HMRC restricts scope of VAT reliefs on replacement cladding

Following the Grenfell tragedy, many organisations are looking to replace their defective cladding. As reported in our alert on 3 May 2019 VAT reliefs on replacement cladding, HMRC accepted that these works could be subject to the zero or reduced rate in certain circumstances.

Although this remains the case, HMRC has issued further guidance noting that they would not expect these works to be zero-rated in the majority of cases.  

What qualifies as zero-rated? 

Works to replace defective cladding can be zero-rated if they qualify as snagging works. Clearly these works will normally be many years outside of the normal period for snagging defects; the building will have been signed-off as completed and any retentions would have been paid to the builder. However, HMRC states that it is relaxed about the time lapse.

Rules under the construction process

Where HMRC now appears more stringent is whether the works can be seen as part of the construction process. In order for this to be the case, HMRC expects:

• the defective cladding was part of the original construction of the building. HMRC implies it will expect to see copies of the original plans showing the cladding in situ
• the property still needs to be owned by the organisation that commissioned its development; and it is this organisation which organises the replacement of the cladding. Many stock transfer housing associations, and large groups that have been through various corporate rationalisations might find this removes several of their properties
• the cladding is being replaced because it is faulty or defective. This might seem obvious, but organisations erring on the side of caution may face challenges.

As noted in our earlier alert, there may be opportunities for works to be charged at the zero or reduced rate where cladding was fitted as an energy efficiency measure some time after the initial construction of the building. HMRC’s latest guidance does not address this.

Conclusion

While HMRC’s policy has not actually altered, the tone of this latest guidance is disappointing. With the second anniversary of the Grenfell tragedy just passed, pressure is mounting about the slow pace of remedial works and many organisations face significant bills for these vital works. Placing additional obstacles in the way of contractors charging without VAT, where they are entitled to, is unhelpful.

Further support

To discuss these issues and how they apply to your organisation, please contact Adam Cutler, Director, VAT.