New hope of VAT cut for construction industry

The European Commission has proposed enshrining in European law the right to reduce VAT on the construction and repair of houses to a minimum of 5%, putting pressure on the British government to abandon its full-rate policy.

The move is part of a comprehensive review of European VAT regulations, aimed at better harmonising the EU's national systems, which vary widely regarding which goods and services attract reduced rates.

At present, 12 member states apply reduced rates under special national exemptions to the construction and repair of housing, a right that is limited by EU regulations to social housing projects.

The proposal from the Commission would extend this right to all housing construction in every member state.

This move follows pilots of low VAT schemes in the renovation and repair of private dwellings.

The scheme was trialled in the Isle of Man, Ireland, Belgium, Greece, the Netherlands and Portugal, but not in mainland Britain.

Given that the pilot is being wound up (with construction being the only industry where the exemption will be made permanent), it is unclear whether the temporary exemption in the Isle of Man will be extended.