Why Pay VAT on Renovations?

VAT on building work has long been a contentious issue. I remember when it was first introduced, back in 1984. Before then, no one had ever thought to charge any sort of additional tax on building work — its introduction really put the cat amongst the pigeons in the world of small builders and their customers.

There were two aspects to the way VAT was introduced that upset builders. The first was the fact that it applied to some parts of building work – namely repairs, maintenance and improvements (RMI) on existing homes – but not to others — namely new builds. The second was the introduction of a turnover threshold (currently £67,000) above which VAT registration for builders became mandatory. Both aspects caused problems in 1984, and continue to do so a quarter of a century on.

We are the only EU country to treat new homebuilding this way: all the other member states charge VAT on new house construction, although the rates applied are very different. But this doesn’t mean that the UK doesn’t charge any tax on new construction. Over the years developers and, increasingly, self-builders have been asked to pay ‘contributions’ by way of Section 106 Agreements — often at a rate which can make VAT at 17.5% look cheap.

Notwithstanding, this VAT concession for new builds has been great news for selfbuilders and partly responsible for feeding the interest in selfbuild over the years. However, if you are renovating an existing property, rather than rebuilding it, then you have every right to feel indignant at the apparently arbitrary way this tax concession is applied. Why should a new bathroom or kitchen cost 17.5% more in a renovation than in a new build or a conversion?

The small builders themselves are only too aware of the different tax regimes applied across their workload. Add to this the other piece of the VAT jigsaw – the turnover threshold – and there is plentiful reason why builders wanting to remain below the threshold work for cash when undertaking RMI works.

Cash payments are a problem. It’s not actually illegal to pay a builder in cash, but it is quite another thing to enter into a contract whereby the builder knocks off the VAT if you pay cash. If there is so much as a hint of a discount, then both parties are engaged in a criminal conspiracy. However, the temptations for both builders and their customers are huge, and thus a great deal of RMI work ends up in the black economy — and any hopes of making building work more transparent, more accountable, and more professional go by the wayside.

But, surprisingly, the biggest loser in this current arrangement is the Government. For several years the Isle of Man has trialled a system where renovation and improvements have attracted a reduced rate of 5% VAT. As a result, many more builders have been happy to register for VAT, their customers seem happy to pay VAT at this rate, and the Manx Government’s tax take has actually risen. Other countries in the EU have trialled something similar, with the same results. It appears that the building trade and their customers are happy to live with a sales tax, provided it is set at a reasonably low rate. It’s the 17.5% that causes all the problems.

What is now certain is that a reduction in the VAT rate for renovators and improvers would be a welcome shot in the arm for the building trade at a time when much of their regular workload has dried up. With people currently choosing to stay put rather than moving house, the Government could make a real difference — let’s hope they are listening.

CUT THE VAT COALITION

The Cut the VAT coalition was set up by 12 organisations, including the FMB (Federation of Master Builders), RICS (Royal Institute of Chartered Surveyors) and the Countryside Alliance, and serves to petition for VAT reduction – from 17.5% to 5% – on home improvements and renovation. Find out more by visiting fmb.org.uk/cutthevat

Mark Brinkley is an experienced builder and author of The Housebuilder’s Bible