VAT at 20% provides a very big incentive to home improvers to use a non VAT registered builder, or to pay in cash, in order to avoid the tax. This costs the treasury, but can also play into the hands of cowboy builders. Meanwhile legitimate builders cannot compete on equal terms, because they are at least 20% more expensive, and probably more if they are doing everything by the books.
The VAT increase to 20% has boosted the construction black economy and also encouraged the demolition and replacement of many old run down dwellings in order to benefit from the zero rate of VAT for newbuild dwellings. Reducing the rate of VAT on home improvement in the budget tomorrow would bring a significant part of the construction sector into the legitimate tax paying economy, likely more than offsetting the loss of VAT paid on materials sold into the black economy from 20% down to 5%.
The VAT relief would only be available through the builder, so home improvers would have a massive financial incentive to use a legitimate VAT registered builder in order to benefit from reduced rate (5%) VAT on all labour and materials. Currently, by using a non-VAT registered builder (legitimate or not) they pay no VAT on labour, but 20% on all materials.
The net result would save them money. Meanwhile, the reduction in VAT would act as an incentive providing a significant boost to the home improvement sector, helping stimulate a flagging economic recovery. This would in turn boost tax revenues and also help with the introduction of regulation and fair taxation of the construction industry, helping to weed out the cowboy operators.