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Value Added Tax (VAT
The PRS has made great improvements in relation to improving the quality and condition of its housing stock, but still has some way to go in order to provide parity with other tenures. Unfortunately private landlords do not benefit from the same funding provisions as social housing providers in order to meet decent homes, and related, targets and face additional hurdles.
One of these hurdles is the additional expense of VAT in relation to efforts to renovate and refurbish private-rented properties.
VAT is charged when an appropriately registered business sells to either another business or to a non-business customer. VAT registered businesses can generally reclaim the VAT they've paid. There are three rates of VAT, depending on the goods or services the business provides.
From January 2011 these rates will be:
Standard - 20 per cent- this is the default rate applied to all goods and services unless they are specifically designated as reduced or zero rate.
Reduced - 5 per cent – certain goods and services may be subject to a reduced rate, for example domestic fuel charges, children’s car seats and installation of energy-saving materials.
Zero - 0 per cent – some goods and services may be zero rated. These include; food (not including restaurant meals or takeaways), books, newspapers, public transport and children’s clothes.
Goods and services which qualify for reduced or zero rate VAT are restricted by legislation.
However, VAT rate reductions could still be used as a fiscal stimulus to encourage investment in the housing market. In particular reducing the rate of VAT chargeable in connection with services and supplies would significantly reduce the cost of carrying out repair and maintenance work across tenure. This in turn would help to incentivise improvements and lead to greater investment in housing stock – helping to achieve decent homes targets in the private sector.
Furthermore, reducing the rate of chargeable VAT would reduce the price advantage tradesman operating in the black economy may have over legitimate businesses which charge VAT, and therefore drive down potential tax evasion.
The EU ‘experimented in 1999 with reduced VAT rates for labour intensive services involving nine countries: Belgium, Luxembourg, Italy, France, Spain, Netherlands, Portugal, Greece, and the UK, represented by the Isle of Man. These countries were permitted to reduce VAT within certain categories including renovation and repairing of private dwellings.
As a result of this initiative we know that a reduced rate of VAT can reap economic benefits. In December 2007, the Isle of Man Treasury reported on the impact of a reduced rate of VAT and concluded that, “The actual tax take increased despite the 12.5 per cent differential in VAT for the comparable organisations” and that, “The experiment had been a fiscal success on the Island.”
The Belgian Government saw the measure increase both turnover and employment within the relevant sectors. While the French Government saw the creation of approximately 43,000 new jobs in the construction industry and a 5.6 per cent increase in turnover in the construction industry equating to around €1.4 billion. In Italy, the measure saw the creation of between 65,000 to 75,000 new jobs in the construction industry and35,000 enterprises emerged from the informal economy and started paying VAT for the first time. And Portugal’s construction industry, which enjoyed 20 to 25 per cent growth, well above average, and created many thousands of new jobs.
As such NLA would like to see the VAT rate for renovations and home improvements reduced to the minimum allowable 5%. This would remove many of the cost barriers to improving quality standards, help to modernise aging housing stock and also remove much of the advantage traders currently operating in the ‘black market’ have over legitimate tradesman who charge the appropriate VAT.