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VAT chance: Can tax reforms spur a retrofit renaissance?

VAT   RetroFirst

Isabella Kaminski looks at the renewed and growing calls to slash VAT on building repairs and alterations

RetroFirst Logos 2019 8

Nothing is certain in life but death and taxes, or so Benjamin Franklin thought. How much tax is charged is a more contentious issue, but what is certain is that the tax system could be used as a powerful financial lever for improving the quality, sustainability and energy efficiency of the nation’s building stock.

At present, the standard 20 per cent VAT is charged across the country on most repair and maintenance work, while much demolition and new-build, including housing, attracts a zero rate.

The disparity has existed since VAT was introduced in the UK in 1973, when all new construction and alteration work was zero-rated, whereas repair work was standard-rated.

Alterations were soon shifted over to the standard VAT category, essentially making almost all retrofits liable for the higher rate.

The differential between new build and refurbishment rates was initially more marginal but has increased in the intervening years to 15-20 per cent (see table).

In the 1980s, EU laws were passed which only allowed a zero rate for buildings with a clearly defined social purpose, although in practice this covers a lot of new construction. 

For many the discrepancy seems arbitrary and a further disincentive to saving structures which could, with thought, be reused. Leading Scottish architect Malcolm Fraser, of Fraser/Livingstone Architects, who has campaigned to change VAT rates for well over a decade, describes the current situation as ‘simply bizarre’.

He says: ‘The net effect is very significant economic leverage that encourages the replacement, rather than repair, of our existing building stock.’

And, according to experts, these differentials make a difference to the construction sector’s practical decisions. 

Andrew Forth, head of policy and public affairs at the RIBA, agrees that VAT ‘too often seems to distort behaviours across the picture’ and says the sustainability targets set out in his institution’s 2030 Challenge won’t be met without a significant increase in retrofit.

Exceptions to the standard 20% VAT rate Source: HMRCRate

Construction of new qualifying dwellings and communal residential buildings, and certain new buildings used by charities


Conversion for a housing association of a non-residential building into a qualifying dwelling or communal residential building


Conversion (other than for housing associations) of a non-residential building into a qualifying dwelling or communal residential building and conversions of residential buildings to a different residential use


Renovation or alteration of empty residential premises


Alterations to suit the condition of people with disabilities


Installation of energy saving materials; and grant funded heating system measures and qualifying security goods



Addressing this discrepancy is one of the three key asks of the AJ’s RetroFirst campaign, which is now backed by well over 100 architectural practices and industry organisations. The campaign argues that there would be a huge environmental benefit in reducing the amount of embodied carbon required for new buildings and avoiding wasted resources from demolishing old ones.

Making VAT rates more equitable may have other advantages, too.

Since repair is more labour-intensive, says Fraser, a shift in emphasis from new-build would create jobs. He believes it would also reduce the construction industry and customers’ incentives to pay ‘cash in hand’ and use rogue traders, bring empty properties back onto the housing market, and put work on heritage buildings on a par with new development.

And it could potentially slash red tape, surely a big plus for the new Conservative government. There are some exemptions to VAT rates, including for specific energy-saving measures in existing buildings. But these take time and money to calculate and, says Forth, there is ‘a very low level of awareness’ within the construction sector and among the public about what is applicable.

Nor is it always clear what counts as retrofit. Last year, the Glasgow School of Art lost a legal battle challenging a £500,000 tax bill on the £21 million development of its city centre campus, a project that combined elements of renovation with new-build additions such as the Steven Holl-designed Reid Building.

A further knot in the system is that new public sector housing designed directly by an architect is liable for the full 20 per cent VAT rate, but design and build construction is not, something which further complicates efforts to achieve design quality and low-carbon outcomes.

There have been many attempts to amend these tax discrepancies over the years, usually with the aim of promoting urban regeneration by making existing properties liveable again. 

