Is VAT incentivising housing demolition? A literature review

REPORT LAUNCHED NOW

The Public Interest Law Centre’s Gentrification Project are proud to present this new report by Jules Moscovici which questions how VAT policy influences construction, demolition and environmental outcomes, given 50,000 building are demolished every year, with the built environment representing up to 40% of the UK’s total emissions.

We have commissioned this research as a result of our work with housing campaigners and their concerns about developers hastily demolishing structurally sound buildings. We noted disparities in VAT rates between new builds and refurbishments, and commissioned researcher Jules Moscovici to produce a literature review to begin to piece together the impact of this VAT structure, especially as local authorities have net zero targets, in addition to the Government's legally-binding 2050 net zero objective. 

Overall, the literature shows that the tax regime is incentivising developers to demolish housing rather than renovate it. This has negative consequences for the environment, carbon emissions, and of course, communities. 

By looking at publications over the past 20 years, Jules found that the tax system around construction is complex and there are many exemptions, however, generally:

• New build construction resulting in housing or a charitable outcome is zero-rated or exempt from VAT 
• Most refurbishment is subject to full 20% VAT, including renovating housing which is currently/recently occupied

Notable exemptions [subject to 0-5% VAT] include: 

Refurbishing properties vacant for 2 or more years

Converting non-residential buildings into housing 

Changing the number of housing units in a building 

Certain energy-saving refurbishment measures.

Reducing VAT rates of refurbishment does make a difference. In the Netherlands and Isle of Man this has led to increased economic activity in the retrofit sector.    

What Does This Mean For Housing & Environmental Campaigners?

● Tax incentives and exemptions may be increasing the number of housing demolitions and/or related evictions, and contributing to a lack of housing maintenance.

● Focusing on environmental outcomes may be a useful legal or political strategy for housing struggles and vice versa. Many local authorities have net zero targets.

● Groups promoting alternatives to demolition could seek tax advice to see how incentives affect developers, architects and councils.

● The complexity of the tax system and its incentives may also be contributing to the housing crisis in other ways. For example, the fact that live-in guardians do not count as ‘occupying’ a property may be (further) encouraging landlords to evict ‘ordinary’ tenants. By doing so, landlords may benefit from VAT exemptions for renovating ‘vacant’ property in the future.  

You can read the full report here