Why reduce VAT?

The Issue

The current housing shortage, the impact of our buildings on carbon emission levels, and the on-going problem of rogue traders taking advantage of the public are three different issues with one common thread; all of them are made worse by the 17.5 percent (15 percent until January 2010) rate of VAT charged by the Government on maintenance and home improvement work.

The Proposal

The Cut the VAT Coalition believes that reducing VAT from 17.5 percent to 5 percent for all maintenance and home improvement work would help the Government achieve its target of cutting carbon emissions by 80 percent by 2050. It would also benefit millions of UK homeowners by getting rid of cowboy builders, helping those who cannot afford vital repairs to their homes, bringing our empty properties back into use and protecting the countryside.

The Benefits

The benefits in reducing VAT that will accrue for both society and business are many and varied. Below are ten convincing reasons to get VAT reduced. 

1. Reap economic benefits

European Commission As a result of a European Commission initiative in 1999 we know that a reduced rate of VAT can reap economic benefits. The experiment set out to determine whether or not a reduced VAT rate would increase employment and reduce the black economy. The renovation and repair of private dwellings was included in the list of labour intensive services where VAT could be reduced. Seven countries including the UK (Isle of Man) took part. In order to monitor the assessment of this experiment, the European Commission sent the relevant Member States a questionnaire listing the main points needed to evaluate the measure reliably. In December 2007, the Isle of Man Treasury reported on the impact of a reduced rate of VAT charged on the renovation and repair of private dwellings in the United Kingdom (Isle of Man) and it makes interesting reading to those in government who still doubt the validity of the argument:

"Whilst not all the data sets are available, it is apparent from the VAT details, the trade survey, other government departments input and general hearsay and discussion with the general public that, from the Isle of Man's perspective, the experiment has been successful in achieving its and the EU's aims of creating employment and reducing the size of the shadow economy. In addition there have been other benefits to the Government and people of the Island, including improvements to the existing housing stock and reduced pressure on green field site developments. There has been far less pressure on builders to cut corners, reduce prices and work outside the system - the knock on effect of this, according to the Employer's Federation is happier customers and staff, fewer complaints and staff movements, all of which contribute to improved profitability. All concerned have expressed the desire to continue with the regime and for it to become a permanent feature."

Most important was the final conclusion that, 'The actual tax take increased despite the 12.5 percent differential in VAT for the comparable organisations' and that, 'The experiment had been a fiscal success on the Island.' Clearly, this case study shows that a reduced rate of VAT can reduce the black economy.

This experiment led the Council of European Finance Ministers (Ecofin) to decide that it would allow EU Member States to permanently reduce VAT to 5 percent from the 10th March 2009.

2. Reduce the number of rogue builders

The construction industry continues to get the highest number of complaints recorded against it by the Office of Fair Trading with more than 120,000 consumers complaining in 2004. According to Trading Standards a staggering £170 million is stolen by cowboy builders from unsuspecting homeowners across Britain each year. Bad builders cause heartache to tens of thousands of households every year. Successive governments have allowed this situation to continue by failing to tackle these rogue builders directly. Cowboy builders flourish by evading VAT and offering the customer a cheap deal as a result. But all too often, these rogues disappear with deposits, perform shoddy work and cannot be found when there are complaints. Without a proper written contract, the enforcement of consumers' rights becomes almost impossible. And getting the job put right by a replacement builder can cost thousands of pounds extra.

Reducing the rate of VAT on domestic building work to 5% would reduce significantly the commercial advantage of the VAT evading trader. The financial incentive to choose a rogue will diminish and a level playing field will emerge instead. In time, this will drive the rogue traders out of the market as customers focus on quality and value not just price. Survey evidence suggests that more than 50 percent would employ a VAT dodging builder to cut their costs. The evasion of VAT on domestic building work is endemic and the shadow economy is estimated at £4.5 billion, which suggests a VAT loss of around £780 million per year. The proper enforcement of the existing VAT law is not a viable option, as it would mean a VAT Inspector in every home. Cutting the rate of VAT is the only way to ensure the eviction of rogue builders.

