Senior Whitehall sources said the VAT reduction would be one of several measures in the urban white paper to be published this autumn.
It has also emerged that paymaster-general Dawn Primarolo is to reopen talks with the industry with a view to scrapping CIS6 certificates. The tax scheme has been criticised by the industry as too bureaucratic.
The decision to cut VAT on refurbishment comes after months of negotiations between the DETR and the Treasury. The duty is levied at a rate of 17.5%, compared with a zero rate for new build.
However, government insiders say the Treasury has asked the DETR to delay publication of the white paper until late November, after the Treasury’s pre-budget statement. This is believed to be an encouraging signal as it may mean the Treasury has earmarked funds for the cut.
The CIS6 certificate being reviewed by Primarolo is required by all subcontractors with a turnover of £30 000-£5m a year.
Construction minister Nick Raynsford, who has lobbied the Treasury over the tax scheme, declined to comment on whether CIS6 would be scrapped. He said: “I have spoken to Dawn Primarolo and she has assured me that the matter is not closed and she is aware of the industry’s concern.”
However, a Treasury insider said the minister accepted that she had made a mistake with the scheme. The insider said Primarolo had failed to understand how unworkable much of it was.
Construction Confederation chief executive Jennie Price welcomed the moves to cut VAT and review the scheme.
She said: “We knew the Treasury was looking at the issue of VAT and we were aware that civil servants were doing a lot of preparatory work.
“If [the VAT cut] is in the urban white paper, it is very good news because it is the key to unlocking the rogue builders problem and underpinning the government’s quality mark scheme.”
Referring to the tax review, she said: “The Treasury had initially said they were finished with looking at the scheme. However, it is very good news that Dawn Primarolo is to look afresh at the issue.
“We understand that a review is currently under way and expect to hear from the Treasury within the next three to four weeks.”
The plan to scrap CIS6 was also backed by contractors. A spokesperson for Kvaerner said: “The CIS scheme is not unworkable but it is unwieldy and does need changing, so we welcome any review.”
Lord Rogers, who chaired the urban taskforce, was one of a number of industry figures to lobby for a cut in VAT on refurbishment.
At this stage, it is unclear whether the proposed cut will lead to the introduction of VAT on new build.
However, a senior source said the urban white paper would also include a strengthening of regional development agencies and would be more radical than the Rogers report in establishing a blueprint for urban regeneration
The source said: “People will know this is important. The white paper will be much wider than Lord Rogers’ agenda and will provide a comprehensive template for revitalising inner cities.”