Richard North, 06/11/2012  

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On 8 October last, the EU Commission launched a consultation on reduced VAT rates.

At the time, Algirdas Šemeta, Commissioner for Taxation, Customs, Anti-fraud and Audit, said: "It is high time that we take a fresh look at reduced VAT rates. Member States need new revenue sources, while businesses need simpler tax systems with fewer compliance costs. Today we are asking whether certain reduced VAT rates are delivering what they seem to promise, or whether they pose more problems than they are worth".

OK … seems reasonable enough. Even if you think VAT is the devil's spawn – and we do – there doesn't seem to much harm in this, at the moment. But that was before last Saturday, when the Express had a go at it.

"An EU plan to slap VAT on new homes will send prices soaring, experts warned yesterday", Sarah O'Grady breathlessly tells us. "Brussels has quietly issued a consultation document that proposes scrapping the current zero VAT rating".

Then we are told: "The move to charge the full 20 percent is part of a plan to standardise tax rates across Europe. It would drive up the average price of a new home by £48,000 from £238,000 to £286,000 and have a catastrophic impact on the UK".

But when we look at the explanatory memo that goes with the press release, something rather different emerges. In Q&A format, it asks: "Does the Commission plan to abolish some or all reduced VAT rates?" Then it provides the answer:
This consultation is part of the assessment process, and does not pre-suppose the elimination of any particular reduced rate at this stage. The Commission will only make proposals on the possible abolition or introduction of certain reduced rates next year, once it has completed its thorough review and gathered extensive feedback. Moreover, it should be remembered that even if the Commission were to propose getting rid of one reduced VAT rate or another, this would have to be unanimously endorsed by Member States before it could happen. So the review of reduced rates will be a holistic and very inclusive one.
That is what the Express translates into "an EU plan to slap VAT on new homes", a mystery that intensifies when you see the actual consultation document

Actually, when you get to "housing", you find there is a story, but a different one altogether from the one the Express has to offer. It tells you that, in September 2011 the Commission presented a "Roadmap to a Resource Efficient Europe".

Housing, it says, is pointed out as one of the sectors with a substantial environmental impact. Better construction and use of buildings in the EU would influence 42 percent of final energy consumption, 35 percent of greenhouse gas emissions and more than 50 percent of all extracted materials.

Significant improvements in resource and energy use during the life-cycle – with improved sustainable materials, higher waste recycling and improved design - should contribute to the development of a resource efficient building stock, it then says, thus arguing that:
Coherence with this EU policy would require that the scope of the reduced VAT rates that can be applied by the Member States to housing would be restricted to those supplies that take this resource efficiency aspect into consideration.
On the other hand, says the Commission, "certain questions could be put forward as to the way to implement this VAT rate differentiation in practice and whether this will not result in adding a substantial level of complexity for taxable persons active in the housing sector".

And so we get to the question:
Q5 In your view, how can the reduced VAT rate for housing be best applied in order to take the resource efficiency element into account, and how should/can this be achieved with a minimum of increase in the administrative burden for businesses, in particular SME's, providing supplies of goods and services in the housing sector?
In other words, the EU is not in any way suggesting that VAT is slapped on new houses, per se. In some senses, it is worse than that. It is suggesting reduced rates (which includes the UK zero rates) to be confined only to "green" materials, such as insulation, which go into construction.

And why is this worse? Well, in Die Welt recently, we saw a report which found that insulation can drive up heating costs. The reason for this is intriguing.

House walls, even in the winter, retain heat from the sun and in the late evening give it up to the interior spaces. In heavily insulated houses, because of the thick plastic mass on the outer walls, this is not possible. The interior thus never benefits from this free source of heat.

That in itself is a story, and there is much more to it, with compulsory insulation adding significantly to the costs of new houses – and now, it appears, to the running cost. But as far as the Express report goes, this is actually a non-story. Adding VAT to new houses is not a realistic political proposition, and since Mr Cameron has a veto, it isn't going to happen.

You do wonder, therefore, what is the point of running these scare stories, especially when the real stories, which are far more important, go unrecorded.


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