The standard rate of VAT has increased from 17.5% to 20%, in a move designed to raise £13 billion a year to help balance the nation’s public finances.
Retailers have warned that the 2.5% hike will depress consumer spending in the high streets, while there are also fears it will fuel inflation and put upward pressure on pay settlements.
Labour leader Ed Miliband on Monday branded it “the wrong tax at the wrong time”.
But Chancellor George Osborne defended the hike – announced in his emergency Budget in June 2010 – as “a powerful weapon to tackle debt” and challenged Labour to say what cuts it would make to cover the cost of scrapping it.
Mr Osborne has previously said that the 20% rate is “not temporary” but a structural part of the tax system, leading economists to predict it will remain at least until the next general election, scheduled for 2015.
The rise is the second VAT increase in a year, after Labour chancellor Alistair Darling restored the 17.5% rate last January having temporarily reduced it to 15% for 13 months to stimulate the economy during the recession.
The change affects any VAT-registered business that sells or purchases goods or services that are subject to the standard rate. Most foodstuffs, children’s clothing and books remain zero-rated and reduced rates remain on items such as children’s car seats and supplies of domestic fuel and power.
Online shopping group Kelkoo said the change would increase the price of a litre of petrol from £1.19 to £1.22, a digital camera from £131 to £133.79 and a Ford Focus car from £15,195 to £15,518.
The British Beer & Pub Association said it would add 6p to the cost of a pint of beer, pushing it through the £3 barrier for the first time.
Many shoppers are believed to have beaten the rise by buying big-ticket items in the New Year sales over the past few days before the new rate came into effect. A report by the Centre for Retail Research suggested consumers will spend an average of £324 less in the remainder of this year as a result, cutting UK retail sales by as much as £2.2 billion in the first quarter of 2011 alone.