Government fears tax breaks for developers would lead to fraud

The Department of Finance is concerned moves to reduce VAT on residential construction could lead to fraud and tax avoidance among property developers and would not increase housing supply.

Internal briefing documents, prepared in advance of the budget this October, advised a proposal to reduce VAT on property development from 13½ to 9 per cent would simply “transfer tax revenue from the State to developers with no effect on housing supply”.

Department officials considered the tax cut for residential construction as a temporary measure for two years. But they ultimately decided that creating a two-tier VAT system for construction “could lead to accidental or fraudulent underpayments”.

The Government feared some developers would exploit loopholes by availing of the tax break to build apartment blocks classified for residential use, then change parts of the property to commercial or retail use later. “Policing the measure would be difficult,” according to departmental briefing notes, obtained under the Freedom of Information Act.

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Estimated cost of the tax cut was €383 million and analysis showed the policy would have “limited effect on supply”, due to other factors holding up building such as planning restrictions and low financial capacity in the industry.

In the end Minister for Finance Paschal Donohoe opted against lowering the rate on construction.

Lobbying

The Construction Industry Federation and others from the sector engaged in a lobbying campaign to push for the reduction for property developments and renovations ahead of the recent budget.

The Society of Chartered Surveyors Ireland lobbied Mr Donohoe to eliminate VAT entirely on residential construction for affordable units priced below €300,000.

The Property Industry Ireland business group also wrote to Mr Donohoe to propose a “crisis measure” zero-rate of VAT to reduce the cost of building and incentivise housing supply.

Fianna Fáil housing spokesman Barry Cowen TD pushed for the rate cut on property development at the point of sale in pre-budget discussions with the Government.

Mr Cowen said the proposal would reduce the cost of building and “encourage affordability” for buyers. The department’s view was the policy would “put money in the pockets of the builders”, said Mr Cowen, but “if you’re going to build houses you need builders”, he added.

Big push

Departmental briefings warned if a two-year special reduction on VAT was brought in, the industry would push to make the lower rate permanent “once it is in place”.

Several draft options drawn up to pay for the construction tax cut included scrapping the current 9 per cent reduced rate for catering and hotel services.

One source in the department said there was a big push and “a lot of political momentum” behind the scenes to introduce the tax cut in last year’s budget as well. Former minister for finance Michael Noonan decided to introduce the Help-to-Buy scheme for first-time buyers instead.