In 2003, economist Kate Barker’s Review of Housing Supply found that applying standard-rate VAT to new housing could correct the discrepancy between new-build and repairs, maintenance and improvement and ‘create a more efficient market for housing resources’, but her recommendation was not taken up by government.

A 2010 campaign to level the VAT playing field was turned down by the then Labour government, but led to serious discussions about the matter by the Coalition government over the following year.

Standard VAT rates since 1973
From To Rate of VAT
1 Apr 1973 Jul 1974 10%
Jul 1974 17 Jun 1979 8%*
18 Jun 1979 18 Mar 1991 15%
19 Mar 1991 30 Nov 2008 17.5%
1 Dec 2008 31 Dec 2009 15%
1 Jan 2010 3 Jan 2011 17.5%
4 Jan 2011 Present 20%

* During this period an alternate VAT rate of 12.5% was introduced for petrol and some luxury goods. This was abolished in 1979

Then commercial secretary to the Treasury and Tory peer Lord Sassoon estimated that reducing VAT on repair, maintenance and improvement of residential property to 5 per cent, ‘in the absence of behavioural change’, would put a £2.2 billion dent in government coffers.

But he also noted that making the construction of new dwellings liable for a higher 5 per cent rate would increase tax revenue by about £1.5 billion.

In 2017, a House of Lords committee on the built environment published a report recommending a review of VAT on building repairs and maintenance because the 20 per cent rate ‘provides a perverse disincentive to the retention, restoration and revitalisation of historic buildings, and works to prevent owners from looking after them properly’. However, apart from a few tweaks, the status quo has pertained.

Catherine Croft, director of The Twentieth Century Society, says it is ‘extremely frustrating’ that successive governments have been unable to rectify the VAT discrepancy, ‘despite, in most cases, being sympathetic to the objective of eliminating the disincentive to repair and renovate, which has contributed to the decay and loss of many historic buildings’.

Fraser and others attribute political reticence to VAT reform to vested interests within government and lobbying from big business.

‘My view is that the building industry is based on business deal-flow and they like to build stuff that will fall down before long, because then they’ll get money to build new stuff again,’ says Fraser. ‘Good building stock from the past is an aberration to that model.’ He describes this as the ‘planned obsolescence of the built environment’.

For its part, the Treasury is obviously concerned about potential loss of tax revenue and is not convinced that levelling the VAT playing field would deter rogue traders.

The government has also argued that it is constrained in making changes to VAT by EU law. That’s why many now see a perfect opportunity to push for reform post-Brexit. 

‘The complexity of current VAT rules on retrofit is certainly something that needs looking at,’ says Forth. ‘Brexit does provide an opportunity to change how we use the VAT system to incentivise behaviour.’

Glasgow sha 14 01 7506

Glasgow sha 14 01 7506

Source: Iwan Baan

Last year the Glasgow School of Art lost a legal battle challenging a £500,000 tax bill on the £21 million development of its city centre campus

Growing awareness of the climate emergency and a push towards a more circular economy in which waste is minimised are also potential drivers for change.

Hew Edgar, head of UK government relations at the Royal Institution of Chartered Surveyors (RICS), says the government’s net zero target for 2050 cannot be met without improving building energy efficiency and notes that domestic buildings alone are responsible for about 20 per cent of the UK’s carbon emissions.

He says: ‘There must be both an incentive across the sector to retrofit and boost the available professional skills capacity within the industry to undertake small to large-scale measures.’

Sam Turner, architect at Webb Yates engineers and building working group lead at the Architects Climate Action Network, sees VAT reform as a clear environmental win. ‘I would like to see the playing field at least levelled, if not weighted in favour of refurbishment.’ 

We need to seize the moment and make 2020 the year we start changing things

He adds that there are new markets opening up for products to boost domestic energy efficiency that the government should be supporting. He says: ‘That way they can really take the whole country forward, not just the building industry. We need to seize the moment and make 2020 the year we start changing things.’

Procurement expert Walter Menteth, of Walter Menteth Architects, does not think the government fully recognises the implications of reforming construction VAT, and believes that backlashes to previous tax changes were due to poor implementation. 

