VAT on remedial works
VAT on cladding remediation
Following the events of Grenfell Tower where 72 people lost their lives due to highly flammable, non-compliant cladding, remediation works became an area of political significance which includded VAT on cladding remediation.
Many other residential blocks of flats were found to have serious historical fire safety defects associated with cladding installed in their original construction or subsequent refurbishment. As this posed a serious risk to life it was announced to make liable for the associated costs the companies which installed unsafe cladding for its replacement.
Developers who carry out cladding remediation works to residential buildings with fire safety defects would normally incur VAT on the goods and services purchased to complete this work. VAT on cladding remediation is not straightforward.
As the remediation works are carried out after the completion of the construction they can only be treated as ‘snagging’ if the work carried out is linked to the initial construction, and this was subject to either the:
- zero rate of VAT
- reduced rate of VAT
If the remediation works are not part of the initial building construction, they are subject to VAT at the standard rate.
RCB3/24 summarises their current policy.
HMRC policy is now that VAT on cladding remediation costs can be deducted if it is:
Directly and immediately linked to the initial construction, because it is snagging; or
Directly and immediately linked to the general activities of the business.
For remedial work to be considered snagging, it must be connected to the original construction via a retention clause in a contract to perform damages work, within the original contract for construction, and works must be performed by the person who undertook the initial construction.
Any remediation works which are not considered snagging may have a link to general business activity. Revenue and Customs brief 3/24 says that HMRC consider this to mean that the remediation work is a cost component of future taxable supplies by the developer – meaning the developer intends to continue to undertake developments or other taxable activities. VAT on these costs is deductible in line with the developer’s partial exemption method.
VAT specialist
Ask one of the VAT specialists at Solve VAT about VAT on cladding remediation.
HMRC now recognises that developers will be able to treat VAT on cladding remediation works as a cost component of future business activity. VAT is deductible in line with the normal overhead VAT recovery.
HMRC no longer see it as a requirement that work is carried out under the statutory provisions of the Responsible Actors Scheme.