United Kingdom - VAT rules discourage refurbishment

The National Audit Office has added its voice to those calling for a rethink of the VAT rules that make it cheaper to demolish and rebuild homes than to refurbish them.

The NAO noted the issue in its report last week on the government's £2bn 'Pathway' Housing Renewal Programme to tackle low demand for homes in the north and Midlands.

A plan to revamp a street in Salford saw a local council pay £1.4m more to demolish buildings to save on VAT of £2.8m, it said.

'The proposal involved retaining as much of the existing structure - walls, floors and brickwork - as possible. However, when appraised in July 2004 this refurbishment scheme attracted an additional VAT cost of £2.8m, a sum that English Partnerships and Salford City Council could not meet.

'Consequently, the scheme was altered to ensure it qualified as a new build project at the zero VAT rate. Much of the original properties were demolished with only the facades retained,' the report said.

The sustainable development commission has already highlighted the issue. 'Of the houses we have today, 75% will be here in 2050 so we need to remove barriers to their maintenance and upgrade now,' it said in a policy document on the issue.