HMRC has published guidance clarifying its policy on the VAT treatment of remedial works to buildings, including the replacement of cladding.

Cladding remediation work has been a critical issue for developers since the identification of fire safety defects in many residential buildings. There has been uncertainty over the VAT treatment of the work and whether developers may recover any VAT incurred in carrying out the work. HMRC has published a revenue and customs brief and guidelines for compliance to clarify its policy.

HMRC’s policy

HMRC says that the first step is to determine if there is a direct and immediate link between the remediation work and the initial construction.

If there is no such link, the work should be subject to the standard rate of VAT. Any VAT suffered by the developer should be treated as residual and recovered in line with the normal recovery rules for overheads. This is contingent on the remediation costs being a component of future taxable supplies made by the developer.

If there is such a link, the work is considered ‘snagging’. HMRC defines snagging as: “the carrying out of remedial works to correct faulty workmanship or replace faulty materials. Normally, it is carried out by the original developer under the terms of the original contract. This means it is not seen as a separate supply of construction services.”

VAT should be charged on snagging at the same rate as for the original construction. Any VAT suffered by the developer in carrying out snagging works may be recovered subject to the normal rules.

More detail is provided in the guidelines for compliance.

Examples

The following examples are based on examples in HMRC’s guidelines for compliance. See the guidelines for further detail.

Example 1:

A developer builds an apartment block and supplies a zero-rated freehold grant to a landlord, who leases the apartments. The contract includes a two-year warranty for remedial work. The following year, the landlord requests repairs under the warranty. The developer hires a contractor to complete the work. As the remedial work is linked to the original zero-rated supply, no VAT is charged (and no VAT is to be recovered).

Example 2:

A fully taxable developer builds and sells a block of flats. Safety issues are later found, and the developer replaces the materials to protect their reputation. The cost is recovered through ongoing sales. The developer hires a contractor and is charged VAT. There is no direct link to the original supplies, but there is a link to the general business activities. The input VAT can be fully recovered.

Record keeping requirements

Businesses should have the correct documentation to support any VAT claims in relation to this issue.

Documentation for determining VAT liability may include:

certificates of completion;
documents showing when affected buildings were first occupied;
the original plans for construction;
documents showing the detail of any disputes related to the completeness of a building;
fire and safety report demonstrating a latent defect;
planning permission certificates; and
any relevant contracts of construction.

Documentation to prove a right to recover the VAT as input tax would include:

contracts;
invoices; and
documents showing how costs link to any supplies that you make.

Next steps

Businesses that need to correct a submitted VAT return must complete form VAT652 and email it to vatremedialworks@hmrc.gov.uk with ‘VAT Remedial Works GfC11’ in the subject line.

If still unsure, businesses can apply for a non-statutory clearance with ‘VAT Remedial Works GfC11’ in the subject line of the email or at the top of the letter.

Further reading

HMRC manual VAT Construction. See VCONST02600 for guidance on snagging.
Buildings and construction (VAT Notice 708)
HMRC manual VAT Partial Exemption Guidance. See PE21000 for guidance on attribution.

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