UK HMRC sets out position on VAT recovery of cladding-remediation works

HMRC has published new guidance and a policy paper confirming that the costs of cladding remediation works can be recoverable as a general business overhead provided there is a link between the expenditure incurred and the ongoing sales carried out by the business.

The guidance published on 17 December helpfully includes a specific example clarifying that costs incurred by a business voluntarily undertaking remedial work to protect its reputation are recoverable.

The guidance acknowledges that it was drafted following feedback from developers and representatives from the building industry about how VAT should be applied to remediation works.

Previous uncertainty

The recovery of VAT incurred on cladding remediation work has been a complex issue.

In autumn 2023, HMRC indicated that cladding remediation costs would only be considered an overhead if the work was compulsory, such as under the Building Safety Act. This stance implied that such treatment would not apply to voluntary remediation by housebuilders; for example, to protect the reputation or brand of the business.

Following discussion with the housebuilding industry, HMRC revised its position earlier this year, confirming to interested parties that it would publish guidance to enable the recovery of  input tax on cladding remediation as long as the cost forms a cost component of the business' future supplies.

Osborne Clarke comment

The long-awaited guidance provides welcome clarification for housebuilders and developers, ensuring fair treatment between those obliged either legally or contractually to replace defective cladding and those who voluntarily replace it.

While the clarification is welcome, there are still complexities. There will still be circumstances where the VAT incurred will only be partially recoverable or not recoverable at all. The guidance recommends applying for a non-statutory clearance if the taxpayer is still unsure of the correct VAT treatment after reading the guidance.

The guidance also highlights the process to follow if a taxpayer needs to correct a submitted return or if they have previously received advice direct from HMRC on the VAT treatment of remedial works which is different to the information given in the guidelines.

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