HMRC says VAT applies to most cladding remediation

Contractors have been told they may need to examine any VAT recovered from cladding remediation work dating back to 2021.

The call comes after HMRC published a policy paper stating VAT must be paid on all cladding remediation work, unless it is snagging carried out under an original construction contract that was subject to VAT relief.

The move means that many developers and contractors now have to retrospectively declare any VAT owed for remediation work over the past four years, or risk being fined.

The tax body warned developers that cladding remediation to residential buildings with fire safety defects will “normally incur VAT on the goods and services purchased to complete this work”.

But it added: “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.”

HMRC said for cladding remediation to count as snagging, there must be a fault with the original construction of the building and an obligation to correct this fault under the original contract.

It added there must also be someone with “person constructing status” undertaking the remedial work “to satisfy the link to the original construction”, and there must not be any new or additional supply or charge made for the remediation.

Where cladding remediation qualifies as snagging, VAT is paid at the rate of the original construction work. No VAT is paid for new-build housing, while certain property conversions pay 5 per cent rather than the standard 20 per cent rate.

Jas Dhillon, VAT partner at law firm Lubbock Fine, told Constrution News: “HMRC can go back four years with regards VAT, so effectively any VAT recovered, not recovered, charged or not charged should be looked at going back to 2021.”

He added: “Generally, VAT has been charged [for cladding remediation] unless the contractor/builder seeks advice or is led by the recipient of their services obtaining advice. If VAT is correctly charged the next question is can that VAT be recovered.”

HMRC has provided companies with details of how to correct a submitted VAT return, adding that if they fail to they may be liable to pay fines and interest on missing sums.

The tax agency added that a range of documentation may be needed to support any VAT claims, including certificates of completion, original plans for construction, fire and safety reports showing defects, planning permission certificates and construction contracts.

Dhillon said HMRC had previously been “unclear with inadequate guidance regarding the VAT liability and VAT recovery position of property remediation work”, while the Institution of Chartered Accountants in England and Wales has also described “uncertainty over the VAT treatment of [cladding remediation] work.”