Business group calls for VAT to be set at 5pc on building work

The federation says selective VAT variations are allowed by the European Union and other countries have shown they work.

The federation’s West Yorkshire development manager, Lyndsey Whitaker, said: “Construction has a massive supply chain. And tourism has a wide knock-on effect, through caterers and event organisers and local attractions.”

FSB chairman John Walker revealed the VAT proposal yesterday at the same time as the federation’s quarterly Voice of Small Business Index, which reflects turnover, prospects and confidence.

Mr Walker said: “The Government’s growth strategy is just not working.”

Priyen Patel, author of the FSB policy paper on the subject, said five European countries – most recently Ireland – had got permission to make VAT reductions on tourism-related transactions and several, including Germany and France, had done it for construction. They had seen a measurable response in increased business and it was likely that the initial loss of government revenue would be made up in the long run.

His report pointed out that VAT was already five per cent instead of the standard 20 per cent on new building, which created a “perverse incentive” to demolish rather than renovate.

It discouraged private householders from taking up some of the slack in the building trade.

In March 2009, it was agreed that EU member states could permanently reduce VAT to five per cent on repairs, maintenance and improvement of private dwellings, excluding materials.

A UK report on the potential impact said it could create 34,500 jobs in the construction sector by the end of 2019.