Less Can Be More - (call for VAT Holiday)

Posted on December 8, 2011 by Professor Benfield There have been 0 comments

Come on Chancellor, think about it.

Investing’ in a small VAT giveaway could create 800,000 jobs and yield near 85% financial return for Britain

Responding to David Cameron’s Prime Ministerial rallying call to the nation, I urge the Chancellor of Exchequer to grant home extenders and improvers a two year VAT ‘holiday’.

Create Thousands of Jobs - Quickly

This simple measure could quickly create thousands of jobs without damaging the nation’s finances.  It could even bring more money into Britain’s coffers to help reduce our National indebtedness.

A blanket VAT giveaway will NOT work

Many people are calling for the Chancellor of the Exchequer, George Osborne to cut VAT, but take care  …

Recent calls to lower VAT across the board will not create jobs. Alistair Darling’s one-year 2½% VAT reduction evidenced this.

The supposed £12.5 billion cost of that little exercise is very similar to the £12 billion now being spoken of for a similar misdirected effort to create UK economic growth.

Avoid A Blanket VAT Reduction

A blanket reduction in VAT may increase some retail sales.  But, in doing so, it will most probably suck in imports and lead to a general worsening of the UK’s balance of trade. Moreover, such reduction would not address any real and urgent imperative in society – other than some spurious claim that it might lead to an increase in GDP.

Target Any VAT Reduction Wisely

Conversely, totally removing (Zero Rating) the 20% VAT on building extensions & improvements for a 1 or 2 year period would almost immediately put tens of thousands of builders and tradesmen back to work.

As explained below, it would capitalise on the desire of property owners to upgrade their buildings, giving them the reason to invest savings and other money in property value, and create a real ‘buzz’ of productive activity that could change the outlook of many Britons.

Moreover, it could actually lead to a net growth in the Chancellors Tax-take, helping reduce the national debt and strengthen the national economy,

The sums are pretty simple.

While I don’t have access to the sophisticated modelling used by the Treasury, Bonk of England, CBI, et al, a reasonable approximation may be achieved using fairly basic assessments.

Historically, until the recession, some 240,000 home extensions were carried out in the UK each year. Along with other construction work this has been roughly halved to perhaps 120,000.  This means that over the last 2 years some 240,000 such projects have been put on hold.  Add a further 120,000 for the year ahead and we have 360,000 that might be considered ready and waiting to go ahead.

However, a one-year VAT holiday on home extensions and improvements (it may need to be longer to allow for delays in the planning system and getting jobs mobilised) would kick start further massive pent up demand for these.

Slow housing markets, and other disincentives to moving house means this is actually growing all the time. Encouraging thousands of homeowners and residential landlords, not to mention owners of other property, to bring forward improvement projects, would also secure more jobs in, for example, soft furnishings and white goods.

Think Of It This Way

Overall – and for the sake of argument – assume that the historical 240,000 p.a. or so such projects was doubled to 480,000 for a year.  Assuming a high average spend of £50,000 each, this would be £24 billion gross work value per year.

One year’s loss of VAT on this would only cost £4.2 billion.

Now assume a low 40% labour to materials value on that £24 billion and such new work would create £9.6 billion of wage income.  At an average £20,000 per job that adds up to 480,000 jobs.

At average income tax rates of 25% on the £13,000 or so of taxable income per job, this would yield £3,250 per job, or some £1.56 billion in total.

Perhaps one third of the 60%, or £14.4 billion to be spent on materials and components, would also find its way into additional jobs, Rather conveniently that works out at £4.8 billion, or half that for direct construction jobs, Thus we could see around an additional 240,000 jobs to yield another £0.78 billion of income tax.

Happily the sums don’t end here.

If we anticipate that overall the businesses through which this £24 billion of work passes make an average of 10% profit before tax, i.e. £2.4 billion and pay only the small company corporation tax rate of 19%, and the Government receives a further £0.446 billion into its coffers.

But we are still not done.

So far we have seen that perhaps 720,000 jobs can be created, paying a total of £14.4 billion in wages, or £14.336 billion after income tax has been paid.

Although there seems to be no common agreement on how income is used, allowing the £8,424 per family disposable annual income reported by The Guardian (27 Sept 2011), this could mean £6.07 billion to spend in VAT able goods, potentially yielding another £1.21 billion for HM Revenue & Customs.

Assuming now that only one quarter of this extra spend would go on jobs, at the average £20K each assumed in this article, that adds up to around another 76,000 jobs.

Again they pay income tax that could amount to another £0.247 billion, and spend their disposable income of £0.64 billion, to yield £0.049 of VAT.

Summarising the Multiplier

While these considerations only scratch the surface of the multiplier effect, if we draw a line under these at this point we can summarise the above as follows:-

Business £’s Corp Tax VAT New Jobs Income tax
Direct Construction Jobs 24.0 B 0.446 B - 4.2 B 480,000 1.56   B
Indirect Construction Supply Jobs In above In above In above 240,000 0.78   B
Discretionary Purchase Jobs 6.07 B 0.115 B 1.21 B 76,000 0.247 B
Further Discretionary Purchase Jobs 0.64 B 0.012 B 0.49 B Ignore Ignore
TOTALS 30.71 billion 0.573 B -2.5 B 796,000 2.587 B

Thus the Governments position would be:-

  • Net VAT lost                             - £2.50   billion
  • Increased Corporation Tax           £0.573 billion
  • Increased Income Tax                £2.587 billion
  • Extra revenue                              £0.660 billion   … to create nearly 800,000 jobs.

Taking 800,000 people off even basic unemployment benefit of say, £3,600 per year would add back a further £2.88 billion leading to a total £3.54 billion financial return for a £4.2 billion outlay spread over 12 months.

Come on George,

… even you and David should be able to see that an 84.29% return on our money should be too good for even the most die-hard fiscal fundamentalist to ignore.

Especially if you are a Tory!

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