VAT reductions
47. A central recommendation of the Sustainable Development
Commission's 2006 Stock Take report was that VAT rates for work
related to refurbishing, renovating and otherwise improving homes
should be equalised with lower rates applying to new-build construction
or demolition works. At present, the former work often attracts
full-rate VAT at 17.5 per cent while the latter is exempt from
VAT, arguably providing a significant financial incentive for
builders, developers and other parts of the construction industry
to focus their efforts either on building new homes or on knocking
down old ones rather than on improving them. As noted earlier,
although the Government itself commissioned the SDC's work, it
has not, in the 18 months since its delivery, directly responded
to that or any other recommendation contained in it.
48. The Government appreciates the role that VAT
reductions can play as incentives for renovation and refurbishment.
In Budgets since 1998, it has progressively reduced the VAT rate
to 5 per cent for the professional installation of certain energy-saving
materials, including insulation, draught-proofing and some microgeneration
technologies. This does not, however, allow for reductions when
homeowners choose to install measures themselves. The Construction
Products Association backs the extension of a lower VAT rate to
DIY work:
Many householders are, for example, quite capable
of installing loft insulation themselves and yet they are paying
the full rate of VAT on a product the Government must surely want
to encourage them to buy. We therefore believe that the Government
should reduce the rate of VAT on key energy efficient products,
irrespective of how they are installed.[65]
The Chartered Institute of Building Services Engineers
(CIBSE) has sought a system that places rather more value on the
quality of the installation work. CIBSE has pressed, and continues
to press, CLG to provide in the Building Regulations for a "Competent
Persons" scheme, under which qualified installers could certify
that work on such things as window frame replacement or domestic
electrical installations met the required standard.
49. The Commission for Architecture and the Built
Environment (CABE) believes the Government should urgently review
the VAT regime "which currently disadvantages improvements
to the existing housing stock, and works in favour of new build."[66]
CABE also believes that UK VAT rules are out of alignment with
practice in other parts of the European Union, an impression the
Sustainable Development Commission agrees with, particularly as
regards Germany and France.[67]
The Government, in fact, is in discussion with its EU partners
about introducing a widened reduced VAT rate for energy-efficient
products, with the specific intention of encouraging private householders
"to make more sustainable decisions."[68]
50. The Royal Institution of Chartered Surveyors
(RICS) refers to the "perverse incentive" that makes
it cheaper to knock down a property and rebuild rather than improving
it.[69] Friends of the
Earth calls the same thing an "anomaly".[70]
Jack Pringle, former President of the Royal Institute of British
Architects (RIBA), told us:
we see in projects time and time again that the imbalance
between zero-rated on new build and 17.5 per cent on refurbishment
can skew the strategy of some projects and can inhibit the final
spend, if you like, on elements that would be highly beneficial
like renewable energy sources.[71]
51. The then Minister for Housing told us that decisions
on VAT rates, as with all taxes, were a matter for the Treasury,
not for her (although as she has since become Chief Secretary,
this is less true of the person than of the post she then held).
That said, she did point out that the Exchequer would lose revenue
by effectively subsidising works many people currently undertake
without a VAT reduction:
The difficulty with [reduction] is the deadweight
cost. Obviously there are a lot of refurbishments that already
take place and therefore it would be a hugely expensive thing
to introduce if this were to be done right across the board.[72]
The SDC has suggested, however, that VAT rates for
both refurbishment works and demolition/reconstruction could be
equalised at around 11 or 12 per cent without reducing revenue
to the Treasury.[73]
A range
of witnesses have pointed out the perversity of differential VAT
rates that may in some circumstances make the demolition and reconstruction
of a home more financially attractive than its refurbishment or
renovation to a higher environmental standard. We recommend that
the Government seek to remove this anomaly.
Council tax rebates
52. Council tax rebates are a further financial incentive
frequently suggested for householders. The SDC and the Association
for the Conservation of Energy are among supporters of the idea.
Friends of the Earth notes that council tax could be used to
apply rebates at any time and not just at the point when a property
is bought and sold, allowing wider coverage than, say, a reduction
in stamp duty for carrying out repair works.[74]
Centrica, the parent company for British Gas, has put a form
of rebate into practice by working with 64 local authorities across
England to offer householders returns of between £50 and
£100, administered via council tax bills, after they have
had subsidised cavity wall insulation installed in their homes.
The Local Government Association notes that such schemes have
proved popular with householders, and agrees that council tax
rebates offer "an obvious area for linking the energy efficiency
of the property with the level of tax."[75]
We commend
Centrica's initiative in administering rebates through council
tax and urge other energy suppliers to follow suit. We urge the
Government to monitor the success of such schemes.
Stamp duty rebates or reductions
53. As already noted, stamp duty has also come in
for some attention as a potential source of a financial incentive
for householders who make energy efficiency improvements. The
RICS and the Association for the Conservation of Energy both back
the idea, the latter suggesting that purchasers who make improvements
to their homes within a set period—perhaps six months after
moving in—should receive a rebate.[76]
Friends of the Earth, however, has argued against such a rebate,
on the grounds that only property owners would benefit from it
and that, since it would apply only when houses were bought and
sold, it would take more than a decade to reach even half of all
homeowners.[77]
54. The Government has in fact already established
the principle of granting stamp duty relief for energy efficient
performance—but once again it has chosen to focus on new
build rather than existing stock. Last year's Budget contained
a time-limited stamp duty land tax providing relief for zero carbon-rated
new developments. This year's Budget extended the exemption to
new flats, retrospectively from 1 October 2007.[78]
CLG has said this "will provide a way of stimulating the
innovation needed to develop what is currently a niche market
into a mass market".[79]
It is hard to see why this logic should apply only to new build,
and once again the question arises of why the Government continues
to focus on new build to the disadvantage of the existing stock
that represents the bulk of the problem. Stamp duty rebates tied
to specific improvements to a newly purchased home within a specific
time frame would surely equally stimulate innovation and develop
fledgling markets in microtechnologies. The obvious way to implement
such rebates would be to connect them to the newly introduced
Energy Performance Certificates, to which we shall turn in the
next chapter. Having recognised
that stamp duty reductions or rebates can incentivise energy efficiency
improvement in new-build homes, the Government should apply the
same logic to existing homes. Once again, the Government's emphasis
on measures aimed at new development underestimates the carbon
reduction contribution required from the vast bulk of the housing
stock. We recommend the development of a scheme to provide stamp
duty rebates or reductions for all home-owners who act on certain
Energy Performance Certificate recommendations within a year of
moving in.
64 Ev 140 Back
65
Ev 154 Back
66
Ev 175 Back
67
Ev 175, and Q 9 Back
68
Ev 285 Back
69
Ev 202 Back
70
Ev 215 Back
71
Q 35 Back
72
Q 289 Back
73
Sustainable Development Commission, Stock Take: delivering
improvements in existing housing, July 2006, pp. 21-22 Back
74
Ev 214 Back
75
Ev 312 Back
76
Ev 202 and Ev 99 Back
77
Ev 213 Back
78
HM Treasury, Budget 2008: Stability and Opportunity: building
a strong, sustainable future, 12 March 2008, para 6.73 Back
79
Department for Communities and Local Government, Building a
Greener Future: policy statement, July 2007 Back
