The Tax Strategy Group has considered reducing VAT on construction services and materials as part of the government's housing policy.
In a paper, it points out that since 2022, EU member states can apply a reduced rate of between 5 and 15% on the supply and construction of housing which is 'part of a social policy’ as well as work on the repair and renovation of residential housing. This would include retrofitting for energy savings.
VAT on construction services in Ireland is already at a reduced rate of 13.5%.
The paper estimates that if VAT on the provision of social housing was lowered to 9%, the cost would be €400million. The cost for residential repair and renovation is estimated at €180million.
This estimate doesn’t include any allowance for underpayments of VAT.
The issues considered in the paper include getting a definition of ‘housing as social policy’ agreed, the complications involved in administering different VAT rates and whether or not the reduced rates would be passed on and if they would make ‘any material difference to the market.’
The paper notes there would no obligation on builders to pass on the potential savings in VAT and says there’s a ‘reasonable possibility’ that it would be used by contractors to ‘improve their cashflow.’
It also says that if VAT were ever to increase again, prices could also increase in order for builders to preserve the gains from what could be a temporary reduction.
The paper overall strikes a cautionary note when it comes to tax incentives and residential property.
It notes that tax reliefs in the property sector ‘contributed to the property bubble’ in the past and to a ‘misallocation of resources.’ It also points out that they’re not equally available to all taxpayers which means they are regressive. This means the better off benefit disproportionately.
