Robbing Peter to pay Whitehall

Plans to introduce VAT on all home-building projects could force hundreds of Britain's largest builders and developers out of business – and leave homeowners with an even bigger hike in the cost of buying a new property. The move, which would add 5 per cent VAT to a previously zero-rated sector, was condemned this week by UK property companies. And several say they face the "unthinkable and invidious" prospect of abandoning housebuilding altogether in favour of commercial projects. So what are the implications for homebuyers? If developers decide to pass on the new VAT, a couple moving into a £260,000 house would pay £13,000 on top of their £7,800 stamp duty (3 per cent) while purchasers moving into a £550,000 home would have to stump up £27,500 plus £22,000, equivalent to the price of a three-bedroom terrace house in Manchester.

Plans to introduce VAT on all home-building projects could force hundreds of Britain's largest builders and developers out of business – and leave homeowners with an even bigger hike in the cost of buying a new property. The move, which would add 5 per cent VAT to a previously zero-rated sector, was condemned this week by UK property companies. And several say they face the "unthinkable and invidious" prospect of abandoning housebuilding altogether in favour of commercial projects. So what are the implications for homebuyers? If developers decide to pass on the new VAT, a couple moving into a £260,000 house would pay £13,000 on top of their £7,800 stamp duty (3 per cent) while purchasers moving into a £550,000 home would have to stump up £27,500 plus £22,000, equivalent to the price of a three-bedroom terrace house in Manchester.

The VAT bombshell follows the release of statistics from the Office of the Deputy Prime Minister, showing the biggest fall since 1924 in the number of new homes being built. The 220,000 new households in 2001 surpassed the number of new homes (162,000) for the first time since records began. The 2002 figures are likely to be similar. "The fact there are more households than dwellings is a frightening statistic," says Pierre Williams, of the House Builders Federation.

"The Government has admitted the growing imbalance between supply and demand is a key factor in long-term house inflation. Housebuilders simply won't be able to integrate VAT into the costs of building new homes, housing development and land purchase. It will inevitably rebound on the homebuyer and increase the prices of property. It will also lead to a catastrophic reduction in the amount of land bought for redevelopment."

A recent HBF/Halifax survey shows more homeowners want to buy new homes. But Paul Cooper, of Try Homes, says: "With VAT on top of everything else, the new-homes market simply won't be able to compete. It will drive people back into buying second-hand again." The other threat, he says, will be to the UK's 1,000-plus medium to large housebuilders and developers. "We will be forced to move into commercial building and development and have to replace all new home schemes with office blocks and factories. Housebuilders have to plan two or three years ahead. It would have such a harsh effect on our margins that we would have to pass the VAT on to housebuyers."

Cooper, who specialises in urban regeneration, adds: "The tax goes against all the Government's announcements about under-supply and the brownfield projects it has been espousing to help relieve congestion in the southern housing market. There must be more viable options than VAT to reduce the Government's public sector borrowing requirement."

Malcolm Harris, chief executive of Bovis Homes, one of the UK's largest housebuilding companies, says: "If the Government wishes to increase the supply of new housing, the last thing they should consider is VAT on new homes. This additional tax would further reduce the supply of new homes and impose yet another tax on the British public."

Tony Richardson, of Lane Fox, says if VAT takes immediate effect after the Budget, "builders and developers will be crippled and many forced out of

business". Even if it is being phased in over a longer-term, it will take the industry at least 18 months to re-adjust, he says.

The idea of adding yet another item to the homebuying package has prompted the Council of Mortgage Lenders to call for rearguard action to rescue the UK's beleaguered housing industry. The council's Bernard Clarke says: "The Government needs to reform the stamp duty system and make the tariffs fairer and cheaper. They should also reduce VAT on property repairs so that we have better-quality housing."

In 2000, Gordon Brown reduced the VAT bill for house conversions from 17.5 to 5 per cent, while any renovation work on homes standing empty for 10 years or more became zero-rated. John Davison, VAT partner at accountant Baker Tilly which acts for several large property companies, says: "The Government was quite happy to bring in these helpful measures. Now it wants to introduce VAT on new homes. It would be particularly disastrous for first-time buyers desperate to move into a new property."

In response to the concerns, an HM Treasury spokesman says rather equivocally: "VAT on new housing is not for us to decide. Taxation issues are matters for the Chancellor of the Exchequer and the Budget."