taxpayers will pay 28%.

Graham Kean, head of public at EC Harris, said: “Remember last year when everyone said the 2.5% cut in VAT was not noticeable in the high street?  This is the same level of increase.

“The real impact will be on major purchases. We will need to look into the detail to understand how this will impact construction.”

The Federation of Master Builders (FMB) has warned the VAT rise will boost the informal economy and cowboy builders as consumers resort to ‘cash-in-hand’ to avoid paying VAT on building work.

Ian Hyde, a tax partner at Pinsent Masons, warned the VAT rise would be a blow for any business that can’t increase prices for its goods or services.

He said: “For the construction industry this will have an impact on any business supplying VAT exempt and partially exempt businesses such as financial services companies, universities and residential landlords. These sectors cannot recover any VAT that they incur and so will resist price increases.

“Where companies are in the process of making a purchase then there will be rules to prevent suppliers bringing forward the order.  For the purchase of goods and one off services then provided the goods are paid for and delivered before 4 January 2011 17.5% will still apply. Attempts to avoid the VAT increase with pre payments are likely to be caught by new anti avoidance rules.”

On the Capital Gains Tax announcement, Clare Hartnell, global head of property and construction, welcomed the increase coming into effect from midnight. She said it would “avoid a potential glut of properties coming on to the market before next April”.