How VAT Forces Homeowners to Harm the Environment

March 13th, 2015
in econ_news

by Duncan Baker-Brown, The Conversation

There’s something wrong with Britain’s sales tax regime. It is forcing homeowners into bad environmental decisions which endanger the country’s carbon reduction targets and it is undermining efforts to boost housing supply just when it seems most crucial.

Follow up:

When I’m not teaching students, I help run a sustainable architecture firm and entirely by accident, we find ourselves in the business of destroying perfectly good houses and sending them off to landfill, all in the name of sustainable design.

Tax, of course, is never popular. And VAT has never been a popular tax as it is paid for by purchasers – or rather, is normally paid for by purchasers. Historically there have always been some situations where VAT is charged at a lower or even “zero” percentage rate. Food (except for “snacks”) attracts no VAT, and neither do medicines, books and some forms of transport. There is one other area of business where the two-tier system applies: the construction industry.

Building a case

If you construct a new house or a collection of new houses from scratch, VAT is in effect not charged at all, it is “zero rated”. This is true for one-off Grand-Designs-inspired families or massive national house builders.

But if you are renovating or extending an existing house or housing estate, then VAT is imposed at a full 20%. Up until 2010, VAT was reduced to 5% if renovation and extension works were undertaken on listed buildings. Even this was unfair. It tended to favour better-off people living in well-heeled buildings of significant historic merit (that’s why they were listed in the first place).

Surveying the scene. Osborne and Boris Johnson at a building site in London. Jason Alden/EPA/Pool

Towards the end of 2010, chancellor George Osborne appeared to level the playing field by applying VAT at 20% to all refurbishment and extension works on all domestic properties. However, new-build homes unexpectedly remained zero-rated. Now when you consider that most residential properties are built by the massive national house builders, not individuals, and that most refurbishments are undertaken by individuals, you can see where the emphasis of Osborne’s VAT policy really lies. V

AT at 20% affects normal people trying to renovate and maintain their private homes. Big developers building new homes for sale avoid it altogether.

Cash in hand

There are other, perhaps unforeseen, negative consequences of Osborne’s VAT policy. As an architect I am often approached by people who want to convert their lofts or build a back extension on their family homes. They have watched TV programmes and feel that they have a proper amount of money saved for this dream renovation project; maybe somewhere from £25,000-£50,000.

But the first thing I have to point out is that 20% of that hard-saved cash will have to go straight to the Treasury. That’s one pound in every five. In some cases it stalls the project. In other cases people simply pay small constructors in cash and the shadow market flourishes – alongside Ed Balls’s window cleaner.

For larger refurbishment projects there is another completely ludicrous consequence. I often work on private residential schemes with budgets of £1m-£3m (I also build the odd house made of toothbrushes, but that’s a side issue).

Although my practice tends to attract clients with a sympathetic point of view about environmental issues, if you spend this sort of money renovating and altering a building you will be paying hundreds of thousands of pounds in VAT. Our projects will normally be described as “green retrofit”. We adapt existing properties, often unattractive buildings from the mid to late 20th Century and nearly always buildings that are structurally sound.

Eco house, part of Bordon Eco Town. BBM Sustainable Design, Author provided

A green retrofit will probably reduce the carbon footprint of a formerly gas-guzzling home by 60-80%. But most clients, however well off, will baulk at handing over say £350,000 on a £1.75m retrofit project when, rather amazingly, the alternative is to completely demolish the existing property for as little as £7,500, and then build a completely “new” property with VAT zero-rated therefore saving over £300,000. And this is why I’m in the demolition business, while trying to be a sustainable architect.

The effects go down the chain too. Even people with modest budgets are simply put off spending money on reducing energy consumption. As VAT eats into their budgets, so very often their priorities are to spend whatever money they have saved on a new bathroom or kitchen, not on new solar panels or external wall insulation.

Chipping away

There are knock-on effects on a national level. Even if national commercial house builders start building at post war levels (about 300,000 new homes per annum), by 2050 more than 85% of our housing stock will still be old homes from the 20th century. It is these homes that need the eco-refurbishments to ensure we have some hope of meeting our government’s commitment to reduce carbon dioxide emissions by 80% by 2050. These targets can only be met if central government works with home owners and the small building contractors who renovate their properties. This simply will not happen while works to these existing homes is undermined by excessive taxation.

We need a level playing field for new build and renovation projects. VAT rules should encourage green retrofit projects, not undermine them. Could there not be a sliding scale of VAT for renovation projects that supports green retrofits?

It is quite straightforward to produce calculations that can verify the levels of energy savings that a retrofit scheme can bring to a property. So why not award a scheme that reduces a home’s CO2 emissions by 80% (the government’s own target) with a zero-rated VAT policy, a scheme with 60% savings a 5% VAT policy, and so on? We must reward people for helping us achieve ambitious carbon reduction targets, not persecute them.

The ConversationThis article was originally published on The Conversation. Read the original article.

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