The tax that penalises work on existing homes

A 20 per cent charge sits on almost every extension, rewire, re-roof, damp repair and loft conversion carried out on the 29 million homes we already have. This is a decision, and it is the most distorting feature of the tax system as it applies to the built environment.

The anomaly is simple. Demolish a house and build a new one, and the work is zero-rated, with VAT on inputs recovered in full. Repair, extend or retrofit that same house, and it's taxed at 20 per cent, with the homeowner recovering nothing. The split dates to 1973, and it has widened with every rise in the standard rate since.

HMRC puts the VAT relief for new dwellings, including DIY housebuilder refunds, at £16 billion in 2023 to 2024, the fifth largest non-structural relief in the tax system. VAT reliefs cost £69 billion a year in total, more than any other tax head, and none of it reaches the stock we already own.

What it does to a small building firm

A homeowner isn't a taxable person, so VAT on domestic refurbishment adds a flat fifth to the cost, with nothing recovered anywhere in the chain. The firm collecting it, funding it between invoice and quarterly return, is typically a handful of people with no tax department.

Under the domestic reverse charge, a subcontractor in a CIS chain charges no VAT, because the liability sits with the main contractor. That protection stops the moment the customer is an end user. Same firm, same trade, no VAT in its cash flow on a developer's site Monday, collecting it for the Exchequer on a private job Tuesday.

The HomeOwners Alliance, Resi and YouGov found that VAT costs put off close to a quarter of homeowners, roughly four million people, from work they'd otherwise commission. Add a £90,000 registration threshold, and smaller firms have every reason to manage turnover rather than grow it, while households have every reason to keep the invoiced figure down.

Around 70 per cent of buildings standing in 2010 will still be in use in 2050, yet the tax system charges nothing to demolish and replace a dwelling and a fifth to insulate and repair one. It got worse in 2012, when zero-rating for approved alterations to listed buildings was withdrawn.

The case has been made, repeatedly

A House of Lords committee called the 20 per cent rate a perverse disincentive to restoring historic buildings back in 2017. MPs made the same point last November: the disparity with new build discourages retrofit. The Culture, Media and Sport Committee went further this summer, calling for VAT rules on repurposing buildings to be reformed and the bias towards demolition to end.

CBI Economics, for the Federation of Master Builders and RICS, estimated that a temporary five-year cut from 20 to 5 per cent would deliver £51 billion of additional output, £25 billion of gross value added and 345,000 jobs, at a net fiscal cost of £2.8 billion. The FMB's own modelling, covering just labour, put the effect at £15.4 billion of extra spending, 300,000 jobs and £24.8 billion of gross value added. The Treasury's counter-figure was around £6 billion a year.

A better alternative

The standard campaign ask, a cut to 5 per cent on repair and improvement, is directionally right but strategically weak. There's a stronger version of the argument.

Apply one neutral rate across residential construction.

Remove the distinction between new build and existing homes and apply a single reduced rate to both. On Treasury's own estimates, moving repair and improvement to 5 per cent costs around £2.2 billion, while bringing new dwellings into charge at 5 per cent raises around £1.5 billion. That's base-broadening rather than a giveaway, and it would close down the litigation over what counts as a new dwelling, a conversion or an alteration.

If a single rate is politically impossible, work on the customer side instead.

Leave the headline rate where it is and introduce a digital home improvement rebate: the household reclaims a defined share of VAT through an HMRC portal against an invoice from a registered, insured contractor. It's the DIY housebuilder scheme, generalised. The invoice condition is the point: it makes documented work cheaper than the alternatives, and gives HMRC visibility of a market it currently can't see.

Weight the relief towards fabric. Make it more generous for insulation, glazing, roofing, damp remediation and heat pumps, which carry a public return alongside the private one, and leave cosmetic work at the base rate.

None of this is special pleading on behalf of builders. We tax the replacement of the housing stock at nothing and its maintenance at a fifth, then express surprise that so much of it is cold, leaky and only partly repaired.

David Cameron's conclusion after Pastygate was that VAT definitions should never be touched, because the trouble outweighs the gain. Fair enough as political memoir, useless as tax policy. The definitions aren't the issue. Their number is.

Joe Garner MRICS, Axo Consulting