Should I refurbish or replace an existing dwelling?

We are often faced with this dilemma. When taking VAT into account a replacement dwelling often looks more favourable as you will not need to make so many compromises, especially with regards to heat loss, thermal comfort and airtightness; however, a replacement dwelling is likely to provide less usable floor area than a refurbishment and extension for the same budget. New dwellings have zero-rated VAT, while refurbishments and extensions are charged at 20% VAT.