HMRC confirms VAT policy on cladding remediation

What is the VAT treatment of cladding remediation?

Unless the building is not yet completed, or the works qualify as snagging, 20% VAT will be due on cladding remediation and other fire safety works. For these works to qualify as zero rated or reduced rated, the main construction/conversion works also needed to have met the qualifying criteria for a lower VAT rate to be applied.

For snagging, HMRC's view is that this is limited to situations where there was a fault in the original construction, and this fault is only fixed by the original contractor. However, in these situations, it is unlikely that there would be an additional charge for such works (the works being fault remediation), so HMRC's position is far from generous as there does not seem to be much scope for this situation to apply.

In other situations, HMRC considers the charge for the remediation work to be standard rated. These include:

• where a building was initially finished to the safety standards in place at the time but changing building regulations now mean that additional works are required
• where fire safety measures were included in the original plans but did not end up being installed, and this is now being corrected
• where faults in the original construction are corrected by a party other than the original contractor.

HMRC does not address the possibility of zero rating these works as the installation of energy-saving materials. This is a point which we may expect to feature in future discussions with HMRC.

Can any VAT charged on the works be recovered?

To the extent the remediation works are not zero rated, the potential for VAT recovery depends on the activities to which these costs have a 'direct and immediate' link. HMRC provides three examples:

• A developer has sold long leases in flats (zero rated) but retained the freehold and now charges exempt ground rents. The developer incurs costs in bringing the property up to current safety standards. HMRC considers these costs to be related to the ongoing rent of the property, and so the VAT is not recoverable.
• A developer sold the freehold of a new block of flats (zero rated). The building is still under warranty, and the developer hires a new contractor to repair some faults. HMRC's view is that these works are related to the initial zero-rated sale, and so the VAT is fully recoverable.
• The developer has sold some flats but agrees to carry out remedial works in order to protect their reputation. The developer intends to recoup these costs through sales of other properties in the future. In this case, the VAT is considered to be an overhead cost and is fully recoverable (if the developer builds solely for sale).

Where there is potential for VAT recovery, the appropriate documentation must be held to support any VAT claims, such as valid VAT invoices and supporting contracts with suppliers. Documentation supporting the VAT rate applied to works should be held by suppliers. Examples include, but are not limited to, certificates of completion, original construction plans, and planning permission certificates.

What are the implications for developers?

The implications of this guidance, should it remain as is, are fact specific, but generally the following is likely.

• Investors and property developers who incur VAT on fire safety costs should review their circumstances to determine if the VAT recovery treatment they have applied needs to be revisited.
• For developers who build for sale, this is likely to be a positive outcome. They should review whether VAT has been underclaimed in the past four years.
• Residential investors will be disappointed since any VAT incurred will not be recoverable.
• For housing associations and others who build for a mix of sale and rent, there may be potential for partial VAT recovery.
• Contractors who have undertaken these works may need to revise the VAT treatment applied if it was not in line with HMRC's policy.

What next?

The recent guidelines provide some long-awaited clarity of HMRC's position but also highlight several outstanding areas of ambiguity. GfC11 differs from some previous statements from HMRC policy and rulings given by individual officers. Contractors, developers and investors must now review their VAT charging and recovery practices in light of the guidance.

HMRC's policy is disappointing for those whose main activity is renting residential property, including student letting providers, private landlords, and housing associations. We anticipate that litigation will now proceed from those affected.

The need for thorough documentation and the possibility of litigation underscores the importance of staying informed and compliant with HMRC's evolving policies. Moving forward, it is important to remain vigilant and proactive in addressing any VAT-related issues that arise from these changes.

For further information on the VAT policy on cladding remediation, please contact Adam Cutler or your usual Crowe contact.

This article was first published in Taxation magazine in February 2025.