EU’s Economic and Financial Affairs Council to allow VAT cut on repairs and refurbishment works

The EU’s Economic and Financial Affairs Council has agreed to allow member states to cut VAT on repairs and refurbishment works in domestic buildings to 5%. In the UK, VAT on such works is currently set at 15%. A cut to a 5% VAT rate here could encourage people to invest more in energy efficiency works. This would increase business and create jobs in this sector, while improving the quality of the UK’s housing stock.

A trial EC initiative has allowed seven member states to reduce the VAT rate for labour intensive services in a number of different sectors since the year 2000. On the Isle of Man (the only part of the UK involved) the VAT charged on the renovation and repair of private dwellings was reduced from 17.5 to 5% from January 2000. The trial was originally due to end after three years but was extended until the end of 2010. One criticism levelled against VAT rate cuts is that they can reduce public revenue. In December 2007, the Isle of Man Treasury called its experiment a success as results showed that despite the cut, tax revenue actually increased and black market activity decreased. A similar VAT reduction in Italy is thought to have led to the creation of as many as 75,000 jobs in the construction sector.

According to the Cut the VAT Coalition, another reason to lower the VAT on repairs and refurbishment works is to reduce the incentive to construct new buildings instead of renovating existing ones. At present no VAT is paid on the construction of certain new buildings. This can, in some cases, make it cheaper to demolish and rebuild a property rather than undertaking refurbishment works. A cut in the VAT rate to 5% would make refurbishment and the restoration of existing buildings more economically attractive and hopefully prevent unnecessary demolition.