Demolish or Refurbish? How VAT Policy is undermining the UK’s housing and climate goals

The UK needs 1.5 million new homes. That’s the scale of the challenge. But the government’s current VAT policy is making it harder, not easier, to meet that target and is doing untold damage to our environmental ambitions in the process.

Under current rules, new build housing attracts 0% VAT, while most renovations and refurbishments are hit with 20% VAT. The result? Structurally sound buildings are being demolished purely because it’s cheaper to start again than to work with what’s already there.

At MESH Engineering, we’ve seen this first-hand. Developers and housing providers are frequently steered toward demolition not because the structure is unviable, but because VAT makes it the more financially attractive option. 

It’s a policy contradiction that’s hard to ignore and one that puts short-term economics ahead of long-term sustainability.

A system that rewards waste

Construction and demolition waste accounts for over 60% of all UK waste. That’s a staggering figure. In an industry increasingly focused on sustainability and embodied carbon, encouraging full demolition over renovation flies in the face of logic, surely?

The embodied carbon already locked into existing buildings is often fairly substantial. When we demolish a structure unnecessarily, we throw away that embedded value, essentially starting the carbon clock from zero with new materials, new transport, and new energy inputs. This is bad for the environment, but it’s also inefficient, and ridiculously  expensive in the long run.

But despite knowing all that, current VAT policy effectively subsidises this approach. We’re giving developers a tax break to build new, even if what’s already there is structurally sound, well-constructed, and full of reuse potential. 

The missed opportunity in refurbishment

Renovating existing buildings is not only greener, it’s often smarter. 

Many older properties were built with materials and methods that have proven longevity: thick masonry walls, well-proportioned layouts, natural ventilation strategies. These aren’t throwaway assets! They’re genuinely robust foundations for modern, efficient homes, ideal for 21st century living.

Yet the financial disincentive is clear. By applying the full 20% VAT to renovation, the government is making the most sustainable housing option the least economically viable. It’s a policy that creates perverse incentives at the very moment we need to be doing the opposite.

And this doesn’t just affect city centres or historic buildings. It applies equally to suburban estates, industrial conversions, and housing association stock that could be upgraded and reimagined rather than knocked down. Doesn’t the world need more reimagining right now? We need creative solutions rather than - frankly - embarrassingly basic ones.

A reduced rate that misses the mark

The UK does offer a 5% “Reduced Rate” VAT for some types of renovation — such as converting a property into multiple dwellings or renovating homes left empty for over two years. However, these provisions are limited in scope and tend to benefit landlords, developers, and businesses more than individual homeowners. 

In practice, the policy continues to favour large-scale commercial projects over everyday retrofits. 

If VAT relief is meant to encourage reuse, it should be far broader, simpler, and more accessible, particularly for those trying to make existing homes warmer, greener, and more liveable. Right now, it’s a missed opportunity.

What other countries are doing

The UK isn’t alone in facing housing and climate challenges. But many of our European neighbours have recognised the role that tax policy can play in solving them.

• France applies a reduced VAT rate of 10% for most renovation works, with 5.5% for energy-saving improvements.

• Germany offers VAT incentives for renovation to encourage reuse of existing buildings.

• The Netherlands applies a reduced VAT rate on labour for renovation and home repairs.

And the EU has been introducing affordable housing initiatives aiming to double renovation rates. How? By breaking down long-standing barriers to energy and resource-efficient renovation, and by also improving reuse and recycling in the industry. Their aim is that, by 2030, the construction sector could see 35 million renovated buildings in the EU. 

These aren’t radical ideas, are they? They’re practical tools used to drive better outcomes for housing, energy use, and urban regeneration. 

And - as someone who prides themselves on sustainability and innovative solutions in the industry - I’m embarrassed to say: the UK is lagging behind, and it’s costing us and future generations dearly. 

Green Belt pressure and untapped Brownfield potential

Most recently in her 2025 Spring budget, Chancellor Rachel Reeves confirmed £39bn for social and affordable housing, but what will that actually look like and what does it mean for policy? 

In England, there is growing pressure to release green belt land to meet vast housing targets. Which, given the current “discount” for new builds, is a serious issue. 

I believe that, before we start building over the beautiful countryside, we should be making brownfield and existing sites more viable. That means levelling the economic playing field between refurbishment and new build. 

By lowering VAT on renovation, the Treasury could make it financially attractive to the industry to retain and reuse existing structures instead of building from scratch. This would help unlock housing potential in urban areas without resorting to urban sprawl or irreversible land use change.

A call for common sense!

Deciding whether to demolish or refurbish isn’t solely a construction industry issue. It’s a key policy problem that undermines the UK’s net zero targets, inflates the cost of housing delivery, and sidelines one of the most sustainable tools we have: the existing built environment.

If this government is serious about tackling the housing crisis and meeting its environmental goals - as the significant spending in the Spring Budget demonstrates - it must align its fiscal policy with its strategic objectives.

That means the Treasury should be:

• Reducing VAT on renovation, particularly where energy efficiency or reuse is involved

• Considering a modest VAT on new build projects to level the playing field

• Recognising the environmental and economic value of existing structures

Until they make sensible choices, the system will continue to reward waste, discourage sustainable design, and slow progress on both housing and climate.

We can do better. Come on Rachel Reeves, let’s start taxing smarter - for people and for the planet.