In his Pre-Budget speech, chancellor Alistair Darling confirmed that VAT will return to 17.5 per cent, as planned, on 1 January 2009.

The rate was cut to 15 per cent earlier this year to encourage consumer spending as the UK entered its worst recession since the Second World War.

However, some believe that the reversal could spark a collapse in new year retail sales and derail the UK’s economic recovery.

Jim Leaviss, head of retail fixed income at M&G, said, ‘The VAT reversal will not only cause a blip upwards in inflation rates – most of the CPI basket apart from food attracts the tax – but might also derail the recovery of the UK economy.’

Reports that the Conservatives will announce a further rise in the VAT rate to 20 per cent should they come to power will also serve to exacerbate the situation.