HMRC have published 'Revenue and Customs Brief 3 (2024): VAT on cladding remediation work' which clarifies HMRC's policy on the recovery of VAT incurred on cladding remediation works which are carried out on existing residential buildings.
Background
Where developers undertake cladding remediation works to residential buildings with fire safety defects they will usually incur VAT on the Goods and services used to complete the work.
- Such VAT will be charged at the standard rate where the remediation works are not part of the initial Construction or conversion of the building.
- Remediation works undertaken after the completion of the construction can only be treated as ‘snagging’, and potentially subject to the zero or reduced rates of VAT, if the work carried out is linked to the initial construction.
- HMRC defines snagging as the carrying out of remedial works to correct faulty workmanship or replace faulty materials.
- Snagging is typically carried out by the original developer under the terms of the original contract, meaning it is not seen as a separate supply of construction services.
HMRC's policy
Businesses that are VAT registered can normally Recover the VAT incurred on the purchase of goods and services used for their business purposes subject to the normal rules.
- Businesses should first consider if there is a direct and immediate link between the cost incurred and a specific output supply.
- The VAT may be treated as residual and recovered in line with the normal recovery on overheads where this is not present, but there is a direct and immediate link between the cost incurred and business activity as a whole.
- If the remediation has a direct and immediate link to the initial construction, this is treated as ‘snagging’ and any VAT incurred may be recovered, subject to the normal rules.
- Where the remediation works do not have a direct and immediate link to the initial construction, the costs may have a direct and immediate link to the general activities of the business.
- This is on the condition that the cost of the remediation work is a cost component of the future taxable supplies made by the developer.
- In this instance, input tax would be recoverable as a general business overhead, subject to the normal rules.
Further guidance
HMRC have also published Guidelines for Compliance 11 (GfC11) : 'Help with VAT treatment of remedial works', which aims to give more detailed guidance on VAT and remedial works generally, including the replacement of cladding.
GFC11 includes:
- The definition of 'snagging'.
- Detail of when input VAT can be recovered.
- Examples of the VAT treatment of remedial works.
- Examples of documents and evidence to be kept.
- Information about correcting a submitted return.
Useful guides on this topic
Land & Property VAT (Subscriber guide)
An outline of the VAT treatment of some of the more common supplies of land and property.
Land & Property VAT at a glance
A summary of VAT on common land and property transactions.
Land & Property: Dwellings
What is a dwelling for VAT purposes? What is the VAT treatment for construction, conversion, sale, and letting of a dwelling?
Input VAT: What constitutes a valid claim (& VAT invoice)?
What is Input VAT? Who can claim it? What is needed for a valid claim? What needs to be included on a VAT invoice and can you make a claim without one?
Partial exemption & input VAT
How do you calculate the amount of input tax you can recover under the VAT partial exemption rules? What are the de minimis rules?
External links
HMRC: Revenue and Customs Brief 3 (2024): VAT on cladding remediation work
HMRC: Help with VAT treatment of remedial works — Guidelines for Compliance GfC11