3. Reduce the number of empty homes

The Empty Homes Agency We are currently experiencing a housing crisis where demand is out-stripping supply, forcing up prices for every one, and leaving first-time buyers with little hope of getting onto the property ladder. In this situation, you wouldn't expect there to be more than 700,000 homes in England alone with no-one living in them would you? That is the situation. Why? The reasons are many and complex, but a key one is that they require considerable repair work before they can be lived in, and the high rate of VAT makes them too expensive for anyone with business sense to take on.

Further information: www.emptyhomes.com

4. Reduce the number of those living in substandard housing

According to the Government's own figures, there are seven million homes classed as "non-decent" in England alone i.e. substandard in terms of their state of repair, kitchen and bathroom facilities, heating and insulation. The current high rate of VAT on building repair work prevents people, particularly in low-income areas, from maintaining their homes. In many instances, this results in people living in misery because they cannot afford to have basic repairs or central heating installed. What makes this worse is that these tend to be the most vulnerable people in our society, with the elderly particularly at risk.

5. Protect the countryside

One of the ways in which the Government has tried to tackle the housing crisis is by completely exempting the construction of new housing from VAT. This is a good idea, but it does provide an incentive to build on greenbelt land to satisfy housing needs because it is more cost effective than renovating existing property. By making home repair and improvement work more affordable, it would encourage the use of existing structures rather than continuing the urban sprawl by building on greenbelt land.

Further information: www.cpre.org.uk

6. Stop the destruction of decent existing buildings

The difference between having to pay 17.5% VAT on building repair work and not having to pay any VAT on new buildings inevitably leads to decisions which can only be justified by reference to such an unjustifiably high level of taxation. For example, in Lewisham, south London, a school sports hall less than 10 years old, built with Lottery funding and in need of renovation, was knocked down to build a new academy specialising in sports, because it was cheaper to do this than keep the old one and pay the subsequent £4 million tax bill associated with the renovation!

Further information: News article on the Lewisham school

7. Increase the number of zero-carbon homes

Building a Greener Britain The most cost-effective way of increasing the energy efficiency of buildings is when they undergo major renovation. Currently the VAT rates are heavily weighted in favour of demolition and new build as opposed to refurbishment - zero percent VAT on new homes but 17.5% on the renovation and repair of existing homes. While it is relatively easy to build zero-carbon homes, it is harder to retrofit the existing housing stock. Homes contribute 27 percent of the UK's total carbon emissions but existing grants and long pay back periods offer little incentive for householders to make their homes more energy efficient. Reducing the level of VAT from 17.5% to 5% on repairs and maintenance to buildings would provide the kick start that is currently needed to encourage every householder to make their home green.

Further information: www.buildingagreenerbritain.org.uk

8. Help tackle fuel poverty

The number of people living in fuel poverty in this country has doubled since 2004 and the increase in energy prices will only make matters worse. The Government cannot sit by and let the most vulnerable people in society suffer any more. We know that even before the recent hike in energy bills a staggering 1.25 million pensioner households live in fuel poverty and that 22% of older people living in fuel poverty go without gas or electricity in order to make ends meet. More worrying is the fact that in 2006 25,000 people over the age of 65 died of cold related illnesses.

The growing problem of fuel poverty is highlighted in the latest Scottish House Condition Survey which reveals that fuel poverty, defined as a household spending more than 10% of its income on heating, rose from 18% of Scottish households in 2004/2005 to 23% of Scottish households in 2005/2006.

The Government could stop this desperate situation from getting even worse if it cut VAT on all energy efficient home improvements from 17.5 % to 5%. This simple cut would enable thousands of families to upgrade their homes to make them more energy efficient and enjoy a warmer winter. The truth is that the current high rate of VAT on building repair work prevents people, particularly those on low-incomes, from maintaining their homes. In many instances, this results in people living in misery because they cannot afford to have basic repairs or central heating installed.

9. Help preserve our national heritage

Britain's national heritage is threatened by the VAT burden that repairs and maintenance work carries. Buildings of significant historical interest will continue to be lost to modern developments unless the costs of their maintenance can be reduced.

10. Allow disabled people to have essential renovations made to their homes

VAT should be abolished on all Disabled Facilities Grant works. Working out VAT on Disabled Facilities Grant works is a minefield, with some items such as ramps and bathrooms being exempt, while other essential items such as accessible kitchens and bedrooms are not exempt. Charging VAT on this building work can reduce the available grant by up to 17.5 per cent (reducing the current maximum grant of £30,000 to £24,750).