Cladding remediation is not optional. Where unsafe cladding or fire safety defects have been identified, the priority is to make buildings safe and ensure residents are protected.
However, for developers, landlords, housing associations and other property owners, there is another issue that can quickly become significant: VAT.
In many cases, cladding remediation works are expensive, complex and already difficult to fund. If VAT is charged at 20% and cannot be recovered, the cost of the project can increase materially. That can affect budgets, cashflow, funding decisions and, in some cases, the timing of the works.
VAT should not be allowed to become a barrier to building safety.
Why VAT is an issue for cladding remediation
For many people outside the tax world, the VAT issue can seem surprising.
If a building needs remediation because of unsafe cladding or fire safety defects, why should VAT be charged on the cost of fixing it?
The answer lies in how VAT applies to construction and property works. Remedial works to an existing completed building will often be treated differently from the original construction of a new residential building. That means works such as replacing cladding or carrying out fire safety remediation may be standard-rated for VAT purposes.
If VAT is charged at 20%, the numbers can be substantial.
For example, if a cladding remediation project costs £1m, VAT could add £200,000 to the invoice.
For some businesses, that VAT may be recoverable. For others, it may be partly recoverable or not recoverable at all. This is where the commercial impact becomes serious.
VAT recovery depends on who pays
The VAT outcome is not the same for every organisation.
A VAT-registered developer may be able to recover VAT in some circumstances, depending on the structure of the project and the nature of its activities. However, a landlord, housing provider, management company or partly exempt business may not be able to recover the VAT in full.
Where VAT cannot be recovered, it becomes a real cost.
That can leave organisations having to find additional funding simply to cover the VAT element of works that are being carried out for safety reasons. In practice, this can reduce the money available for other remediation, maintenance or future housing investment.
This is why the VAT position needs to be reviewed early, before contracts are finalised and before invoices are issued.
Why cladding VAT disputes arise
The VAT treatment of cladding remediation can depend on a number of factors, including:
- who is paying for the works;
- who is receiving the supply;
- the contractual arrangements;
- whether the works relate to the original construction;
- whether the works could be treated as snagging;
- whether the payer has any right to recover VAT;
- whether the property is used for taxable, exempt or non-business purposes.
This is not always straightforward.
Some disputes arise because HM Revenue & Customs (HMRC) may view the works as standard-rated refurbishment or remedial works. Businesses may argue that, in certain circumstances, the works are more closely connected with the original construction of the building, particularly where the original build was defective or incomplete from a safety perspective.
That distinction matters because it can determine whether VAT at 20% is due.
Where the amounts involved are large, the question is not academic. A VAT dispute can affect project funding, commercial negotiations and whether a party has made adequate provision for the total cost.
Why this matters for property owners and housing providers
Cladding remediation already involves difficult practical issues. These may include identifying responsibility, securing funding, appointing contractors, managing residents, dealing with insurers and satisfying building safety requirements.
VAT can add another layer of complexity.
If a property owner assumes VAT will be recoverable and it is not, the project may suddenly become more expensive than expected. If VAT is not charged and HMRC later decides it should have been, there may be assessments, interest and penalties. If the VAT position is uncertain, the parties may need advice or clearance before progressing with confidence.
This can slow things down.
The wider policy question is whether that is acceptable where the works are safety-critical. If the Government requires unsafe cladding to be removed, there is a reasonable question as to whether irrecoverable VAT should be adding to the cost of doing that work.
That does not mean every cladding project should automatically be zero-rated. VAT reliefs need to be clear, targeted and carefully controlled. But where VAT is creating disputes, delays or unrecoverable costs, the current position deserves proper review.
The Building Safety Levy does not remove the VAT issue
The Building Safety Levy is intended to help fund remediation of residential buildings where fire safety defects have not been addressed by the original developers.
This is a positive recognition that building safety costs need a funding mechanism. However, it does not remove the need to consider VAT.
The levy may help fund remediation in some cases, but it does not automatically solve the problem of irrecoverable VAT for every property owner, landlord or housing provider. It also sits against a challenging property and construction market, where additional development costs may affect viability.
For businesses and housing providers currently dealing with unsafe cladding, the key practical issue remains the same: what VAT will be charged, can it be recovered, and how should any irrecoverable VAT be funded?
What should be reviewed before remediation works start?
Anyone involved in cladding remediation or fire safety works should review the VAT position before the project begins.
This should include:
Confirming the VAT treatment of the works
Do not assume the contractor’s VAT treatment is automatically correct. The nature of the works and the contractual arrangements should be reviewed.
Checking whether VAT is recoverable
VAT recovery depends on the payer’s own VAT position. A landlord, housing association or partly exempt business may not be able to recover VAT in full.
Reviewing whether the works link to original construction
If the works relate to defects in the original build, consider whether there is any basis for a different VAT treatment.
Considering whether HMRC clearance is needed
Where the VAT amounts are significant and the treatment is uncertain, clearance may help reduce risk before invoices are issued.
Documenting the VAT analysis
Keep a clear record of the decision, the evidence considered and the reason for the VAT treatment adopted.
Factoring VAT into budgets and funding applications
Irrecoverable VAT should be identified early so it does not become an unexpected cost later in the project.
Why early VAT advice matters
VAT on property and construction works is often fact-specific. Small differences in structure, contracts or use of the building can change the outcome.
For cladding remediation, the stakes are high because the works are usually expensive and safety-critical. A 20% VAT cost can materially affect the total project budget.
Getting advice early can help property owners and housing providers:
- identify whether VAT should be charged;
- understand whether VAT can be recovered;
- reduce the risk of HMRC challenge;
- avoid unexpected irrecoverable VAT costs;
- support funding and board approval processes;
- document a robust VAT position.
The earlier the VAT position is reviewed, the easier it is to manage the risk.
Key takeaway
Cladding remediation is a building safety issue, but VAT can have a real effect on how that work is funded and delivered.
Where VAT is recoverable, it may be a cashflow issue. Where it is not recoverable, it can become a significant additional cost. For landlords, housing providers, management companies and partly exempt businesses, that distinction is critical.
VAT should not be treated as an afterthought. It should be considered at the start of any cladding remediation or fire safety project.
The Government should also consider whether clearer guidance, faster HMRC clearances, targeted relief or grant support for irrecoverable VAT could help prevent tax uncertainty from slowing down vital building safety work.
For support with cladding remediation VAT, property VAT, VAT recovery or HMRC disputes, contact The VAT Consultancy’s Land and Property specialists or make an enquiry.
