Unscrupulous deals ’still attractive’

A government report has acknowledged domestic consumers continue to be attracted to cheap cash deals that avoid VAT.

The issue remains a problem despite attempts to tackle it – including reduction of VAT on conversion of residential buildings to a different residential use, and for the installation of microgeneration technologies – have failed to curb the problem.

However, the business and enterprise committee (BEC) has rejected calls for an overall reduction on VAT for maintenance and repair work, saying instead a “full analysis” should be carried out – a decision which has provoked fury from industry insiders.

“There are reports from all over Europe which describe the benefits of cutting VAT on domestic repair, maintenance and improvement works; Italy found that around 35,000 firms emerged from the informal economy when it cut the VAT,” said Richard Diment, director general of the Federation of Master Builders (FMB).

“The Isle of Man report showed that, when they introduced the reduced rate there, the number of VAT registered firms increased, the size of the informal economy reduced and more employment was created.”

The findings form part of a wide ranging government enquiry into the UK’s construction industry which was released today, identifying “significant problems” in the sector, with a variety of threats hanging over its long-term prosperity.

After a decade of almost consistent growth the industry is now experiencing “sharp downturn” in the wake of the fall-out from the subprime mortgage market crisis, finds the Construction Matters report.

However, despite the short-term slowdown, the construction industry remains integral to the UK economy, reports the BEC.

The industry provides employment for more than 2.8 million people and contributed 8.7 per cent of the UK economy’s gross value-added (GVA) in 2006 — twice that produced by the energy, automotive and aerospace sectors combined.

The built environment - roads, houses, offices, factories, etc - which represent the output of the industry is also estimated to account for some 70 per cent of UK manufactured wealth.

Despite this the BEC reports the industry is complex and fragmented; operating on low profit margins.

There are also difficulties in ensuring that lessons from experience are shared; that the workforce is sufficiently trained, particularly regarding the provision of apprenticeships; and that appropriate contractual relationships are in place between different parts of the supply chain.

Problems with labour supply, which have been temporarily address by an influx of migrants from eastern Europe, are also proving difficult to solve in the long term.

As a result of this, and ongoing problems with the planning system, the report finds there is still “significant room for improvement in finishing projects both to time and to budget” in the UK construction industry.

In response the report recommends the government set up a regulatory framework and provide support for training, as well as creating the post of chief construction officer – a move which could “immeasurably” improve the situation.