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VAT: Construction

Volume 488: debated on Wednesday 25 February 2009

To ask the Chancellor of the Exchequer what the revenue effects would be of reducing the rate of value added tax on rebuilding and renovation work to (a) 3 per cent., (b) 4 per cent., (c) 5 per cent., (d) 6 per cent., (e) 7 per cent., (f) 8 per cent. and (g) 9 per cent. (258576)

Using data from the Office for National Statistics’ Construction Statistics Annual 2008, and assuming all of this expenditure to have been subject to the standard rate of VAT (17.5 per cent. in 2007) then the following illustrative costs can be estimated for different rates:

Alternative VAT rate (percentage)

Illustrative revenue impact, (£ million)

3

-2,100

4

-1,950

5

-1,800

6

-1,650

7

-1,500

8

-1,350

9

-1,200

Note:

Under EU laws the minimum permitted reduced rate of VAT is 5 per cent.

These estimates are very tentative. The definition of expenditure used in the data covers a wide range of activities, some of which will already be subject to the current 5 per cent. reduced rate of VAT (while complete demolitions and rebuilds of houses are currently zero rated). The estimates also do not factor in behavioural responses, the current 15 per cent. standard rate of VAT, those businesses not registered for VAT or developments in the relevant markets since 2007.