Insurance industry would get £70m boost from VAT cut

Cutting VAT to 15pc could save the insurance industry at least £70m a year, claims the Association of British Insurers (ABI).

Banks and insurance companies say a VAT cut to 15pc will provide them with a much-needed boost in difficult markets.

The finance industry, which is unable to recover a large proportion of the VAT it incurs, said the expected reduction from 17.5pc is a step in the right direction, particularly for the struggling banking sector.

The ABI said that the insurance industry incurred £495m in irrecoverable VAT costs in 2007 and this figure would have been £71m less if VAT was at 15pc.

"Effectively, if you charge VAT, you can recover it. Insurance companies incur VAT on property, expenses, office equipment and a number of other areas, but cannot claim it back," said Erfan Hussein, a spokesman from the ABI.

A spokeswoman for the British Bankers' Association added: "We welcome the move to reduce VAT. While there will always be an element of VAT which is unrecoverable we feel this is a move in the right direction.'

Richard Baxter, a tax director at Alvarez & Marsal Taxand, expects struggling banking companies to benefit from a VAT cut to 15pc.

He said: "A reduction in VAT to 15pc is a good idea as it will help banks and insurance companies, who are often able to recover only a very small amount of VAT. This will help reduce financial sector costs and will provide a small but much-needed boost in the current environment."