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Ireland’s new build VAT merry-go-round
The case for reducing the tax rate on the construction of new social homes
FINANCE
Eddie Magowan
Senior Associate Consultant, Campbell Tickell
Eddie Magowan
Senior Associate Consultant, Campbell Tickell
Issue 74 | October 2024
In a previous article examining the high levels of gearing among Approved Housing Bodies (AHBs) in Ireland, at least one AHB had questioned whether it was time to revisit the VAT rules for social housing construction. Currently, a 13.5% VAT rate applies to the construction of new dwellings in Ireland. This contrasts with the UK, where the VAT rate for constructing new buildings is 0%, provided the supply is for a social purpose.
Debate on zero tax rate
According to Ireland’s Business Post, tax advisory firm Grant Thornton has proposed that the Irish government should reduce the VAT rate on the construction of new homes to 0%, citing that the housing shortage and rising costs are hindering economic growth and driving talented young workers away.
Meanwhile in December 2022, the Irish Times reported that the issue of reducing VAT to 0% on new builds had been raised in the Dáil. The government responded that, due to the EU VAT Directive, there was not a simple fix. Additionally, applying the zero rate could present challenges, given certain ‘grey areas’ that have arisen in the UK in the interpretation of qualifying criteria.
“Grant Thornton has proposed that the Irish government should reduce the VAT rate on the construction of new homes to 0%, citing that the housing shortage and rising costs are hindering economic growth and driving talented young workers away.”
“Grant Thornton has proposed that the Irish government should reduce the VAT rate on the construction of new homes to 0%, citing that the housing shortage and rising costs are hindering economic growth and driving talented young workers away.”
Impact on the delivery of social housing
Setting aside the complexity of delivering a reduced rate, what is the impact of the current arrangements on the delivery of much-needed social housing?
As the bulk of housing provision continues to be financed via a 100% debt model, the application of VAT can be shown to result in an effective ‘fiscal merry-go-round’.
This starts with the requirement for an AHB to take on an additional 13.5% borrowing to meet the VAT cost. While generating VAT receipts for the State, it also gives rise to a higher demand for “payment and availability” funding from the State over the project lifetime to enable the body to meet the associated interest and debt repayments.
Potentially this leaves the State no better off in the long term, yet has the immediate effect of saddling larger AHBs with higher levels of debt. It also ties up excess loan finance that might be usefully employed on other projects.
While current EU rules might preclude the possibility of securing a zero rating, the fact that an apparent incongruence in current policies gives rise to a somewhat dysfunctional fiscal model would suggest that there is a case for reducing the VAT rate on the construction of social housing to the minimum possible.
Although some may consider it naïve to assume that a VAT reduction would result in a like-for-like fall in final property costs, as some developers might avail of the opportunity to boost profit margins, it should not be beyond the abilities of legislators to establish qualifying criteria that anticipate and restrain such behaviour.
13.5%