VAT will be increased from 17.5% to 20% from January 4, 2011.
Dealers will be hit hard as new car prices are pushed up which could unbalance recovery in the automotive market.
The rise in VAT in January 2011 could prompt customers to put forward purchase decisions on a new car this year to take advantage of the lower rate.
Businesses should already be prepared for a change in VAT in their accounting systems following changes when the rate was lowered last year to 15% and when it returned to 17.5% this year.
Chancellor George Osborne said: “This Emergency Budget deals decisively with our country’s record debt. It’s tough but it’s also fair. This is the unavoidable Budget.”
Measures to boost business were also announced during Osborne's Emergency Budget.
A new tax scheme will be introduced which will see new businesses outside London and the south east exempt from up to £5,000 of employer National Insurance payments for the first 10 emploees hired.
The small companies tax rate will be cut to 20 pence.
Corporation tax will be cut by 1% per year for four years from next year, bringing it down to 24%, while the employers' National Insurance threshold is to rise by £21 per week.
There will be no new rises on fuel duty, alcohol or tobacco. However, there was also no mention of a fuel duty stabiliser which would have adjusted the amount of duty claimed on fuel depending on oil prices.
Higher rate taxpayers will now pay 28% on their capital gains.
The chancellor said tax-free personal allowance on income tax will be increased by £1,000 in April, giving 23 million people up to an extra £170 per year and taking 880,000 out of the tax system altogether.