VAT and Unsafe Cladding: Removing Barriers to Remediation

For building owners, housing associations, landlords and contractors, the practical challenge is getting remediation work commissioned, funded and completed.

VAT treatment is emerging as one area where uncertainty can add cost and delay to essential fire safety works. With thousands of residential buildings over eleven metres still awaiting remediation, greater certainty around the tax treatment of these projects could help remove one of the barriers to progress.

Ola Adigun, VAT Director, said:

The Government must address VAT disputes with HMRC which is one of the factors delaying the removal of unsafe cladding. Official data shows thousands of residential buildings over eleven meters high are still awaiting remediation works

Why VAT treatment matters

The most publicised example is the contractor Equans and major housing associations taking HMRC to court over the VAT treatment of cladding and fire safety remediation works. The dispute centers on whether these works should be treated as standard-rated refurbishments, as HMRC contends, or as part of original construction and therefore not subject to VAT at 20%.

For organisations able to recover VAT, the ultimate financial impact may be limited. However, where VAT is wholly or partly irrecoverable, it becomes a genuine project cost. That can affect budgets, financing decisions and the amount available for other essential property investment.

Businesses are disputing HMRC’s treatment because where VAT cannot be recovered, or can only be partly recovered, it becomes a real additional cost impacting budgets. For example, if a cladding remediation project costs £1m, the VAT charge could add £200,000 to the invoice.

A VAT-registered developer may be able to recover VAT in some circumstances, but a landlord may find that VAT is an absolute cost. For those landlords, a 20% VAT charge can mean less money available for remediation, maintenance or future housing investment.

Certainty could help unlock stalled projects

The Government should review whether targeted relief, clearer guidance, faster HMRC clearances or grant support for irrecoverable VAT could help speed up remediation and prevent disputes going to court. Building safety work needs certainty. If there is uncertainty over whether VAT is due, whether it can be recovered, or whether HMRC may later challenge the treatment, that uncertainty can slow decision making and create financial risk for businesses.

This points to a broader policy question: should the tax system create additional friction around work that is effectively required to make buildings safe?

Providing clearer guidance, quicker decisions and greater certainty could allow building owners and contractors to price projects more accurately and reduce the risk of costly disputes after work has begun.

The Building Safety Levy adds another consideration

The Government has taken a positive step with the Building Safety Levy payable on new residential developments, due to come into force 1st October. Residential developers must pay a levy to local authorities to help fund the remediation of residential buildings where the original developers did not address fire safety defects. It aims to raise £3.4 billion towards remediation works.

However, there is a risk that additional costs could prove challenging for an already subdued property and construction market.

Ola concluded:

However, the property and construction market is stagnated, meaning few residential properties are being brought and therefore built. This levy may further disincentivize building and struggle to raise enough to support businesses who cannot recover remediation VAT costs

The policy challenge is therefore about balancing the need to fund building safety with the need to maintain incentives for new development and investment.

What should businesses and property owners consider next?

Building owners, landlords, developers and contractors involved in remediation should consider:

• Establishing the VAT position early: Determine whether VAT is likely to be chargeable and, critically, whether it can be recovered before committing to a project
• Building VAT into project budgets: Where recovery is uncertain, model the potential VAT cost rather than treating it as a technical issue to be resolved later
• Seeking clarity where necessary: Consider whether specialist advice or an HMRC clearance is appropriate for complex remediation arrangements
• Reviewing contractual arrangements: Ensure contracts clearly address responsibility for VAT and the consequences if the treatment is subsequently challenged
• Monitoring policy developments: Further Government guidance or targeted support could materially affect the cost and timing of remediation projects

The priority should be clear: essential building safety works need to be delivered as quickly and efficiently as possible. Greater certainty over VAT would not solve the UK’s wider remediation challenge, but it could remove an avoidable source of cost, delay and dispute.

Would you like to know more?

If you would like to discuss any of the above, please speak to your usual Blick Rothenberg contact or Ola Adigun using the form below.