Taxing times – how will the VAT rise affect the building trade?

June 28, 2010 - PRLog -- Friday 25 June 2010 – now the dust has settled, following George Osborne’s announcement of his “tough” new tax measures, the UK construction industry is asking the same question as everyone else. How will the VAT rise affect the building trade? Osborne has put the standard rate of VAT up from 17.5% to 20% – a measure that will affect everyone by making daily items more expensive. Will the new VAT rate of 20% make building, and buying, houses and other construction projects more expensive?

Fortunately, the short answer is basically “no”. That’s because construction work, and a significant portion of the materials involved in it, is subject to the lower VAT rate of 5%. The emergency budget released by Mr. Osborne raised the Standard rate of VAT to a much publicised 20% - the lower rate, which has been 5% for some time, remains unchanged. Items and services taxed at the lower rate of VAT include: energy saving products, such as double glazed windows and insulation; heating products and heating services; and all construction work on uninhabited buildings. Some of these tax breaks for builders dovetail nicely with the Government’s new Building Regulations, which require a hike in the energy saving potential of building materials for new builds and extensions. In effect, the budget is trying to encourage eco friendly (not to mention money saving) construction by making the materials needed to improve the energy rating of houses less expensive in tax terms.

Building, of course, is a trade uniquely tied up with Governmental targets, in that it supplies the housing we’re always hearing people argue about in the Commons. You can’t house people without houses, so it has always been in the interests of the Government to encourage the trade to build new ones. As a result, all new builds are completely tax free: while converting existing buildings into residential dwellings, or renovating an empty house or flat, are taxed at the reduced rate of 5%. Any alterations or installations designed to help disabled persons also reap the benefit of zero rated VAT.

Where VAT is zero rated, construction companies are usually able to zero rate the materials they purchase in order to complete work as well. That means that customers pay no tax on either the building work or the items used to complete it. For people commissioning new builds, then, the VAT hike means nothing – no impact, no struggle to find an extra 2.5%’s worth of cash, and no worry. As the reduced rate of VAT also remains unchanged, there’s no real impact to be found where builders and their clients are involved in projects that come under the specified exemption clauses listed earlier.

The rise in VAT will have an effect on some building: granny flats, alterations and extensions to inhabited properties, and loft conversions, for example, are all chargeable at the new standard rate of 20%. The impact this will have on the building trade and its customers is simple and clear: everyone is going to have to pay more for the same services and materials.

On the one hand, that’s a seeming inconvenience: on the other, it’s a tax raise in an area where cost, to a degree, is a negligible part of the equation. To explain: a great deal of commissioned building work on inhabited properties is undertaken to satisfy the desires of the homeowner, rather than any particular necessity. As a result, building work done on inhabited properties is generally something that is done at the request of clients whose income is such that they can afford to have it done. That, within reason, makes the actual cost a secondary part of the equation – everyone is going to have to pay more, but if they’ve got the money to pay the price that’s not going to affect them further than being slightly annoying. All building work undertaken for customers whose income puts them at risk of not being able to pay full VAT prices, as listed above, is subject to tax breaks of either 15% or the full 20%. In which case, the answer to our original question – how will the VAT rise affect the building trade? – is, mostly, not too much.

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