Tax Laws drive market inequality

I have just heard an item on BBC Radio 4 about the huge increase in the cost of raw materials for the building industry. The price of Bricks and concrete have reportedly soared by a potent 20%. Tax laws are an important factor fuelling inequality within the market. While average inflation, according to the retail price index, shows a 2 or 3% rise, the cost of ‘trade’ inflation could be much higher. The trouble is that there is no barometer for this because the cost of raw materials is only picked up when those materials go through to the retail sector. The retail price index measures a selected basket of items sold in the shops, and by ‘shops’ they don’t mean builder’s merchants.

“But for builders faced with rising materials costs, the fact that they can’t pass this increase onto the customer is not quite so good.”

The building industry is even further out of the loop because house prices are not even included in the inflation index. I suppose there is a good reason for that because houses can be sold on to people who have also benefited from price hikes, but if you are trying to save up for your first house then the rate at which prices are moving away from you is the most relevant bit of inflation there is.

Happily, for first time buyers, house prices are falling or at least static. But for builders faced with rising materials costs the fact that they can’t pass this increase onto the customer is not quite so good. The only way that increased material costs can be absorbed is in reducing labour costs or cutting profits. You can guess which is more likely. With high unemployment and a huge army of migrant workers looking for any job, they can find it is wages that end up bearing the brunt of this shortfall.

For anyone looking to have work done on an existing property the fall in labour costs may also offset the rise in materials but there is another factor which distorts the market, Tax law. VAT is not charged on new builds but is charged on home improvements. It is even more unequal because small builders are sometimes zero rated for VAT because their turnover is below the threshold. With VAT now being 20%, this can make a huge difference to a quotation. So although we have a 20% increase in materials there is a possible saving of 20% on labour costs if you turn tax law to your advantage, and find a builder who is either not VAT registered or is willing to do the job for cash.

Do Tax laws punish the honest builder?

The idea of having a VAT threshold is to encourage start-up businesses, but I know plenty of builders who have been trading for 20 years or so who still manage to keep below the VAT threshold. They do this by working for cash or getting the customer to buy the materials. Meanwhile, the honest builder (yes there are some) who is forced to charge VAT loses jobs to the fly by nights.

The obvious answer here is to address unequal tax laws. The government should give the same VAT relief to home improvements, as they do to new build projects, or abolish the VAT threshold. I, and many others in the industry would prefer tax laws to treat new build and refurbishments equally. It would be a brave move, but one which would give some real stimulus to our industry, at a time when there are skilled tradesmen stacking shelves in supermarkets, while people are in desperate need of housing.