Renovation of Empty Property (VAT)

Chloe Smith Excerpts

Tuesday 18th October 2011 Westminster Hall

[The Economic Secretary to the Treasury (Miss Chloe Smith)]

Thank you, Mr Chope. I am grateful for your warm welcome. I thank the hon. Member for Sefton Central (Bill Esterson) for securing this debate. I acknowledge some of the good arguments that he made, but I believe that his proposal is not the right tool for achieving economic growth. I shall deal with some of his specific points, including a note on apprenticeships, a little on energy supply and some remarks on green opportunities for householders.

The hon. Gentleman made some sensible arguments regarding the reuse of empty properties. Of course, we would all like existing housing stock to be put to good use; I know that from my constituency, as I am confident he does from his. He also made good points about the need in the current economic situation to support small businesses as best we can, and about evasion. I shall come to those points, but I will begin with a few words about the Government’s policy on empty property in the round before discussing the specifics of how VAT applies to empty property. I reassure you, Mr Chope, before I veer anywhere near being off-subject, that tackling the country’s 700,000 empty homes is a priority for my right hon. Friend the Secretary of State for Communities and Local Government, as promoting growth and apprenticeships are for all my other colleagues.

The hon. Gentleman will know that in this year’s Budget, the Government announced £180 million for up to 50,000 additional apprenticeship places over the next four years. That is real action, and I am sure that hon. Members agree that it will meet some of the concerns raised in this debate.

On 20 September this year, the Department for Communities and Local Government announced more powers for community groups to bring empty homes back into use. Community and voluntary organisations will be able to bid for a share of £100 million in Government funding to pioneer housing schemes to help ensure that empty properties are lived in again. That will also help to provide more affordable housing, which I am sure the hon. Gentleman welcomes.

[Bill Esterson]

I welcome the Minister to her role. I do not know whether this is the first debate that she has responded to, but I congratulate her on her appointment. She mentioned the £100 million available to community groups. How many homes are expected to be brought back into use as a result?

[Miss Smith]

I will ensure that the hon. Gentleman receives a specific figure, as I do not have it with me. However, as I will discuss—this goes straight to the heart of the issue—incentives also exist for councils to bring empty homes back into use by including them in the new homes bonus, which he will know about. I think this figure will reassure him: after just one year of the new homes bonus, 16,000 previously empty properties have been brought back into use.

The Department for Communities and Local Government will also consult in due course on plans to allow local councils further discretion to introduce a council tax premium on homes in their area that have been empty for more than two years. That will provide a stronger incentive to get those homes back into productive use—an aim I am sure the hon. Gentleman and I share, as do other colleagues—and remove that blight on local neighbourhoods.

It might be helpful to the hon. Gentleman if I explain how VAT applies to empty property. He might be unaware of some reliefs that go a significant way towards meeting the demands of the “Cut the VAT” campaign. The VAT system already provides for numerous reliefs from the standard rate of VAT, as he will know, but some reliefs particularly encourage new housing supply and the bringing of empty properties back into use as homes. The first sale of a new domestic property is zero-rated for VAT, as are most supplies of goods and services used in the construction of a new build, as he acknowledged. However, he might not be aware that the renovation or alteration of residential premises that have not been lived in for two years benefits from a 5% reduction in the rate of VAT. He mentioned European constraints. The 5% reduced rate of VAT exists, and is the minimum available, under long-standing EU VAT legislation. The reduced rate also applies when properties are converted from non-residential to residential, and when the occupancy of existing residential property is increased.

Wide relief already exists for the renovation and conversion of empty properties. I am sure the hon. Gentleman will agree that that goes some way towards meeting the valid concerns that he raised about the homes in which his constituents might live. He might not be aware that the “Cut the VAT” campaign’s report makes it clear as early as page 5 that

“the many and varied exceptions that exist within the housing RM&I VAT regime…can easily lead to confusion as to what attracts VAT at the standard rate and what attracts a reduced rate.”

