Budget 2013: cut VAT on building repairs to boost the economy

Simon Read

SimonBuilding 225x300 Budget 2013: cut VAT on building repairs to boost the economyOfficial figures released this morning show that Britain’s construction industry is under pressure. The good news is that it managed growth of just 0.9 per cent in the final three months of 2012, breaking a year-long run of decline. But January’s figures revealed a 6.3 per cent slide in output, putting the industry in danger of a plunge back into the red.

As Steve McGuckin, boss of the management consultancy Turner & Townsend, said today: “Sadly the momentum of the last quarter of 2012 has not been maintained, and the construction sector risks being recast as the fall guy of the British economy.  The government’s hopes of the private sector pumping desperately needed money into infrastructure and helping the economy build its way to recovery look further away by the day.”

But here’s a problem that could be solved in an instant by a seemingly simple solution. And it’s an idea that George Osborne should consider as he prepares for his 2013 Budget on Wednesday week.

The solution? Slash the VAT rate for the building industry. It’d cost an estimated £2.2bn, but it could be one hell of a boost to the economy.

The idea comes from Alan Pearce, VAT partner at accountants Blick Rothenberg. He says the Chancellor should give serious thought to cutting the VAT rate from 20 per cent to 5 per cent on housing repairs and refurbishments.

“If VAT on services such as domestic property maintenance, repairs, refurbishment, alterations and extensions was reduced by 15 per cent, for say two years, it would give a significant boost the building and construction industry and kick-start this sector into growth and recovery,” Alan says.

“There is no problem from an EU perspective as the 5 per cent rate is allowable for residential property under existing EU law and therefore the change could be made very quickly. Construction firms and self-employed builders would be given a huge boost that should stimulate employment with businesses taking people back on that were laid off in recent years.”

The move would lead to an inevitable cost in lost revenue to the Government, reckoned to be in the region of £2.2bn, but this would be more than made up by getting people back to work and businesses operating again in the struggling industry.

It would also have an extra bonus in that it would help improve the UK’s crumbling housing stock that is not being repaired and maintained simply because people do not have the money to do it.

Alan Pearce says: “If property owners and tenants had a two-year window when they knew that a saving of 15 per cent could be achieved, then many of them would consider carrying out essential maintenance or having an extension built sooner rather than later.

“Deep targeted cuts of this type are likely to have a much greater impact on consumer spending than Labour’s policy of repeating the general 2.5 per cent cut in the standard rate of VAT across the board at a cost of around £13bn a year in lost revenue”.

He continues: “If this VAT reduction was made it would have a positive effect for builders, builder’s merchants, manufactures, suppliers of household equipment, etc. There just needs to be some creative thinking and this sort of approach would go a long way in giving the whole industry a kick-start.

“It would also simplify the VAT rules by harmonising the VAT rate with refurbishments of empty houses, conversions from non-residential use and projects involving a change of residential use or a change in the number of self-contained dwellings within a building, all of which already benefit from the 5 per cent rate.”

Another side effect would be to encourage those builders currently operating in the black economy to contribute at least some tax. This is because with only a 5 per cent VAT rate payable on sales, builders would want to register and account for VAT in order to reclaim the 20 per cent rate of VAT that would still apply to the materials and other expenditure they incur. “This could go some way towards reducing the significant tax gap between the amount of VAT the Government thinks it should be collecting and the amount it actually collects,” points out Alan Pearce.

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  • David Hill

    Whatever is in the next budget it will not turn around the nation to provide sustainable long term economic benefit. Indeed it will be just another short-term budget fix with all its usual political rhetoric. For there are far more important issues for the the UK and where providing the foundations for long-term jobs should be paramount, not short-term thinking on jobs and ways to make things look better. Indeed unemployment is one and a main yardsticks as we know for a nation’s economic dynamism, but where this is really a bigger problem than the government makes us all aware of. Construction for instance which is an economic barometer has nearly 25% of architects out of work and where there is no light at the end of the tunnel – they need a long-term vision to turn this around, not short-term fixes such as VAT reduction on mere building repair works (a very small part of the UK’s construction sector). Indeed if anything at all, Britain needs great political vision and intuition now if it is to have any economic future For over the last 40 years successive governments have spent tens of billions of pounds on so-called employment initiatives that have provided little in terms of long-term employment. Indeed according to analysis the UK’s unemployment is over 11 million according to the ONS (the number of adults aged 16 to 64 who are not currently in employment) and not 2.5 million as the official government’s figures state. Therefore the rate of unemployment is not 7.8% but in fact around 34%. Considering these facts, government employment initiates have totally failed over the last 4 decades and show no sign of any real beneficial change. The reason for this disastrous situation is because politicians never have a long-term view of the world and where political tranches of 5 years is as much as they consider. Therefore politics always rises above the country’s future. This is at the very heart of why the UK never creates enough full time jobs. So, politicians have therefore to start to think in terms of decades, not five-years and provide an economic ‘blueprint’ that can be built upon decade upon decade. If they did this common-sense thinking they would provide with intuition, a lasting economic legacy for the people of the UK. But it has to be said to do this, they will have think out of the box and think in terms of building the foundations of such an economic renaissance. In this respect, this can only come with a long-term vision to build new technological industries and where only a vast new science and technology city can produce this future outcome. But having said that and although the British people certainly have the brain-power, our politicians certainly have not either the brain power or intuition. Therefore the UK will stay in relative economic oblivion and in the realms of high unemployment for decades to come. Oh how I wish our political masters had real creative talents and vision, but where according to history, they clearly have not. Great change is needed but where it appears that none is on the horizon for our future generations to come.
    Dr David Hill
    World Innovation Foundation

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