At present, if I buy a newly built house from a construction company, I will probably not have to pay VAT on it (the company from which I buy it has the 'Option to Tax' which means that they can recover VAT on the supplies they bought if they in turn charge VAT on the end product; but in practice it's not very common for them to take this option up). This is a nice tax break for the construction industry and is meant to be a bit of an incentive for housing construction.

There has been concern for some time now about lack of housing in various forms; terms like 'key worker', 'affordable housing' and so on have now entered the political lexicon - alongside the older terms 'brownfield' and 'greenfield' sites. Part of the problem is that there are lots of houses which are in very bad states of repair - some estimates put this at over 2 million houses in the UK. At present, repairs, maintenance and improvements (RMI) do attract VAT. This uneven playing field means that there is a sizeable cost advantage for developers to build on greenfield sites, rather than redevelop brownfield sites. A report published with the 2004 Budget looking at this issue proposed that VAT be imposed on new houses in order to solve this problem. On the face of it this sounds like a good solution - we'll have more brownfield development, regenerating inner cities where buildings are falling down and saving the green belt from further intrusion - and at the same time the Treasury will net a bit more money to pay for its borrowing.

But there is another - better - solution. In 2000, the European Commission changed the rules governing VAT to allow Governments to experiment with reduced rates of VAT on RMI. Many other European countries, notably France and the Netherlands tried this. The results were very positive. According to the Federation of Master Builders, when France cut the VAT on RMI from 19.5% to 5.5% it led to a reduction in 'cowboy practices' (since the amounts by which unscrupulous builders could undercut legitimate builders was reduced significantly), increased domestic market turnover by £1 billion, and created 40,000 jobs in construction. This policy also has broad support from interested groups - as ePolitix notes.

The Budget's Barker review on housing supply did reject the option of imposing VAT on new builds. But it did not suggest the obvious alternative either, claiming that cutting VAT on RMI would not be effective - it would only benefit those who would carry out the work anyway. In the absence of any better solutions, and given the empirical evidence of the experience on the continent, maybe the Government should look again.