The effects of a reduction in the rate of VAT on the labour element of housing repair, maintenance and improvement
On 10th March 2009 the European Council of Finance Ministers (ECOFIN) announced that it would allow EU Member States to permanently reduce VAT to five per cent on the repair, maintenance and improvement (RM&I) of private dwellings.
New research suggests that reducing VAT to 5% on the labour element of domestic repair, maintenance and home improvement (RM&I) works would create over 100,000 new jobs in the UK.
The Cut the VAT Campaign argues that a reduction in VAT to 5% for all domestic RM&I works would bring thousands of empty properties back into use and help the Government achieve its target of cutting carbon emissions by 80% by 2050. It would also benefit millions of UK homeowners by helping to eliminate rogue traders, helping those who cannot afford vital repairs to their homes, encouraging the use of existing structures to rather than adding to the pressure on urban sprawl and greenbelt land, and by reducing the number of households in fuel poverty.
The Cut the VAT Campaign is supported by over 50 varied organisations and the campaign has successfully won support from across the political spectrum. The Labour Party, Plaid Cymru and the Scottish National Party all support the policy of reducing VAT on domestic RM&I work to 5%. The Liberal Democrats also argued for a lower rate of VAT on home repairs in their 2010 General Election manifesto. With the UK Government in need of effective policies that will generate growth and jobs, a reduction in VAT on domestic RM&I is a logical choice.
Since the publication of ‘The Opportunities and Costs of Cutting VAT: The effects of selected reductions in the rate of VAT on the labour element of housing repair, maintenance and improvement’ in February 2010 much has changed. Therefore, once again, the Cut the VAT Campaign has commissioned the economic analysts at Experian to update the research. This new report restates the case and updates the evidence base. The first section of this briefing paper provides a summary of the recent research findings. The second section is designed to assist supporters of the Cut the VAT Campaign increase the impact of these findings.
The housing repair, maintenance and improvement market
Repair, maintenance and improvement (RM&I) work for the housing sector covers everything from small painting and decorating jobs to major refurbishment and improvements, such as extensions and room conversions. In fact, everything that can be done in the residential market short of building a completely new dwelling. According to the latest data from the Office for National Statistics (ONS), output in the housing RM&I sectors totalled just over £22.2bn, in current prices, in 2010.
In addition to the £22bn of work undertaken legitimately, a further £9.3bn of work is estimated to have been undertaken in the ‘informal’ economy in that year. Also, some £6.1bn of building materials were purchased for do-it-yourself (DIY) improvements to domestic property.
Output data from the ONS on housing RM&I work is inclusive of labour and materials. The research only looks at the impact of a reduction in the rate of VAT on the labour element of this, which has been calculated at 38% of housing RM&I work .
The research uses a series of realistic assumptions relating to the likely affects on overall demand for RM&I and transfers from the informal to the formal economy to calculate the results of a reduction in VAT to 5% on the labour element of all housing RM&I work. This has led to a central scenario where demand for RM&I work increases by 5% and there is a 5% shift from DIY work to professionals.
Key findings:
Reducing VAT to 5% for all domestic RM&I works would create over 100,000 extra jobs in the UK and would help the Government to achieve its target of cutting carbon emissions by 80% by 2050.
Such a cut would also have considerable social and financial benefits for the public sector by reducing the VAT bills of housing associations and local authorities, enabling more of the current expenditure to be used for improving the UK’s 4.9 million units of social housing stock, thus supporting the Government’s Decent Homes programme.
Furthermore it would benefit millions of UK homeowners by reducing bills for those who cannot afford vital repairs to their homes; help bring empty properties back into use thereby assisting with the alleviation of the housing supply crisis; remove the perverse incentive to demolish existing buildings to avoid the VAT bill; encourage the use of existing structures rather than continuing the urban sprawl and building on greenbelt land; and help protect consumers by cutting the competitive advantage of the informal economy over legitimate traders.
Key figures:
The research demonstrates that the immediate effect of a reduction in the rate of VAT on the labour element of domestic RM&I works from 20% to 5% would be a net revenue loss to the Government in 2012 of between £161m and £864m. However, such a move would be likely to have the following outcomes:
• Provide a total economic stimulus in the region of £1.7bn in 2012 alone, rising to over £20bn by 2020.
