23 Jan 2025
By Ciara McInnes, Associate Director of Architecture, Tinto
In the UK we have some of the oldest building stock in the Western world. Conversely, Scotland also has some of the most ambitious carbon reduction targets, with the Scottish Government having set out its commitment to hit net zero by 2045, five years earlier than the rest of the UK. With space heating from homes and businesses combined accounting for around 20% of greenhouse gas emissions here in Scotland, a significant programme of retrofit and refurbishment works would help to square this circle.
A taxing issue
Now, here's the problem. We have a tax system that actively discourages retrofit. Our current tax system levies 20% VAT on all retrofit and refurbishment works, whilst new builds are zero rated. This means that all retrofit projects are automatically at a 20% cost disadvantage to new builds.
Despite declaring a climate emergency in 2019, the Scottish Government disincentivises the retrofit works required to meet our net zero targets. There have been a few piecemeal offerings over the years to reduce or remove VAT on certain thermal enhancements - such as the installation of renewable technologies - but the system is so complex to navigate that many projects which would qualify for some form of relief are not actually benefitting.
The ideal scenario here would be the comprehensive removal of VAT across the board for retrofit and refurbishment works. We need building fabric upgrades, roof repairs, windows, damp proofing, insulation, sustainable technologies for space heating, all being zero rated. All the time.
As an architect it pains me to advise clients that opting for new build over retrofit will instantly boost their budget by 20%. Over the years how many homeowners, businesses and developers have made the decision not to restore, not to save a part of our built heritage because the tax system will penalise them for doing so?
Holding the bank of carbon to account
This also has far-reaching implications on environmental targets. Every building is a mass of embodied carbon, generated during its initial construction and augmented over its lifespan with each repair and upgrade. Imagine a savings bank of carbon that is now buried within the walls, representing the carbon cost of raw materials, their fabrication, their transport to site and subsequent usage.
Retaining and re-using these existing buildings is typically the most sustainable route to development. However, by incentivising new builds, the tax system discourages this practice. Instead, it encourages the ongoing use of finite materials from across the globe, often from ethically ambiguous sources, to construct new buildings. Then, typically within the next 30-50 years, rinse and repeat.
The retrofit evolution
The ability to adapt buildings is fundamental to maintaining the supply of healthy, livable and crucially accessible places to live and work. In Glasgow, around a quarter of homes were built before 1919, according to data from Glasgow City Council. That's about 77,000 properties which were built long before the widespread introduction of electricity or central heating. Yet, many of these properties, including the famous tenements, remain popular places to live today. This is partly due to their adaptability, as they were typically robustly constructed in largely natural materials (occasional steelwork notwithstanding).
Our own Glasgow studio is located within the Briggait, which started life as a fish market, followed by a brief stint as a shopping centre, before becoming the studios and workspaces for the creative industries that we know and love today. These buildings have been retro-fitted several times over, evolving to suit the changing needs of their inhabitants. The resulting carbon footprint is far smaller than if new properties had been constructed each time.
The human impact
Tax and environmental costs aside, this policy also has a very tangible human cost. People who live in poor quality housing suffer higher levels of fuel poverty and worse health outcomes than those who have access to energy efficient and comfortable homes. The additional burden placed on the NHS of increased respiratory illness and other conditions caused by cold, damp homes could be reduced if tight retrofit budgets went a little further.
Many providers of social housing are currently facing a cliff-edge of aging housing stock requiring costly repairs, combined with upgrading properties to meet new sustainability targets and, fundamentally, provide an acceptable standard of living for the 21st Century. The removal of VAT would enable 20% more homes to be upgraded, reducing fuel poverty and helping Scotland to reduce its carbon emissions faster.
There are clear economic, environmental and social arguments in favour of improving the thermal performance of homes in the first place. Instead of pouring infinite amounts of energy and money into inefficient properties to keep people warm, we should be investing in retrofitting these buildings to make them fit for the 21st Century.
In the context of such challenging times for the economy, correcting this imbalance will be a painful, but essential step towards hitting Scotland's net zero targets. Yes, the wholesale removal of VAT from retrofit works would mean less money heading into government coffers, where it is sorely needed. The introduction of VAT on newbuild projects could hinder viability, and would no doubt meet stiff opposition from the construction industry.
The 20% we can’t afford to ignore
This could, if properly executed, represent a golden opportunity to re-shape the construction industry here in Scotland so as to benefit both the environment and our national finances. Removing the VAT from retrofit and refurbishment projects could spur a new boom in construction, with many smaller projects becoming economically viable. It would also place existing buildings on a more equal footing with their new-build counterparts, saving embodied carbon and providing a much-needed boost to our beleaguered town centres.
Growing economic activity translates into increased tax receipts and national insurance contributions from the additional skilled workers who could be trained and employed to carry out the work. These factors, plus the wider social benefits of better buildings could offset the loss of VAT income. Increased living standards, reduced fuel poverty and lowering the impact on the health services would also help to generate cost savings across other government departments.
The government thinks it can't afford to remove VAT from retrofit projects. I would argue that we can't afford not to.
