How to save the green grass of home

While the housing shortage worsens, empty properties are being left to fall into disrepair. Paul Gosling looks at the case for VAT reforms which would make restoration of existing properties more viable and save our green belt land from over-development

A quirk in taxation law is leading to homes unnecessarily being built on green belt land. At least one million homes are lying empty, partly because renovating derelict properties, which are subject to full rated VAT, can cost more than building new homes, which are free of VAT.

The Empty Homes Agency, a quango, has asked governments for the last two years to harmonise VAT at 5 per cent for new homes and for refurbishment. An estimated 4 to 5 and a half million new homes are needed to meet the growing demand for housing, and it is generally accepted that only an imaginative use of so-called brown-field sites - derelict land - will save green belt land from major erosion.

But Bob Lawrence, chief executive of the Agency, says: "We can knock a million off that number if there is reform of VAT. In most cases a builder will prefer to demolish and re-build, or build on green land, because it is cheaper."

Among those supporting the proposal for VAT harmonisation is planning and regeneration pressure group, the Civic Trust. Director Mike Gwilliam says: "We need to make better use of resources in towns and cities, bringing people back into some of those areas and making them sustainable. Ideally we would like there to be a zero rate of VAT for conversions of redundant buildings." The Chartered Institute of Housing and the Council for the Protection of Rural England also back VAT changes.

The Civic Trust wants the Government to go further by introducing fiscal penalties on new building in green belt areas. It says that the high costs of cleaning often heavily polluted inner city sites should be balanced by a new greenfield levy of at least 10 per cent.

The building industry says that European Union rules prevent reducing the VAT rate on conversions, but research conducted by the Royal Institute of Chartered Surveyors has concluded that it is possible. RICS says that provided the rate reduction was part of a social housing policy then the Government would be permitted to cut the VAT rate. It adds that the existing disparity in VAT is a major factor in encouraging new building, rather than using existing empty properties.

At the last count conducted by the Empty Homes Agency it found there were 765,000 empty homes in England, with one in three empty for more than a year and in a state of worsening disrepair. A further 800,000 vacant properties were identified that could be adapted for use for housing - including hotels, hostels, nursing homes and some low-rise office blocks. The Living Over The Shop campaign says another half a million homes could be created out of rooms lying empty above shops.

Some councils, such as Reading, now see using these vacant properties as the only way they can meet their need for new housing, without an unacceptable encroachment into green belt land. Reading has spent pounds 6 million in the last five years on this strategy - pounds 1 million of which went in VAT payments. The council has created 430 homes during this period, but says it could have provided a further 70 if VAT had not been payable at full rate.

Nottingham City Council has asked its staff and the public to report empty homes, allowing it to offer owners grants to bring properties back into use, with the threat of compulsory purchase orders (CPOs) if they fail to do so. Out of 328 properties so far dealt with, in only 32 cases did the council need to actually use CPO action. Where Nottingham has bought the empty properties they have been re-sold to housing associations, with the council nominating tenants.

St Edmundsbury council in Suffolk has an empty homes strategy, which aims to bring 50 properties a year back into use, at a cost of pounds 2.5m. One old Inland Revenue office block that had lay derelict for 12 years has now been converted into 22 flats. It also contributed pounds 2m towards converting a Victorian school, disused for eight years, into a foyer bringing together accommodation for 52 homeless people, training, a cyber-cafe with Internet facilities and a community radio station. The council is spending a further pounds 250,000 annually to convert empty rooms over shops into flats, helping repopulate the centre of its urban and village areas.

The House Builders Federation is appalled by proposals for harmonisation of VAT on new build and refurbished properties. David Moat, spokesman for the Federation, says: "Neither we nor the Government accept that to slow down the building of new homes is a viable option. The Government has given us an explicit confirmation that new homes will be zero rated for the foreseeable future. Over 50 per cent of new homes are built in urban areas. Builders do not want to build in the countryside."

Customs & Excise says that any decision on VAT rates will not be announced before the Budget. Its spokeswoman added that it was aware of what the House Builders Federation was saying on the matter, but could not make a comment.