Grouping ‘will hit premiums’, reports Jon Bunn.

Insurance company customers face a potential #1bn increase in premiums if providers pass on the costs of proposed changes to the VAT grouping structure.

Bob Jones, a VAT consultant at Neville Russell, warned that Customs & Excise’s proposal to limit VAT grouping to fully taxable entities (11 June, page 1) would hit the City’s financial services sector hard.

He said the Customs prediction of a #400m annual saving was based on a 1992 National Audit Office report on the insurance sector alone.

The real cost, Jones claimed, was likely to top #1bn. That cost would ‘inevitably’ be passed on to customers. ‘There will be a cost in the insurance sector,’ he said, ‘and you can bet it will be passed on. It’s just a question of how much.’

Jones, who has urged his clients to lobby the government on the proposals, said the financial sector had already considered damage limitation alternatives, including the merging of groups. But he said that whatever happened, the sector faced a large bill.

Ernst & Young’s head of VAT Peter Jenkins added: ‘There is no evidence Customs has considered the enormous compliance cost or the mountain of red tape that these measures will create for UK business.

‘The additional VAT burden may be so high for some companies that they will be forced to restructure completely, at significant cost.’

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