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VAT

The Government should reduce the rate of VAT on building work covering the repair, maintenance and improvement of housing and historic buildings so that maintenance and regeneration of our built environment can be taxed in the manner to that of new-build. At present, it could be argued VAT provides a perverse incentive to neglect maintenance of existing homes and build on greenfield sites.

The Empty Homes Agency, an independent pressure group, is currently working with a wide coalition for the immediate reduction of VAT on such work to 5%. Ultimately the Agency is working towards the goal of harmonising VAT between new build and refurbishment to establish a level playing field. The Government needs to work harder to join-up its regeneration and fiscal policies. Encouraging 60% development on brown field sites runs contrary to the current VAT regime, which favours new build. This policy is not sustainable in the long-term.

Regeneration

The 17.5% VAT rate is a brake on the regeneration and re-use of vacant or under used buildings. Putting buildings back into beneficial use, both in town centres and rural areas, is an essential part of improving the quality of life. Restoration projects, even on a small scale, can have a major effect by bringing in private capital to stimulate further projects, increase the attractiveness of an area, and start a virtuous circle of economic revival. These effects can be measured through relative changes in land values. Some regeneration projects already benefit from reduced rates of VAT, but the overall effect is not enough.

Reducing the rate of VAT on repair work will not impose any new restraint on new development, but on the contrary could promote higher standards and quality in new build and design.  

Housing

The VAT impact on regeneration is felt most keenly in the area of housing. There is a huge financial disincentive to refurbish empty properties as opposed to new-build, especially on greenfield sites. For example, Hyde Housing Association recently paid £120,000 in VAT on a project involving 21 homes. With the reduced rate of 5% VAT, they would have saved enough to refurbish another three homes. Moreover, the financial disincentive to repair and maintenance work caused by the high rates of VAT is often the root cause that allows homes to fall into disrepair in the first place.

The Government recently published its English House Condition Survey 2001 (EHCS 2001). The evidence from this survey points strongly to a persistence of non-decent housing that will be costly to correct. For example, there are 2.7 million properties that are non-decent due to disrepair, fitness or obsolescence. The average cost to make these homes decent is £16,000 each, or some £43 billion in total. Reducing the rate of VAT on domestic building work to 5% will cut billions from this repair bill.

Sustainability

Demolishing old but useable properties to replace them with new build projects with a 20-year lifespan flies in the face of the principles of sustainability. However, this is exactly what current VAT policy encourages. There is a huge amount of embodied energy in the brickwork of a typical Victorian terraced house. More energy is used in demolition, yet more in building a replacement. Demolition waste also makes a 17% contribution to the UK’s volumes of waste, most of which goes straight to landfill. The reduction of that waste stream must be an environmental priority. Repair and re-use of buildings – recycling our heritage – is sustainable and makes sound economic sense.

Reducing the rate of VAT on refurbishment work will encourage the repair and adaptive re-use of empty properties rather than building new. It will also lower the barrier to brownfield development and assist the Government in keeping above its target of 60% brownfield development. If we do not stick to these targets, meeting future housing needs will be at the expense of our children’s environment. 

Our National Heritage

The historic environment permeates many aspects of modern life and is relevant to a wide range of public policy objectives. It comprises not only historic buildings and landscapes and other physical survivals from our past, but also the history of all the communities who have made their home in this country. It is our National physical and cultural heritage.

Britain’s national heritage is threatened by the VAT burden that repairs and maintenance work carries. Historic environments will continue to be lost to modern development unless the costs of their maintenance can be reduced and as long as it is more economical to demolish and rebuild than to restore. Cutting the rate of VAT will help to redress that balance.

The national historic heritage is also a major reason why tourists visit Britain, and thus a major source of employment and revenue. Reducing VAT on restoration work will therefore stimulate regeneration, tourism and employment.

Evicting Rogue Builders

The construction industry continues to get the highest number of complaints recorded against it by the Office of Fair Trading. Bad builders cause misery to thousands of households every year. Reducing the rate of VAT on domestic RMI work to 5% will significantly reduce the commercial advantage that the VAT avoiding trader has in the marketplace, and will enable a level playing field for competition instead. In time, this will drive the rogue traders out of the market as customers focus on quality and not price. The present situation of varied VAT rates also promotes confusion and adds to the compliance costs of small firms.

Evidence suggests that over 50% of consumers would employ a VAT dodging builder to cut their costs. The evasion of VAT on domestic building work is endemic and resistant to increases in enforcement activity. The shadow economy in construction is estimated at £4.5 billion, which suggests a VAT loss of around of £780 million per year. Cutting the rate of VAT is a necessary condition for the eviction of rogue builders. 

Consumer Protection

The Government’s current initiative to improve levels of consumer protection in the domestic sector, Quality Mark, is struggling to survive. As consumers appear to prefer the “VAT off for cash” deal, why should builders strive for badges of excellence?

The Department of Trade and Industry fully supports the cross building industry consensus that the reduction of VAT on domestic building work to 5% is a necessary condition for improvements in consumer protection in this sector. The DTI has established an industry wide working party to lobby the Treasury for VAT to be cut to 5% on domestic repair, maintenance and improvement work.

Social Inclusion

The proper maintenance of our historic environment encouraged by a reduced rate of VAT on maintenance work will support and in many cases help to restore civic pride in the local environment. This will promote conservation led regeneration, which is acknowledged to be an important stimulus for social and environmental improvement in depressed areas. The regeneration will promote training and employment in traditional building crafts, thus giving younger people a wider skills base. This will, in turn, bring on to the market the skilled conservation and building professionals, the shortage of which is widely agreed to be primarily responsible for the deterioration in both the public realm and the historic environment.

Time to Act

The evidence for the wide-ranging benefits of a cut in VAT on building work is clear. It is now time for the Government to act. We urge the Chancellor to:

Support the revision of the 6th VAT Directive to allow domestic repair, maintenance and improvement (RMI) work to have a reduced rate of VAT;

To implement in the UK a cut in the VAT rate on domestic RMI work to 5% as soon a possible; and to develop a clear plan to harmonise VAT between refurbishment and new build

To ensure that zero-rating remains available for:

- Approved alterations to listed buildings

- Construction of new buildings for charitable organizations

- Sale of listed reconstructed buildings

 

For further information

Please contact:

RICS – www.rics.org
Federation of Master Builders –www.fmb.org.uk
English Heritage – www.english-heritage.org.uk

 

Information about the Empty Homes Agency

The Empty Homes Agency is an independent campaigning charity, which exists to highlight the waste of empty property in England and works with others to devise and promote sustainable solutions to bring empty and wasted property back into use.

Empty Homes Agency
195-197 Victoria Street
London
SW1E 5NE

Tel: 020 7963 6883
Fax: 020 7828 7006

This paper is based on the work led by the Federation of Master Builders. The FMB has put together a wide-ranging coalition, calling for VAT to be cut to 5% as soon as possible, of which the Agency is a founder member. The Agency continues to campaign further for VAT harmonization between new build and refurbishment.