• Create more than 26,650 jobs in the construction sector, as well as an extra 34,400 new jobs in the wider economy in 2012. A cut to 5% would create an extra 100,500 jobs in the UK by 2020.
1. Calculated as an average of labour-materials spend across a range of RM&I work which came out of the CFR/BSRIA 1996 survey on the home improvement market.
• Create an extra 3,625 construction jobs in Scotland, 1,461 in Wales and 572 in Northern Ireland by 2015.
• Release an extra £374m a year to improve the UK’s social housing stock, which required a total expenditure of £7.9bn in 2010.
• Help renovate or bring back into use approximately 20,160 homes per year over the next decade, by 2020 this could see up to 181,000 extra social homes brought back up to the Government’s Decent Homes standards.
• Stimulate additional spending of around £1.45bn on energy efficiency measures over the decade, which could result in over 163,000 extra homes installing double glazing, insulation and energy efficient boilers between 2012 and 2020. According to figures from the Energy Saving Trust this would save up to 393,600 tonnes of CO2 over the period to 2020.
• Significantly reduce the competitive advantage of the informal economy estimated to be worth £9.3bn a year.
The FMB fully supports the Government’s flagship Green Deal policy. However, ministers must help the private sector prepare for the Green Deal by stimulating further demand in the energy saving market.
At present, the VAT treatment of energy saving materials and microgeneration technologies is inconsistent. The measures highlighted in red in the table above already attract the reduced rate. However, double glazing and boiler replacement do not.
A flat rate of 5% VAT on all energy efficiency measures would result in fairer and more coherent treatment of the energy saving market. Our research shows that to levy VAT at a rate of 5% on the £1bn per year labour element of double glazing and boiler only replacements would cost just £151m per year.
Join the campaign to cut VAT on all home repair, maintenance and improvement work
Independent research shows that this particular change to VAT rates would bring about a number of significant advantages to the UK, which include stimulating economic growth, creating over 100,000 new jobs, improving our housing stock, encouraging spending on energy efficient home improvements and a dramatic reduction in the competitive advantage of cowboy builders. Information about how you can get involved in the campaign is available on the Cut the VAT website.
Please visit the website to sign the online petition and find out more about how you can help us to make an impact. You can also like the campaign on Facebook and share the information with your followers on Twitter.
Spread the word - Share support on Twitter and ‘like’ the Cut the VAT campaign on Facebook to help us to reach out to the millions of people who could benefit from this change. Supporters can even even pin a Cut the VAT Twibbon to their Facebook profile picture.
Add the Cut the VAT campaign to your website - Help share the facts and figures about the campaign with visitors to your website by adding a summary of the research and the campaign logo both available on the Cut the VAT Campaign website.
How can MPs help?
Here are some things everyone can ask their MP to do:
Petition the Minister - Write to the Exchequer Secretary, David Gauke MP, to bring the matter to his attention; request a visit from the Exchequer Secretary to meet with constituents about the Cut the VAT Campaign.
Within Parliament - Sign EDM 59 VAT on Repairs and Maintenance to Existing Buildings (they will not be able to do this if they are a government minister); depending on their position they can raise this issue in Parliament during a speech, or even by moving a ten minute rule motion (this would allow a ten minute speech on the issue and a chance to bring forward legislation for further debate by Parliament).
Within their Party - Opposition MPs should raise the issue with the relevant shadow minister and encourage the party to adopt and maintain the reduced rate of VAT as party policy. All MPs should discuss the issue with their party colleagues and raise the issue at party meetings.
Within their constituency - Include information about the Cut the VAT Campaign when communicating with their constituents via newsletters, websites, social media etc; raise awareness of the campaign through their local press (the FMB can provide a draft press release for MPs to use); attend any local events with FMB members.
Online - Visit the campaign website (www.cutthevat.co.uk) to sign the online petition and find out other ways to spread the word; provide a quote in support of the campaign which can be added to the website.