The report goes on to provide a helpful table summarising the available reduced rates, including for

“Renovation or alteration of empty residential premises”.

I know that the hon. Gentleman is a keen supporter of the campaign, as are those on the Opposition Front Bench. For the most part, the VAT reduction for which he asks specifically for the renovation and refurbishment of empty homes is already available.

[Bill Esterson]

I am aware of those points. I have a copy of the campaign document, as does the Minister. Is she also aware of the Prime Minister’s commitment to the Federation of Master Builders? He agreed to write to Treasury Ministers to consider the case for cutting VAT on home repair and improvement work. Does she know whether he has done so, whether he has received the response and what it might be?

[Miss Smith]

The hon. Gentleman will appreciate that I have just spent my first two days at No. 1 Horse Guards. I shall of course ascertain the location of that letter. However, I will suggest a few things that I have absolutely no doubt the Prime Minister will bear in mind as he considers the issue.

Wider VAT reduction risks a serious impact on public finances. I know the hon. Gentleman will be aware of that, despite some of the comments that he made this morning to the Formby Times. For example, if the rate of VAT on residential property renovation and refurbishment were reduced to 5%, it would cost £2.2 billion in the first year alone. If the rate were reduced for five years, it would cost £2.4 billion each year. If it continued for a decade, the cost to the Exchequer—to his constituents and mine—would rise to £2.9 billion for every year of that period. To put those figures in context, that would cost more annually than the entire budget for the Department for Environment, Food and Rural Affairs, and double the budget for the Department for Culture, Media and Sport

I therefore do not accept the claim that cutting the VAT rate for the home improvement sector would lead to a net increase in jobs across the economy as a whole or pay for itself over several years. Although the impact could be positive, we know the real likely impact. If we made such a cut, the revenue shortfall would have to be met from additional taxation elsewhere, which would lead to job losses that would offset any job gains in the building sector. Alternatively, we would need to meet the cost through additional borrowing, which would risk increasing interest rates. As the hon. Gentleman will know, higher interest rates would have an adverse impact on families and small businesses, including businesses in the building sector. I am afraid that there is no such thing as a free pass without effects elsewhere in the economy.

The Government want to provide support across the entire economy for businesses and households.

[Bill Esterson]

I had anticipated the Minister’s comments, because this morning I received a written answer from her colleague, the Exchequer Secretary. I understand the Treasury analysis, but the answer mentions

“in the absence of behavioural change”.

Such behavioural change would include the impact on cowboy builders and the economic benefits of people spending money in the sector and being able to afford home improvements, so there is a balance. I also mentioned earlier the £1.4 billion impact on the economy that Experian anticipated under the old VAT regime. Will the Minister comment, either today or in due course, on the assessment of the impact of behavioural change, and not just of the figures that she has quoted in isolation?

[Miss Smith]

Let me first deal with behavioural change in relation to rogue trading, because it is important to put this on the record. I do not accept that a reduced rate of VAT would suddenly cause the illegitimate trade to become honest. I do not believe that behaviour changes in that sense—5% can be as attractive, in many ways, as 20% to a crook. There are many other factors—this is key—beside cost that cause a customer to use the informal economy, and a trader to operate in it. It is unlikely that a reduction in the rate of VAT, which is only one factor, would have an impact on rogue trading and purchasing.

On the wider point of evasion, the hon. Gentleman may be interested to know that Her Majesty’s Revenue and Customs is investing £900 million to tackle avoidance and evasion and attacks by organised criminals, and that relates to the construction industry. A reduction of the VAT rate alone would not create a level playing field between legitimate businesses and those operating in the informal economy. I fear that his concerns about behavioural change, in that sense, do not go to the heart of the matter.

I will be happy to come back to the hon. Gentleman on the specifics of the Experian report. I am afraid I do not have the figures to hand, so I cannot respond on the spot.

