Soon after large dealer group Pendragon said it would lose GBP30m this year, a trade association called on the UK chancellor (finance minister) to reduce a key tax.

"A reduction in value added tax (VAT) [from the current 17.5%] would benefit both consumers and businesses, and give the economy a much-needed boost," said Sue Robinson, director of the Retail Motor Industry Federation (RMIF), representing the UK retail motor sector.

The RMIF has written to the chancellor ahead of his pre-budget report, calling on him to reduce the rate to 12.5%.

A reduction in the rate of VAT would reduce retail prices, as well as costs for business, the RMIF said.

Robinson added: "A lower rate of VAT would help bring down prices without there being a negative impact on retailers. At the same time it would also help reduce costs for businesses.

"A lower rate of VAT would immediately cut the price of major purchases.  By effectively cutting around 5% from the price of a new car, and attendant maintenance costs, our recommended VAT reduction would be a step towards helping to revive the new car market."

"With the treasury looking for ways to stimulate the consumer economy, we believe that this is a viable option and are strongly urging the chancellor to enact the move."

Political commentators expect the chancellor to cut taxes in a bid to spur the UK's flagging economy but have speculated this is more likely to be in the form of reduced income taxes.

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