A rise in UK Value Added Tax (VAT) from 17.5% to 20% on 1 January next year may temporarily lift the domestic market, but could be offset by tough budgetary action from the coalition government says an industry lobby group.

The UK Retail Motor Industry Federation (RMI) noted continued media coverage of the British government’s swingeing deficit reduction measures, had already raised concerns among consumers looking to at potential big ticket purchases.

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“Despite reports of a slight recovery in the economy, the threat of increased university fees, removal of child benefits and the rise in petrol prices have all contributed to a more cautious consumer, who favours a car with high miles per gallon, and affordable servicing,” said RMI franchised director Sue Robinson.

“Notably, diesel car sales reached their best ever monthly market share of 54.7% and year-to-date share of 45.3%.” added Robinson.

The VAT rise in January was expected to lift the market towards the end of this year but the potential 2.5% saving appears to have been counteracted by the coalition’s tough budget action, said the RMI.

However, even with consumers becoming increasingly frugal, comparing October 2010 with October 2009, on a like for like basis with the omission of the scrappage incentivised sales, figures are the same, noted the RMI.

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But the organisation added October sales of new cars in the UK were 22.2% down compared to the same period last year and advised consumers to take advantage of low interest rates.

“Porsche, Bentley and BMW all reported increased sales compared to 2009 -the cost of [the] 2.5% VAT increase will have a significant effect on the price of such vehicles – and, with interest rates low those who can afford to are well advised to spend rather than save” said Robinson.