He  acknowledges there may be some loss of direct tax revenue but believes equalising rates would yield an overall benefit to the economy as well as to the environment.

Forth says the RIBA will be looking carefully at the issue over the coming months, including costings, but he cautions against incentivising damaging behaviour or disproportionately benefiting very small sections of society at the expense of others. 

He points, for example, to the large amount of money spent on a few thousand basement conversions around the country. ‘That’s more than £330 million of VAT relief a year that we’d be giving to the (predominantly very wealthy) people who commission these projects. For that money you could carry out a deep retrofit on nearly 20,000 homes or build 20 developments like the Stirling Prize-winning [and Passivhaus certified] Goldsmith Street.’

Menteth says the architectural profession should consider how VAT reform could drive qualitative improvements to buildings. 

He says: ‘It would lock the architect better into the production system for construction, because it would mean that specifications by the architect had to be better upheld and supervised.’

For Robert Prewett, director of Prewett Bizley Architects, retrofit in itself should not be the end-goal; what’s needed is much more energy-efficient building stock, he says. Prewett argues that, while the current VAT disparity does not encourage low-carbon design, nor do many other forms of refurbishment and repair.

There’s nothing to incentivise people doing home improvements to go the extra mile and put in extra insulation

He says: ‘The tragedy at the moment is that there’s a whole market, probably amounting to billions of pounds a year, of people doing home improvements and there’s nothing to incentivise them to go the extra mile and put in extra insulation. It’s a huge missed opportunity.’

Prewett would like to see a slightly different version of tax reform in which the zero VAT rate only applies to deep retrofit with clear environmental benefits. A petition asking parliament to discuss this idea attracted nearly 4,000 signatures before it closed in advance of last month’s general election.

Other options for reform, says Forth, could be reductions in stamp duty, council tax and capital gains tax, which ‘could all prove valuable incentives to invest in the long-term sustainability of a property’.

While calls for reform of VAT have fallen on deaf ears for decades, declarations of climate emergency and the UK’s legally binding commitment to achieving a net zero economy by 2050 have undoubtedly altered the political calculations.

While nothing is certain in life, there is now at least the hope that the RetroFirst campaign and other current calls for VAT reform will be heeded.


Readers' comments (4)

  • chris Dyson

    I can not agree more with this proposal VAT is stupendously high for retrofit and restoration work - especially for listed buildings, which are in fact cultural assets for the nation, maintained at the owners expense.

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  • Our experience is that it is never cheaper to demolish a building to the ground and build new - even with the tax advantage of 20%. For a Scottish Dorran we recently looked at an extensive refurbishment including new insulation throughout worked out at £1200 per msq + vat. Realistically a new build would be £2250-£2000 ex vat and upwards. Its just not the case that its economically advantageous to knock down and rebuild - even with the vat discrepancy. My issue is that refurbishment encompasses a huge portion of the luxury sector. That's new kitchens, basements, basement cinemas etc. If we zero rate these projects then its a big hand out to the most wealthy in society - who also own a lot of historic buildings by the way. How can you separate luxury fit out elements (which can represent significant amounts) from genuine energy saving and heritage restoration projects that benefit all?

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  • MacKenzie Architects

    For every rich guy, there are probably 5,000 poor guys.
    I don't think we should worry over-much about VAT on someone's private basement cinema, if the rest of us can save 20% on our little home improvements.

    Keep it simple, there should be absolutely NO tax burden on the basics of life. Food, clothes, home. Governments of all colours raise enough taxes on everything else. The point is they waste most of it -maybe almost all of it.

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  • The current campaign is laudable.

    But we in the heritage sector have been banging away at VAT reductions / elimination, and other tax incentives (like America's Tax Act for reuse and repair of historic buildings) since 1988, with little effect on HM Treasury : see M. Pearce, "Conservation a Credit Account," published by SAVE Britain's Heritage.

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