VAT on Building it's Not Over Yet

If Gordon Brown was going to harmonise VAT rates between new build and refurbishment at 0% yesterday’s budget would have been the opportunity to announce it. He didn’t. That presumably means that the government will not be taking up the option within the EU rules to harmonise before the window closes on 31 March.

But that doesn’t have to be the end of the story. The EU window allows members states to reduce VAT on building materials and labour to 0%. Once the window closes member states are still permitted to alter VAT rates provided they don’t reduce them below 5%. So VAT can still be harmonised but at a rate of 5% or more.

This may be more realistic. 0% VAT on building materials and labour would have resulted in a large net loss to the Treasury. It wouldn’t just have been the refurbishment of empty homes that benefited, every pot of paint bought and every new conservatory built by DIYers would have had 0% VAT too.

Harmonisation of VAT above 0% would of course mean imposing VAT on new build houses. You may or you may not think this is a good idea. But at a time that the government is calling for a step change in housebuilding it will be very cautious of anything that will disencentivise builders and developers from building houses. There are two schools of thought:

1. VAT on new houses will increase developer’s costs and this will be passed on to purchasers in increased house prices. This will have the effect of making refurbishment more financially attractive and result in more empty homes being brought back into use.
2. House prices are governed by what the market will bear not a sum of the costs that are incurred in their construction. House prices will therefore be little affected by imposing VAT. Developers will have to find savings elsewhere.

You takes your money you takes your choice. I’d be grateful for your thoughts or opinions.