HMRC – VAT treatment of remedial work

On 17 December HMRC published Guidelines for Compliance 11 and Revenue and Customs Brief 3 (2024), which together set out its intended approach to charging and recovery of VAT on remedial work to residential flats.

Whilst not directly referenced in the documents, the context for publication is the ongoing impact of the tragic events at Grenfell in June 2017, which have resulted in the sector investing large amounts to ensure residential blocks are safe and otherwise fit for purpose, with the potential VAT involved in the billions.

The basic position for works on existing, tenanted, residential property is that VAT is chargeable at the 20% standard rate by the contractor, with input VAT being potentially fully irrecoverable by the housing association. It should be noted that the original contractor can potentially fully recover the VAT it has incurred.

Over the years, there has been significant pressure on the government of the day, and HMRC, to modify this position on the basis that it slowed, or stopped, vital works, reduced the ability to meet housing targets elsewhere, and was not right for the government to make a profit from the situation in the form of an increased tax take.

As a result, it was not uncommon for HMRC to be relatively sympathetic to taxpayers, and individual clearances were granted that enabled such works to be zero rated or allow VAT recovery where it was charged.

However, this also led to differences in treatment being applied, and occasional bursts of HMRC compliance activity against taxpayers who thought they were acting on an agreed position. As a result, HMRC had been promising publication of what its view is since 2023.

• The policy position taken is quite orthodox, with two key headlines:
  HMRC’s view of snagging (for the purposes of zero rating) is tightly drawn – applying only when the original contractor rectifies faults for no additional charge under the original contract.
• Input VAT may be recoverable by the landowner/registered provider (if relevant) in respect of remediation services, if it can be linked to the original supply of land or as a general business overhead.

HMRC say this does not represent a change of policy and, indeed as statements, these are what you would expect from application of normal VAT rules – however many in the sector had been hoping HMRC would be able to go a bit further to assist in what is a fairly unprecedented situation.

The published documents do not deal with or comment on the existence of more generous individual rulings, so there will still likely remain differential treatments across the sector. Where registered providers intend to continue to rely on these, we would recommend they take advice on how much comfort they can provide in view of HMRC’s latest round of statements.

In addition, where registered providers have incurred costs on remediation and fire safety, and left the VAT entirely irrecoverable, it may be worth reviewing whether they can be partially recovered, given HMRC’s acceptance of reputational protection, particularly where the costs have not been passed down to residents in the form of increased rents or service charges.