<p>In the UK, a builder constructing a new home need not add tax to the price charged, but a builder undertaking repairs or renovations to an existing home must add value added tax (VAT, currently 20%).  (There are some exceptions but that's the general rule - details can be found in <a href="https://www.gov.uk/government/publications/vat-notice-708-buildings-and-construction/vat-notice-708-buildings-and-construction" rel="nofollow noreferrer">HMRC Notice 708</a>). </p>

<p><em>Question</em>: Are there any economic reasons that could justify a higher tax rate on repairs and renovations than on new construction?  I am interested in general economic arguments, whether applicable to the UK or not.</p>

<p>A possible argument for not taxing construction of new homes (even if most goods and services are subject to VAT) is that VAT should be regarded as a tax on consumption, and should instead be charged on the consumption of housing services (Barker K (2014) <a href="http://londonpublishingpartnership.co.uk/housing-wheres-the-plan/" rel="nofollow noreferrer">Housing: Where's the Plan?</a> p 64). That presumably means that, for owner-occupiers, the tax authorities should determine the value of the housing services they consume each year and charge VAT on that.  However, even this argument does not seem to justify the differential taxation of new construction, since the same argument could be applied to renovations and repairs, implying that what is taxed should be any resulting increase in the value of housing services.</p>

<p>Addendum 14/9/2017: I've slightly changed the wording so that it invites answers on either side, either yes there are reasons or no there are not.</p>

CC BY-SA 3.0
2017-10-28T07:28:45.683Z
One possible reason is that land-bankers have been much more effective in their lobbying than the people who do the repairs. There may also be constraints within the EU VAT harmonisation rules - a check on whether a similar situation holds in other EU countries, might be informative.
410 gone
CC BY-SA 3.0
2017-10-30T20:09:42.900Z
A 20% increase in the price of new homes will kill the construction market. Additionally, a 20% increase in the cost of a new home is not going to raise the new home's value by 20%. It is going to have a value about the same as an equivalent existing home. Thus, new home buyers will be starting off 20% in the hole or they'll simply buy existing homes further killing the construction industry.
Dunk
CC BY-SA 3.0
2017-10-31T11:11:55.990Z
@Dunk Charging VAT on new construction would be only one way to remove the apparent anomaly.  Another would be to exempt repairs from VAT.  A Third would be to charge a common reduced rate on both new construction and repairs.
Adam Bailey
CC BY-SA 3.0
2017-10-31T17:48:20.913Z
@AdamBailey - I'm not going to defend VAT but I was pointing out why there's an anomaly. As I thought I adequately pointed out, charging VAT on new construction is a no-go unless the government wants to put a lot of construction people and businesses out of work. Exempting repairs is that slippery slope to the government choosing winners and losers. If there are going to be exceptions they should be well-reasoned and not purely political to buy votes. A common reduced rate doesn't address the issue of the new home-buyer starting out in the hole by whatever that common VAT rate is.
Dunk
<taxation><housing>
Are there any economic reasons that could justify a higher tax rate on housing repairs than on construction of new houses?
Adam Bailey
# Are there any economic reasons that could justify a higher tax rate on housing repairs than on construction of new houses?

(Asked by: username_0 on 2017-09-10)

In the UK, a builder constructing a new home need not add tax to the price charged, but a builder undertaking repairs or renovations to an existing home must add value added tax (VAT, currently 20%). (There are some exceptions but that's the general rule - details can be found in [HMRC Notice 708](https://www.gov.uk/government/publications/vat-notice-708-buildings-and-construction/vat-notice-708-buildings-and-construction)).

*Question*: Are there any economic reasons that could justify a higher tax rate on repairs and renovations than on new construction? I am interested in general economic arguments, whether applicable to the UK or not.

A possible argument for not taxing construction of new homes (even if most goods and services are subject to VAT) is that VAT should be regarded as a tax on consumption, and should instead be charged on the consumption of housing services (Barker K (2014) [Housing: Where's the Plan?](http://londonpublishingpartnership.co.uk/housing-wheres-the-plan/) p 64). That presumably means that, for owner-occupiers, the tax authorities should determine the value of the housing services they consume each year and charge VAT on that. However, even this argument does not seem to justify the differential taxation of new construction, since the same argument could be applied to renovations and repairs, implying that what is taxed should be any resulting increase in the value of housing services.

Addendum 14/9/2017: I've slightly changed the wording so that it invites answers on either side, either yes there are reasons or no there are not.

**Tags:** taxation, housing

> **Comments:**
> **username_1**: One possible reason is that land-bankers have been much more effective in their lobbying than the people who do the repairs. There may also be constraints within the EU VAT harmonisation rules - a check on whether a similar situation holds in other EU countries, might be informative.  
> **username_2**: A 20% increase in the price of new homes will kill the construction market. Additionally, a 20% increase in the cost of a new home is not going to raise the new home's value by 20%. It is going to have a value about the same as an equivalent existing home. Thus, new home buyers will be starting off 20% in the hole or they'll simply buy existing homes further killing the construction industry.  
> **username_0**: @username_2 Charging VAT on new construction would be only one way to remove the apparent anomaly.  Another would be to exempt repairs from VAT.  A Third would be to charge a common reduced rate on both new construction and repairs.  
> **username_2**: @username_0 - I'm not going to defend VAT but I was pointing out why there's an anomaly. As I thought I adequately pointed out, charging VAT on new construction is a no-go unless the government wants to put a lot of construction people and businesses out of work. Exempting repairs is that slippery slope to the government choosing winners and losers. If there are going to be exceptions they should be well-reasoned and not purely political to buy votes. A common reduced rate doesn't address the issue of the new home-buyer starting out in the hole by whatever that common VAT rate is.  

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