Government weighs VAT cut for home-building to spur construction

Government officials are weighing a VAT cut for home-building in a move that could boost supply and cut house prices, according to a new report.

Builders have frequently called on Government to cut VAT on new home-building to 9 per cent from 13.5 per cent currently, arguing that this would reduce costs and spark an increase in residential construction. The Government’s Tax Strategy Group is considering the reduction, and calculates that it could cost the State €400 million a year, a report from the group published by the Department of Finance shows.

However, officials question whether builders would pass on the reduction to home-buyers as tax law does not oblige them to do so. “There is a reasonable possibility that it would be used by contractors to improve their cash flow,” says the report.

Officials add that other industries that benefited from similar VAT reductions failed to pass the reduction on to consumers. “Moreover it is important to note that any subsequent return to a 13.5 per cent VAT rate could lead to price increases being passed to consumers as firms seek to preserve their gains from the temporary reduction,” their report adds.

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They also argue that such a cut could prove difficult to administer as it would lead to two or three VAT rates on construction. They point out that the 13.5 per cent rate would remain on commercial buildings, while a decision to only reduce VAT for social housing would result in two different regimes for residential construction.

The group’s findings are closely watched as they indicate policies under discussion ahead of the budget. The group is made up of officials from the departments of the Taoiseach, Tánaiste, Finance, Public Expenditure, Enterprise and Social Protection. Officials from the Revenue Commissioners are also involved.

The document shows that investors bulk bought 630 properties since the Government imposed a special 10 per cent stamp duty rate on purchases of 10 or more homes in May 2021. The rate was meant to deter investment funds from “bulk buying” homes and creating an extra barrier to first-time buyers or families. Government raised €20.5 million from the tax up to March this year following 366 returns covering 630 properties. However, the report stresses the figures do not show how many deals did not take place as a result of the Government imposing the tax.

Meanwhile, businesses have claimed more than €105 million under a scheme to aid them in paying increased energy bills announced in last year’s budget. According to the Tax Strategy Group, by June 22nd Revenue had approved 47,084 claims from businesses worth €105.45 million, of which €99.1 million had been paid out.

The Temporary Business Energy Support Scheme (TBESS) allows businesses to claim up to €45,000 a month against energy bills that have surged since the outbreak of the Ukraine war in February last year.

Department of Enterprise, Trade and Employment officials are developing a similar scheme for businesses that use kerosene oil. That will use cash not taken up under the TBESS, which covers gas and electricity, but not oil, liquid petroleum gas or other fuels.

The group says that Revenue “tentatively estimates” the likely cost of an income tax credit refund scheme at €1 billion, leading to a significant loss of income to the State. Such systems refund cash to workers whose income is too low to use up all their available tax credits, so are seen as a way of aiding those in low-paid jobs. However, the report cautions that detailed consideration of the costs, benefits and whether the move would be the best use of public resources is needed before any decision.

The group also questions whether their introduction would tackle the causes of “in-work poverty”.