Leader: Tax tweaks could help get housing market moving

all it “Plan B” or “Plan A with flexibility” : as recession fears continued to deepen across international markets yesterday, various stimulus proposals are now coming to the fore. First Minister Alex Salmond has taken up one of these – a call, first proposed by the Scottish Building Federation – for a targeted reduction in VAT on home improvement and repairs. This is a measured proposal, designed to stimulate household spending, which could bring much-needed work for small building firms and would also be popular with homeowners.

Home refurbishment is to be encouraged. It serves an array of desirable outcomes and does not deserve to be taxed as heavily as it is. It encompasses property modernisation, enhancement and upgrading, with improvements including insulation and measures to increase energy efficiency. This is an increasingly important consideration as fuel bills rise to penal levels. A cut in VAT from 20 per cent to 5 per cent, as called for by the construction trade, would encourage the undertaking of work, with benefits ranging from a useful extension in the life of a building to environmental gains. According to some estimates such a cut would take £750 off the cost of a £5,000 improvement.

That is a significant saving for many and would work to encourage homeowners to bring forward deferred projects. The economy is in need of stimulus and this is one small way in which the government could achieve a multi-sided advantage: a boost to household demand without putting the deficit reduction targets at risk – and it would also be a boon to many small firms.

However, it would be imprudent to over-state the benefits. As Homes for Scotland chief executive Jonathan Fair points out, a cut in VAT on home improvement could encourage people to stay longer in their existing property and thus depress the demand for new homes just when the industry badly needs a demand revival.

However, on cost, there may be a perverse advantage for HM Revenue & Customs. The hiking of VAT to 20 per cent has encouraged many opportunist builders to undertake refurbishment work on a cash basis, thus incentivising the homeowner while depriving the taxman. Estimates of this loss of revenue to the “black economy” range from £1 billion to £2bn. Most home owners, however, would be more likely to go along with paying a 5 per cent tax. Under this the tax authorities would at least get something. Another possible reform in this area would be grading the £250,000 threshold for stamp duty. This has the effect of bunching many properties around the £249,000 level. It is costs like these on housing transactions that are working to discourage demand, activity and new build. Given the energy efficiencies a new house can offer, the sector would benefit by the clearance of at least some of the barriers to demand.