HMRC confirm VAT policy on cladding remediation

In what is long awaited guidance, HMRC has clarified its policies for when VAT should be charged on cladding remediation and other fire safety works to residential buildings, and in what circumstances this VAT can be recovered. However, a number of uncertainties remain.

On 17 December 2024 HMRC issued Revenue & Customs Brief 3/24 and Guidelines for Compliance 11, setting out its policy on cladding remediation.

Treatment of the works

The main point, and one which potentially applies quite narrowly, is that HMRC considers that works could be zero-rated if they qualify as snagging. This would require them to be part of the original construction services. HMRC advises that this will be limited to the situations where there was a fault in the original construction, and the original contractor fixes this. In these circumstances, it is unlikely that there would be an additional charge for this, so there seems little scope for this situation to apply.

In other circumstances, HMRC considers that the charge will be standard-rated. This includes where:

• a building was finished to safety standards as they existed at the time, but changing building regulations require additional works
• where fire safety measures were included in the original plans, but not installed in practice, and this is now being rectified
• where faults in the original construction are carried out by a party other than the original contractor.

It is interesting to note that HMRC do not mention the potential that these works could be zero-rated as the installation of energy saving materials, and this is an issue we will continue to pursue with HMRC as the application of zero-rating could help to reduce VAT costs associated with such works.

VAT recovery

Where VAT is charged on cladding remediation and associated works, the potential for this to be reclaimed will depend on what activities these costs have a ‘direct and immediate’ link to.  HMRC’s starting point is whether they are cost components of the price charged to the customer.

HMRC give three examples

The developer has sold long leases in flats (zero-rated) but retained the freehold and now charges exempt ground rents.  It incurs works to bring the property up to current safety standards. HMRC’s view is that this relates to the ongoing rent of the property and so is not recoverable.

The developer sold the freehold of a new block of flats (zero-rated). The building is still under warranty and the developer engages a new contractor to remedy some faults.  HMRC consider that the works relate to the original zero-rated sale, so the VAT can be recovered in full.

The developer has sold the flats but agrees to do some remedial works to protect their reputation. They will seek to recoup this cost through future sales of other properties. The VAT is an overhead cost (and if the developer just builds for sale, fully recoverable).

What does this mean for developers, investors and contractors?

In the end, the specific circumstances of how an organisation has structured their activities will determine how positively this guidance is viewed.

Property developers and investors incurring fire safety works should review their own circumstances and decide whether the VAT recovery treatment they have applied needs to be revisited.

For developers who build to sell, this is likely to be a positive outcome and they should review if VAT has been underclaimed in the last four years. However, many commercial housebuilders develop each property in a special purpose vehicle, which may limit recovery.

For developers who build-to-rent, and investors who do not develop themselves, this will be disappointing, as VAT incurred will not be recoverable.

For housing associations, and others who build for a mixture of sale and rent, there may be scope for partial VAT recovery. However, it will be necessary to show that these works are a cost of overall future development activity rather than the cost of being a landlord for the specific property.

Contractors who have undertaken this work may need to revisit the VAT treatment applied if it was not in line with HMRC’s policy.

HMRC’s policy will be a disappointment for those whose main activity is renting property, including student letting providers, private landlords and housing associations. We anticipate that litigation will now proceed from some of those affected given the likely sums of irrecoverable VAT that arises from the position that HMRC are adopting.

To discuss this further, please contact Adam Cutler, or your usual VAT contact.