Following on from my recent blog about the Green Deal, I read a piece in The Sunday Times (June 17) by Economics Editor David Smith questioning the discrepancy between the high ‘Skip Index’ (a measure of activity in the home improvement market) and the fall in construction output of 4.8% for the first quarter of 2012. I suspect this is due to the fact that so much domestic building work (Renovation, Maintenance and Improvement or RMI) falls within the black economy and is therefore not officially measured.

I therefore emailed David with my thoughts:

Re: This week’s ST column. The Skip Index does not correspond with the UK Construction Sector Output figures because so much domestic building work falls within the black economy. A vast proportion of residential building work is paid in cash and would be very hard to measure, as much of the money goes abroad.

Reducing VAT to 5% on home improvement would provide a much needed boost to the construction sector and bring a significant slice of this activity within the tax net, as the incentive of a 15% discount on building materials would far outweigh a potential saving of 5% on labour costs.

Research undertaken a few years ago by the Federation of Master Builders suggests such a move would at very least be tax neutral. It would also appease all of those listed home owners who right now are cancelling building contracts with VAT registered contractors and hiring builders from Eastern Europe ahead of the October 1st deadline that ends the Zero rate on approved material alterations.

Reducing the rate of VAT on home improvement would also be a far better way to incentivise improvements in energy efficiency in existing housing than the proposed Green Deal, especially if combined with compulsory CO2 output targets for anyone extending or converting (sensible draft Building Regulations to achieve this have been shelved twice).

The Green Deal is great in principle, but where is the carrot for homeowners in a ‘deal’ that requires them to hand over any saving they achieve by reducing their fuel bills to service an overpriced loan? Green Deal or no Deal!

Michael Holmes

David’s response was as follows:

Michael, Very good point. I suppose the argument about reducing VAT on home improvement is all about the deadweight cost – in other words would the amount the government lost from people who currently pay 20% be more than offset by the extra it would receive from boosting activity at a reduced VAT rate. But I agree that at the very least it would stimulate officially-measured activity.

Regards David Smith

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