The U.K. music industry is to be hit with an increase in V.A.T. (value added tax) from 17.5% to 20%, as the new Conservative and Liberal Democrat coalition government begins to tackle the country's budget deficit.

The general increase in the sales tax on goods and services will take effect from Jan. 4, 2011 and music consumers will see the effect most obviously on the cost of CDs and concert tickets.

"The years of debt and spending make this unavoidable," said George Osborne, Chancellor of the Exchequer, to a raucous reception from opposition MPs in the House of Commons.

Rob Hallett, AEG Live president of international touring, has already voiced concerns about any rise in V.A.T. The six months until the increase should prevent promoters such as AEG being caught out on contracts signed at the existing 17.5% rate, but concert ticket prices will go up.

The changes will appear modest on individual tickets - a £47 ($69.50) concert ticket will cost £48 ($71) from January 2011. But the impact will obviously be more apparent on multiple ticket sales and higher priced tickets. The costs will also ripple through the live sector as other bills inch up.

For recorded music, a CD costing £10 ($14.80) will increase to £10.21 ($15.11). Any retailer can choose to absorb the extra cost themselves but it is likely they would pass the cost on to consumers.

Eighteen months ago, V.A.T. was actually cut to 15% - the lowest allowed under European Union law - from December 2008 and for the entirety of 2009 in an effort to boost consumer spending. Unlike the increase for 2011, retailers had to introduce the 2008 change in prices in just days.

"At least on this occasion we have a bit more notice to work out how best to implement this rise," said a spokesman for U.K. entertainment retailer HMV.

There was no comment at this stage on whether HMV expects the increase in their prices - and the overall rise in shoppers' weekly bills resulting from the V.A.T. rate increase - to impact on HMV's sales.

U.K. retail shares actually rose after the announcement on V.A.T. today. Analysts said the tax increase was largely expected, and the retail sector will be happy that it has six months to prepare, while consumers will also be able to plan any spending on expensive items.

Nevertheless, consumers will clearly have to take decisions on which items they will no longer purchase from January 2011 - and that could mean less spending on music or concert tickets.

Corporation Tax Cut

However, all businesses will benefit from changes to corporation tax, as Osborne aims to ensure the U.K. economic recovery is led by the private sector. He also wants to re-balance the economy and there will be tax incentives for businesses to launch in regions where government employment is dominant in the local economy.

The rate of corporation tax will be cut from 28% to 24% over four years, beginning with a cut to 27% in 2011. The small companies corporation tax - for companies classed as small, with profit under £300,000 ($444,000) - will be cut from 21% to 20%, which Osborne said will benefit 850,000 companies. He described the measures as the "most far reaching reform of our corporation tax system in generations."

He also announced an extension to the Enterprise Finance Guarantee for small companies struggling to secure loans from the banks, who have cut lending following the banking crisis.

It was confirmed 77% of the total deficit consolidation announced today (June 22) will come from spending cuts in the welfare bill and other areas, with the remaining 23% from tax increases. Osborne said public sector (government) employees paid more than £21,000 ($31,120) a year would have a two-year pay freeze.

But the threshold at which people start paying tax on income has been increased by £1,000 ($1,481) to £7,475 ($11,073).

Video Game Sector Hit

Osborne did remove a measure announced by the previous Labour government to introduce tax relief for the U.K. video game sector, which he said was poorly targeted. He also abolished the proposed broadband levy on households to pay for next generation broadband.

Capital gains tax in the U.K. will go up from 18% to 28% from midnight for profit on sale of assets.

The increase in V.A.T. will prompt outrage in some quarters, although it is in line with many European countries where rates are around the 20% level. Items considered essential including food, children's clothing, newspapers, books and magazines remain free from V.A.T. in the U.K.

Harriet Harman, deputy leader of the Labour Party, said the V.A.T. rise "punished the poorest most" and described the package of measures as "a reckless Budget that pulls the rug out from under the economy."

The U.K.'s budget deficit is forecast to be £149 billion ($221 billion) for 2010-2011 financial year, falling to £20 billion ($30 billion) by 2015-2016.