I propose to take Questions Nos. 496, 519 and 521 together.
The VAT rating of goods and services is subject to EU VAT law, with which Irish VAT law must comply. Under the EU VAT Directive it is not permissible to differentiate between the supply of different types of residential property, such as apartments and housing, for the purpose of applying VAT rates.
While most Member states apply the standard rate to construction services, Ireland already applies a 13.5% reduced rate of VAT to all construction services under a derogation from the EU VAT Directive.
It is possible for Ireland to apply the 9% reduced VAT rate to the construction, repair and renovation of residential housing. However, it is not possible to apply the 9% rate to non-residential construction. A reduced rate is also permitted under the Directive as part of social policy.
Applying a 9% VAT rate to the construction of new residential properties would involve having two separate VAT rates applying to different construction services. This would be very difficult to administer and could lead to accidental or fraudulent underpayments of VAT, where an underpayment of VAT may arise in the construction of an apartment block. The apartment block may be classed as purely residential in order to avail of a reduced rate of 9% and then subsequently become a mixed-use block with a commercial/retail element on the ground floor. Policing the measure would be difficult and could result in fraudulent behaviour. Providing for the reduced rate for social housing only, which is permitted under Annex III of the Directive, while leaving general residential construction at 13.5% would obviously give rise to similar difficulties.
I am advised by the Revenue Commissioners that under the EU VAT Directive and Irish VAT legislation the supply of building materials is liable to VAT at the standard rate, currently 23%. Member states are not permitted to apply a VAT rate lower than the standard rate to building materials. However, Ireland by way of derogation from the general rule is permitted to continue to apply a reduced rate, currently 13.5%, to the supply of ready-to-pour concrete and certain concrete blocks.
Property developers charge VAT on sales of developed residential property at the 13.5% rate but are entitled to recover the VAT incurred in the development of that property, including VAT on building materials. As such, a reduction in the rate of VAT on building materials would not reduce building costs.
In relation to the scheme operating in the UK, as the Deputy may be aware, the Home Renovation Incentive (HRI) was introduced by Section 477B of the Taxes Consolidation Act 1997 in 2014 and was terminated in accordance with its statutory sunset clause on 31 December 2018 having been extended twice before that and having been seen to have met its original objective viz. support for job creation in the construction sector in the wake of the financial crisis.
An ex-post analysis of the scheme found that in the context of a housing supply shortage, and the need at that time to deliver 25,000 additional housing units per annum over the period 2017-2021, the potential for displacement of labour from work on new builds to work on home renovations would create a high opportunity cost of labour associated with HRI which was not present at the inception of the scheme. Given the continued constraints on the construction sector’s ability to hire labour to deliver a supply of new housing units, similar issues may arise currently with regard to any re-introduction of the scheme.
The proposal in the Deputy's question would also give rise to additional Exchequer costs. Under my Department's Tax Expenditure Guidelines, the introduction of new tax incentive measures, or the continuation of measures which are due to terminate, should only be considered in circumstances where there is a demonstrable market failure and where a tax based incentive is more efficient than a direct expenditure intervention.
Having regard to these considerations, the case for re-introducing the HRI along the lines mentioned by the Deputy is not a strong one from the perspective of my Department.
In relation to self-build properties, substantial support is already available through the tax system for first-time buyers, including those self-building their first home. The Help to Buy (HTB) incentive gives a refund of Income Tax and Deposit Interest Retention Tax (DIRT) paid in Ireland over the previous four years, subject to limits outlined in the legislation. Section 477C Taxes Consolidation Act 1997 outlines the definitions and conditions that apply to the HTB scheme.