The proposal – likely to raise up to £10 billion a year – is being “very actively considered” at the highest level, according to senior shadow ministerial sources.
It could be introduced within weeks of a Tory victory at the next election, which must be held by June, in a package that is also likely to include severe cuts to public spending.
David Cameron, the Tory leader, and George Osborne, the shadow chancellor, are understood to have reluctantly concluded that the state of the public finances they are likely to inherit will mean that simply cutting spending by tens of billions of pounds will not be enough.
A shadow ministerial source said: “Tax rises will have to be part of the equation. It will be time for some strong medicine.”
By moving quickly to increase VAT after the election, senior Conservatives believe they will be able to pin the blame for the state of the public finances on Gordon Brown and his outgoing Labour government.
They would be following in the footsteps of Margaret Thatcher, who increased VAT to 15 per cent in the 1981 Budget, also at a time when Britain was struggling to emerge from a recession.
Last night, a Tory spokesman attempted to dismiss suggestions that they would raise the tax to 20 per cent.
However, if the move does go ahead, the exact tax-raising model they are likely to follow is a Treasury plan to raise VAT to 20 per cent worked on in detail in 2001, when Tony Blair was prime minister and Mr Brown was chancellor, but which was never implemented.
The plan, the existence of which is disclosed for the first time today by The Sunday Telegraph, was eventually abandoned in favour of a rise in National Insurance contributions to pay for increased spending on the National Health Service.
It was estimated at the time that the average family’s VAT bill would go up by £5 a week if the tax was raised to 20 per cent.
The increase now would be likely to be higher – potentially putting 2p on a litre of petrol and more than 10p on a packet of 20 cigarettes.
It would hit charities and businesses which do not levy VAT – because they would have to pay the tax on items they bought but would not be able to recoup the cost from customers.
In last year’s pre-Budget report, Alistair Darling, the Chancellor, surprised experts by announcing a temporary cut in VAT – from 17.5 per cent to 15 per cent – in an attempt to stimulate spending.
The move was opposed by the Conservatives. VAT is scheduled to go back up to 17.5 per cent on January 1 next year.
Earlier this month, Mr Cameron said: “We don’t rule out tax increases because it would be an irresponsible thing to do.”
Leading figures including Sir John Major, the former prime minister, have raised the spectre of an increase in VAT to 20 per cent to help bring down Britain’s debt mountain.
However, any such move would be likely to alarm those on the Tory Right – who are already irritated by signals that plans to cut taxes have been put on hold – potentially for several years.
These plans include a reversal of Labour’s 50 per cent top rate of income tax, increasing the threshold below which no inheritance tax is paid and possibly even “rebalancing” the tax system in favour of married couples.
The grim future for the public finances is likely to be underlined this week when figures are likely to show unemployment for the three months to June hitting 2.5 million, the highest total since 2004 and up from the 2.2 million that was recorded for the first quarter of 2009.
Vicky Redwood, a consumer and debt specialist at Capital Economics, forecast that the total would hit 3 million in December and go up to 3.5 million next year before falling back in 2011.
Young Britons have been hit hard by the recession, with unemployment in the 16 to 24 age group rising to a 16-year high of 726,000 last quarter. The number of vacancies dropped to a record low of 429,000 in the three months to June, down by 35,000 from the previous quarter.
Growing dole queues mean higher benefit payments and less income for the Government from tax receipts.
The parties have clashed over state spending with Mr Cameron accusing Mr Brown of trying to mislead the public by setting up a false choice between “Tory cuts” and “Labour investment”.
The Conservative leader has also admitted that the introduction of road tolls and an end to tax credits for households earning more than £50,000 a year were among policies being considered.
He has vowed to protect Britain’s health and overseas aid budgets from cuts – but has refused to make such guarantees for other areas.
Last night, a Conservative spokesman said: “There are no plans for a VAT increase and there have been no discussions about it.”