HMRC makes VAT a snag for cladding remediation
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In December 2024 the Government published a briefing note clarifying HMRC's policy paper on the deduction of VAT incurred on cladding remediation works which are carried out on existing residential buildings.
Cladding remediation works have been carried out to existing residential buildings following the tragedy which occurred at Grenfell tower in 2017. Where buildings are discovered to have been designed and constructed in an unsafe way utilising dangerous cladding materials rectification works have been underway to remove the dangerous materials and replace with safe cladding.
The remediation works have been carried out to buildings constructed recently and also to buildings constructed decades earlier. Developers carrying out these remediation works would normally incur VAT on the goods and services purchased to complete this work.
The default VAT treatment is that such goods and services, like most other supplies in the UK, bear VAT at the 20% standard rate. Developers would only be able to recover that input VAT if they have taxable outputs, such as rent charged on commercial property subject to an option to tax.
Where cladding remediation is undertaken as “snagging” – paid by the original developer to the original contractor, under the original contract – the work can benefit from the same 5% reduced rate or zero-rated VAT treatment that applied to the original build, reducing the VAT cost they incur.
But if the work is not done under an existing contractual obligation between the original developer and the original contractor – the work is commissioned by an owner or building manager who is not the original developer, or the work is undertaken by a different contractor, or the same developer and contractor are involved but the work is not required under the original build contract – then 20% VAT should be charged.
In many cases, any such VAT paid to a contractor would be irrecoverable, particularly where the building is residential and the developer granted zero-rated long leases some years ago so any further supplies to tenants would be exempt.
For remediation works to be treated as ‘snagging’ they need to be linked to the initial construction. For the more recently constructed buildings this might be a simple exercise to locate the original contractor. However, where the original contractor or cladding sub-contractor no longer exists and for buildings which were constructed some time ago this will be a harder exercise to link the remediation works back to the initial construction. In the interests of expediency and in line with the Government’s recently published Remediation Action Plan (which is intended to speed up remediation works) it may not be possible to utilise the same contractor as originally carried out the construction works.