To return to the points that we need to take into account in the wider economy, we need to be aware that households face difficult times. That is exactly why, only yesterday, the Prime Minister and the Secretary of State for Energy and Climate Change met energy suppliers to discuss how to bring down customers’ energy bills. It is also why this Government have increased the personal allowance, cut fuel duty and will reduce corporation tax year on year, which will assist businesses, including those that have signed up to the “Cut the VAT” campaign.

It is important that the Government continue to explore their options for credit easing, with which the hon. Gentleman will no doubt be familiar. We should try to inject money directly into parts of the economy that need it, especially small businesses, which are the driving force for economic growth.

Doing those things will not only boost demand in the short term and, indeed, change behaviour, but help to tackle long-standing UK problems associated with the supply of credit to small and medium-sized businesses. That is vital. The Chancellor will announce further details on 29 November.

To finish on the broader point, Labour, I am afraid to say, may have been content to spend beyond its means, but such costs are unsupportable in the current economic climate and simply cannot be reasonably entertained. We need sound public finances to make sustainable growth possible. Over the past decade there has been an increasing reliance on an imbalanced economy, which drove ever greater problems throughout. That model has proved unsustainable and what we have needed in the meantime, as set out in the Budget 2010, the spending review and other work, is a credible plan to tackle the unprecedented deficit that the Government inherited—and that the hon. Gentleman, no doubt, is about to jump to his feet to defend.

[Bill Esterson]

Until 2008 and the financial crisis, the Conservative party in opposition supported the spending levels of the then Government. It was the financial crisis and the bail-out of the banks that caused the deficit to grow to the level it reached. On the balance between quantitative easing and proposals such as the “Cut the VAT” campaign, which has the support of 49 business organisations, many prominent and highly regarded economists think the latter a far more direct way to get money into the economy to stimulate growth and demand, which I know the Government are in favour of. If we disagree on the means, we certainly agree on the need to do it, whether that be via quantitative easing or cuts to VAT on home improvements. We need to take either one action or the other. I hope the Minister will acknowledge that economists have strong views that such VAT cuts are another way of addressing the issue.

--- Later in debate ---

[Miss Smith]

I shall say three things in response. First, on the argument for such a VAT cut, many different sectors make the same argument for their own cuts. It is not clear why this particular cut is the one that should triumph, even if money was available. Secondly, the hon. Gentleman may think that this Government have gone off plan, but his shadow Chancellor, the right hon. Member for Morley and Outwood (Ed Balls), is already £27 billion off the Darling plan this year alone, and the right hon. Member for Edinburgh South West (Mr Darling) has already stated that anyone without a credible economic policy is simply not at the races. Thirdly, our approach to building a credible economy via a credible plan to tackle the deficit has been endorsed, as the hon. Gentleman will know, by the International Monetary Fund, the OECD, the European Commission, the rating agencies and UK business organisations beyond those that deal in installing bathrooms. The difficult decisions that this Government have had to take have made Britain a safe haven in the sovereign debt storm, and that is exactly what we intend to carry on being.

Of course, there are concerning signs. I acknowledge that the recent employment statistics make very tempting calls such as the hon. Gentleman’s on behalf of the construction industry. Those signs, however, show more than ever why the UK must stick to its course. We need stability and confidence in the economy, and we need to hold down the costs of borrowing for businesses and home owners.

The hon. Gentleman’s plan risks putting Britain back in the firing line. It could lead to rising interest rates and falling international confidence, which would undermine the recovery in his constituency, the country and internationally. In that context of a recovering economy, fiscal consolidation is what is most important, not only to ensure stability but to provide the conditions for the private sector growth that we all seek. It needs to provide the conditions for investment and hiring. Any suggestion of cuts to VAT for the construction or any other industry, or of extensions such as that proposed by the hon. Gentleman, on top of the relief that already exists to tackle his concerns, adds up, I am afraid, to calling for the wrong thing at the wrong time.