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The VAT break needs to be widened

The European finance minister’s granting of flexibility on VAT could be a lifeline – but it desperately needs to be extended, says Kate Pugh

There was widespread disappointment at the European finance ministers’ decision over VAT at the ECOFIN (Economic and Financial Affairs) council on 10 March. But at least their decision gives the UK government scope to stimulate the construction industry through reducing VAT on the repair and renovation to private dwellings.

For the first time in 12 years, a breakthrough in the VAT regime offered the prospect of permanently reduced rates for specific services, where they did not affect the internal market.

British and European coalitions of heritage and construction bodies lobbied hard for the reduction VAT permanently from 17.5 per cent to five per cent. The list of specified services included the renovation, repair, transformation, maintenance and cleaning of housing, places of worship and cultural, heritage and historic monuments.

The agreement stipulates that the reduced rate will not apply to the other areas proposed, including the heritage element. So although less than ideal, the possibility of permanently reducing VAT to 5 per cent on the repair and renovation of private dwellings is still a significant development.  Almost 70 per cent of total dwelling stock in England is owner-occupied. 43.4 per cent of housing stock in England was built before 1945.

The treasury estimates that dropping VAT to 5 per cent on all rebuilding and renovation work would lose revenue amounting to £1.8 billion – small beer compared to other stimulus measures. But Heritage Link, a heritage-industry body, believes that the dynamic effect of a VAT reduction would more than compensate the loss in tax revenue, as illustrated by the work done by New Economics Foundation in 2007. Even the limited grant scheme put forward then showed net economic benefit to the exchequer measured in terms of jobs created and welfare benefits saved.

In 2009, job creation and skills retention are even higher on the government’s wish list. Vital though these are, they fail to measure the full benefits of a change in VAT. Even if applied to private dwellings, reducing the differential would stimulate the ‘repair and maintain’ focus of the construction industry, retain professional and specialist skills and reduce long-term costs that result from neglect. It promotes the sustainable re-use of buildings and construction materials as well as conserving embodied energy. It would support the smaller local businesses and their suppliers.

The ECOFIN decision should be harnessed to aid economic recovery. There would be additional dynamic and positive effects on maintenance and restoration and use of historic buildings if the Government were also to ameliorate the impact of other taxes, such as income and corporation tax and strengthen incentives for private sector investment in heritage, leading to bigger tax revenues in the longer term. 

However, it is the short term that is driving government decision-making at present. We need to push for the private dwellings option to be applied to stimulate local economies and create employment.

kate Pugh is secretary of Heritage Link

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