For some time now, HMRC has been unclear with inadequate guidance regarding the VAT liability and VAT recovery position of property remediation work carried out by contractors and developers, post construction.
The two key VAT issues are as follows:
When it comes to VAT on remediation works, there are two main issues:
- Is VAT chargeable by contractors or developers on the property work in question?
- If VAT is chargeable, is it recoverable by the recipient (i.e. the person paying the VAT)?
This has become more an issue following the Grenfell tragedy in 2017, which resulted in a number of property developers needing to revisit past projects where cladding on buildings was considered unsafe in line with new guidelines.
HMRC's new guidance
The business brief recently published by HMRC at the very end of 2024 seeks to provide some clarity. Prior to this, advisers have relied on the view of individual VAT Officers or unofficial comments made by HMRC at various industry group meetings.
The new guidance confirms that the post construction work carried out will be subject to VAT unless the work qualifies as part of the original VAT-free or reduced-rated construction work, in which case it's classified as "snagging" work.
Whether VAT is chargeable on the work appears relatively straightforward. The complexities seem to arise when assessing if the VAT charged is recoverable.
To claim VAT recovery, businesses need to establish:
- A direct and immediate link between the cost incurred and a specific taxable supply, or
- That the VAT forms part of the business's general overheads and can be treated as "residual"
To recover the VAT, businesses should first consider if there's a direct and immediate link between the cost incurred and a specific supply.
The VAT law/rules, case law, and HMRC guidance which now includes this new guidance, needs to be applied to specific situations, supply chains and business models to determine the VAT recovery position.
Key questions to address
When assessing VAT recovery on remediation work, businesses should consider the following:
- Does the work qualify as snagging in line with HMRC's definition?
- Who's charging whom, and for what, in the supply chain?
- If VAT is chargeable, is there an opportunity to recover it to ensure no overall VAT loss?
The latter point in our view is an area where in particular businesses should seek specialist advice and document their position. HMRC are unlikely to elaborate on this current guidance and will issue VAT recovery assessments and penalties if VAT is claimed in error, especially if a reasonable position is not taken backed by the relevant facts and supporting law and guidance.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
