Profit and VAT rules favouring demolition over retrofit, study shows

A significant tax imbalance is pushing developers to choose demolition over retrofit.

Research by the Ministry of Housing, Communities and Local Government (MHCLG) found that nearly half of industry respondents (49 per cent) saw VAT relief as a reason for favouring demolition instead of retrofit.

This ranked third behind profitability/financial viability (67 per cent) and the relative ease of demolition (66 per cent).

The research was based on 988 survey responses and 13 interviews from across the sector, including developers, architects and demolition contractors.

In the UK, new construction and certain demolitions are zero-rated for VAT, while most retrofit and renovation projects are charged at the standard 20 per cent rate.

The most common reasons for favouring retrofit included local appreciation (70 per cent), retention and repurposing of buildings (69 per cent) and sustainability (64 per cent).

When asked for the single most important reason for each approach, respondents selected profitability for demolition (30 per cent) and sustainability for retrofit (24 per cent).

“Such financial prioritisation could mean that the involvement of experts or conducting voluntary audits in the early stages of decision-making was not an option from a price point of view,” the MHCLG found.

The research revealed overwhelming support for VAT reform.

More than 80 per cent of respondents agreed that harmonising VAT rates for retrofit and new builds would incentivise refurbishment over demolition.

Support was particularly strong among consultancy and professional organisations (91 per cent) and community bodies (86 per cent).

However, the responses suggested the VAT advantage plays a more significant role in smaller organisations. While 93 per cent of micro-organisations supported VAT harmonisation, this dropped to 76 per cent for larger companies.

The report noted that decisions on demolition versus retrofit are typically made early in the development process, with 30 per cent deciding it at the feasibility stage and 28 per cent at the site due-diligence stage.

The findings also showed that respondents did not clearly agree on whether current policies encouraged demolition or retrofit. Thirty-three per cent believed that the National Planning Policy Framework (NPPF) – the government document setting out planning policies for England – was neutral towards demolition and retrofit.

Twenty-nine per cent agreed that the NPPF encouraged demolition, while only 10 per cent felt it encouraged retrofit.

“The NPPF was believed to be deliberately ambiguous in order to support flexibility at a local level,” the report said.

“However, there was a broad consensus among participants that existing national planning policy needed to be clearer, considering demolition and redevelopment versus retrofit.”