Letter from Treasury Office of Accounts
to Committee Clerk
HOUSING RENEWAL:
VAT
After the hearing 19 November, I thought it
might be helpful to the Committee to clarify the VAT treatment
of construction and repairs.
1. As the NAO Report says, the rules are
as follows:
— Much of the cost of new construction
is zero rated though fees paid to architects, surveyors, supervisors
or other consultants are charged at the standard rate.
— Some renovation and refurbishment
(for example, to convert a non-residential building to residential
use, or to convert a care home to a group of single housing units)
is charged at 5%.
— A 5% rate also applies to the renovation
and alteration of housing left empty for three years or more (two
from 2008).
— Most other work on housing is standard
rated, ie charged at 17.5%.
2. As Peter Housden said, decisions on VAT
and other taxes are policy matters for the Chancellor. Any change
would require changes in the VAT Act 1994. Perhaps this is what
David Curry had in mind when he referred to the scope for renegotiation
in Brussels.
3. In fact the Chancellor's room for manoeuvre
is fairly limited under the present European VAT Directive:
— It is not possible to extend any
existing zero rating.
— A reduced rate (which must be at
least 5%) may only be applied to: "provision, construction,
renovation and alteration of housing, as part of a social policy",
ie it could not be applied to all repairs or refurbishment, still
less to fees for consultants.
4. Thus under our current European VAT agreements,
the only way in which VAT rates could be equalised for new build
housing and renovation projects would be to remove the zero rate
and apply VAT to new build projects. Further, under these same
agreements, the only way in which the VAT rates could be equalised
for all work to housing would be set a common rate of 17.5%. Presumably
this must be why the NAO advised the Committee that there might
be some scope for action on rates.
5. While the NAO Report does mention a case
in which the difference in VAT rates apparently affected the choice
of action, the Committee will also recall Siobhan McCoy's evidence.
She said that her experience in Liverpool was that it was best
to choose the appropriate route of housing renewal by reference
to the needs of the area. She was no doubt reflecting that a whole
range of issues need to be taken into account in determining the
right course, so that VAT treatment may not be the crucial factor.
Paula Diggle
Treasury Officer of Accounts
29 November 2007
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