The nonsense of VAT reclaims for ending the black market

One of the property concessions in budget 2014 was the ‘home renovation incentive scheme’. This is intended to allow people to get the VAT back on construction work done where the spend is over €5,000 and below €30,000.

While this is viewed as a ‘construction stimulus’ it is in fact a ‘black market disrupter’ which will run from the 1st of January 2014 to the 31st of December 2015. The reclaim will be valued at between €675 and €4,050 and will be given in the two years following the year the work is done, you also must be LPT compliant in order to avail of it.

So think it through, you will pay a certain amount of VAT on top of a job (or more appropriately the builder will charge you that) and over the two years after it you get it back in two tranches.

We have to make a few assumptions here, the first is that the cost of VAT on top of work is a deterrent from purchasing a service like construction, as VAT is an end user cost that cannot be reclaimed (in effect companies act like miniature Revenue collectors) that is fairly visible.

The second is that evasion of VAT is common (it is particularly in construction). So why would somebody want to do a job without VAT?

The incentives in this instance are not simply one sided, it isn’t as if there is only one beneficiary in that process, the buyer of the service will save 13.5% on top of the purchase price (which is a general cost reduction) but the builder also has significant incentives to go along with this as well and that’s the difficulty, you can’t solve something like this by helping one party when two parties can easily benefit.

The builder gains by having higher VAT payable than charged (reduced liability), they don’t have to pay income tax, USC, PRSI, the people on site are often in on it too and receive similar benefit, and some of the tradespeople may also be on social benefits.

The simple trade off boils down to this ‘avoid VAT up front or get it back over two years which involves delay and bureaucracy’.

The answer is simple, people will use this scheme as a way of bargaining down cash prices (again, the proxy is the value of avoidance to each side) rather than going out and purchasing lots of construction services on an above board basis. There will be an uplift, every stimulus has some stickiness irrespective of how it is managed, but don’t be surprised if this is one with a very different outcome.

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