Contractors and developers involved in cladding remediation may need to reassess any VAT recovered on such work since 2021, following updated guidance from HMRC. The tax authority has clarified that VAT must be paid on all cladding remediation, except in cases where the work qualifies as snagging under an original construction contract that was already subject to VAT relief.
This means many firms may now be required to retrospectively declare and pay VAT owed on past remediation work or face potential fines and penalties.
HMRC’s VAT Position on Cladding Remediation
HMRC has stated that remediation of fire safety defects in residential buildings will generally incur VAT on the goods and services used to complete the work. However, if the remediation work has a direct and immediate link to the original construction, it may be considered snagging, allowing for VAT relief.
- For cladding remediation to qualify as snagging, the following conditions must be met:
- The original construction of the building contained faults that required correction.
- There is a contractual obligation to rectify these defects under the original construction agreement.
- The work is carried out by a contractor with “person constructing status”, ensuring a direct link to the initial build.
- No new or additional charges are made for the remediation beyond what was originally agreed.
If these conditions are satisfied, VAT will be charged at the same rate as the original construction work:
- New-build housing: VAT-exempt
- Certain property conversions: 5% VAT
- Other construction work: 20% VAT
Contractors Could Face Retrospective VAT Liabilities
Jas Dhillon, VAT partner at Lubbock Fine, warned that HMRC has the authority to review VAT payments over the past four years, meaning any VAT recovered, not recovered, charged, or uncharged since 2021 should now be carefully examined.
“Generally, VAT has been charged for cladding remediation unless the contractor or 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?”
Risk of Fines for Incorrect VAT Returns
HMRC has provided businesses with guidance on how to correct previously submitted VAT returns, warning that failure to do so could result in fines and interest charges on unpaid sums.
To support VAT claims, contractors may be required to provide extensive documentation, including:
- Certificates of completion
- Original construction plans
- Fire and safety reports identifying defects
- Planning permission certificates
- Construction contracts
Ongoing Industry Concerns Over VAT Uncertainty
Many within the industry have criticised the lack of clarity from HMRC regarding VAT on remediation work. Dhillon described HMRC’s previous approach as “unclear with inadequate guidance”, while the Institute of Chartered Accountants in England and Wales has also raised concerns over the uncertainty surrounding VAT treatment for cladding remediation.
With potential financial implications for many firms, contractors are now being urged to review their VAT position and seek professional advice to ensure compliance.
