Housing minister Darragh O’Brien has appeared to rule out a reduction of the VAT rate for residential construction.
A reduced VAT rate of 13.5 per cent currently applies to construction but a recent review of the Tax Strategy Group (TSG) examined the possibility of a reduced rate under the EU VAT Directive in 2022.
Ireland could now apply a 9 per cent VAT rate to the supply and construction of housing as part of a social policy.
It would not be possible to apply this rate to non-residential construction.
The total estimated cost of a reduction of the 13.5 per cent VAT rate to 9 per cent for residential construction services if all residential construction was classified as part of social policy would be €400 million, while the cost of applying it for repair, maintenance and retrofitting would be an additional €180 million.
The TSG said Revenue has indicated that the current social component of the all residential construction and maintenance would be valued at €204 million.
The expert group said if such a change was to be implemented, there would need to be an agreement on the definition of housing as social policy and consideration for the added complexity in administering different VAT rates.
The TSG also raised concerns on whether the reduced rates could be passed on and questioned whether it would make a material difference to the market.
It said: “There is no obligation that any reduction in VAT rate would be passed to consumers.
“There is a reasonable possibility that it would be used by contractors to improve their cash flow.
“In the event that a reduction is made on a temporary basis this would add an administrative burden and confusion in terms of the implementation timeline and which properties would qualify during the period in question.
“In addition the temporary reduction in other sectors from 13.5 per cent to 9 per cent offers some insights into what might happen, where it is clear that in many cases no reduction was passed on to consumers.
“Moreover, it is important to note that any subsequent return to a 13.5 per cent VAT rate could lead to price increases being passed to consumers as firms sought to preserve their gains from the temporary reduction.”
At the one-year anniversary of the First Home Scheme, Mr O’Brien said it would be a matter for the Department of Finance but added he had not sought the measure.
He said: “I’m not looking at reductions in VAT for the construction sector.”
Mr O’Brien said it was up to the TSG to look at options, and it would be “considered in the round”.
Asked if he was concerned that a reduction would not be passed on to home purchasers, Mr O’Brien said he was focusing on more targeted measures such as the First Home Scheme, the help-to-buy grant and the development levy waiver.
He said it was “always more difficult” to track the impact of VAT reductions to end customers.
“We’re investing at a rate now of about €4.5 billion a year in housing alone,” he said.
Mr O’Brien added: “The interventions we’ve made now already, we can track them, and we can track the results of them.
“And I’m much more comfortable with that.
“If you take the development levy waiver and the Uisce Eireann connection charge, we see that now on a monthly basis.”
By way of example, he said a general reduction from 13.5 per cent to 9 per cent would “apply to everything”.
“If I was living in a €10 million house somewhere in Ireland, and I’m getting an extension, I get the reduction as well – potentially,” he said.
“I think much more targeted measures are what are appropriate and what we’re doing.”
