Consumers who are feeling the pinch could give a boost to the building and construction industry if the Government reduced VAT from 20% to 5% on certain residential building services.

If VAT on services such as domestic property maintenance, repairs, refurbishment, alterations and extensions was reduced by 15% for, say, two years, it would give a significant boost to the building and construction industry and get people back to work, a VAT partner at a London firm of chartered accountants is claiming.

“There is no problem from an EU perspective,” says Alan Pearce, VAT Partner at London Chartered accountants Blick Rothenberg, "as the 5% rate is allowable under existing EU law and therefore the change could be made very quickly.

"Construction firms and self-employed builders would be given a huge boost with many able to take people back on that were laid off in recent years.”

There would be an inevitable cost in lost revenue to the Government (tentatively estimated to be in the region £2.2billion) but Alan Pearce says this would be more than made up by getting people back to work and businesses operating again in an industry that is contributing heavily to the country’s present recession.

It would also help improve the housing stock that is not being repaired and maintained simply because people do not have the money to do it.

Alan Pearce: “If consumers had a two year window and they knew that they could reduce the cost by 15% then many of them would consider carrying out essential maintenance or having an extension built sooner rather than later. “

Deep targeted cuts of this type are likely to have greater impact on consumer spending than Labour’s policy to repeat the general 2.5% cut in the standard rate of VAT, which costs the country around £13billion in lost revenue, says the accountant.

“If this VAT reduction were made, then all sorts of other people – such as builders merchants, manufactures, suppliers of household equipment, etc – would also benefit. There just needs to be some creative thinking and this sort of approach would go a long way in giving the whole industry a kick-start."

One other side effect of such an initiative would be to encourage those builders currently offering 'cash' prices in the black economy to contribute at least some tax. This is because with only a 5% VAT rate on sales, the builder would want to register and account for VAT in order to reclaim the 20% rate of VAT that would still apply to the materials and other expenditure he incurs.

This could go some way towards reducing the significant tax gap between the amount the Government thinks it should be collecting and the amount it actually does collect.