Let’s look at the difference between the Irish house purchasing mayhem and how they do it in the UK.
The first major difference is that in Ireland, all new houses are subject to VAT. The developer pays VAT on labour, materials and so on, and when the house is sold VAT is added to the purchase price. In the UK, however, first-time buyers of new or second-hand houses pay no VAT.
The UK makes up for the lack of a VAT windfall by charging property tax and water charges.
Furthermore, in the UK, property developers pay no levies, planning contributions or connection charges. In Ireland, a planning contribution can be between €12,000 and €18,000 and a water connection can be up to €3,800 per unit. In addition, the developer may have to pay to bring the infrastructure for the services on-site, or at least make a contribution to upgrade pumping stations, for example. This is a significant contrast to how it’s done in the UK, and it’s not hard to see who the winners and losers are in Ireland. According to Galway developer, Fergal O’Mahony, all of this causes a barrier to buying, as first-time buyers are taxed upfront, but then pay little on property tax and nothing on water charges going forward.
So what is Fergal O’Mahonys proposed solution?
Fergal O’Mahony believes that first-time buyers should get a VAT exemption and then pay their contribution through property tax and water charges.
“Why should a first-time buyer be taxed upfront for the lifetime of owning a property when it doesn’t work like that in the UK? We have been developing large sites in the UK for many years and the difference is a world apart. Planning is smoother, sites are developed quicker and first-time buyers get entry to the market much easier. Sure, water charges are a bone of contention in Ireland but perhaps an introduction to first-time buyers would be a good start particularly if they were to save 13.5% off the cost of the house? Well for me, it’s a no brainer”.
So if we look at a scenario where first-time buyers were treated to VAT exemption and developers of first-time buyer housing also availed of a VAT-free zone, surely the cost of houses would remain and the only winner would be the developer? “Not so,” says O’Mahony.
“The way you reduce the cost of buying your first house and stop these new margins going into the developers’ pockets is by having very strict mortgage guidelines. If the first-time purchaser cannot get a mortgage due to tight guidelines then the developers cannot sell the houses, forcing them to pass on the VAT exemption”.
There’s another benefit to this proposal, O’Mahony continues:
“This also broadens our tax base as a society, and not having it so dependent on the construction industry building houses can only be a good thing. What better way of reducing the possibility of boom to bust?” he asks.