On January 4th, 2011, VAT in the UK rises from 17.5% to 20.0%. This Guardian article provides some background on the history of direct and indirect taxes.

According to the FT

“Value added tax is an indirect consumption tax assessed on the value added to a product at each point in the cycle of production and distribution. It is a consumption tax because it is ultimately borne by the consumer, who pays a fixed percentage of the final sale price of a product. VAT is not collected in full from the final seller of the product. The seller deducts from its VAT liability the amount of tax it has paid to other VAT-registered business further up the chain. VAT is therefore collected fractionally from different businesses.”

The rise in VAT will add to the record level of petrol prices - petrol has both excise duty and VAT applied to the final price. This BBC article explains the impact