Industry could save millions in VAT payments.

Alistair Darling’s 2.5 percentage-point Vat cut could save the insurance industry up to £71m next year, the ABI said.

The industry paid £495m in Vat that it could not reclaim from the Treasury last year.

The reduction would also help insurers whose profits had been slashed in the economic downturn, the association said.

Vat will be cut from 17.5% to 15% from 1 December 2008 until 31 December 2009.

David Bearman, Vat specialist at the accountant Ernst & Young, said: “The reduction is to be welcomed and will provide some relief for the financial services industry.

“Big winners will be the retail banks and insurers, both of which can recover little or none of the Vat they incur on their costs. The rate reduction decreases their external costs of broadly 2%.

“The impact for investment banks and commercial insurers is likely to be lower – in the region of a 1% to 1.5% reduction on their external costs,” he said.

“The industry will be budgeting for external expenditure for 2009 and this measure will have released some pressure on those budgets, but I doubt it will have significantly altered the trend to reduce spending.”

The pre-Budget report did not offer any measures to help small businesses with trade credit insurance, however.

The CBI called on the government to act as a trade credit insurer for small businesses that could not obtain cover.

The role could involve supporting credit insurers with guarantees or providing insurance to firms without cover.