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Help with VAT treatment of remedial works — GfC11

Published 17 December 2024

Purpose and scope of the guidelines

These guidelines: 

• explain HMRC’s existing policy on the VAT treatment of remedial works, including the replacement of cladding (this policy has not changed) 
• help you understand what to consider to get your taxes right first time 

Background 

Construction and remedial works, including replacing cladding, are normally charged at the standard rate of VAT. 

Construction services will only be charged at the zero rate if they’re supplied in the course of construction of a qualifying building. Find out more about when services are supplied in the course of construction. 

The reduced rate is charged either: 

• when qualifying services are supplied in the course of a qualifying conversion 
• for certain renovations and alterations of empty residential premises, subject to meeting conditions 

Find out more about: 

• qualifying services and conversions 
• reduced rates for the renovation or alteration of empty residential premises 

When a building is no longer in the course of construction or conversion, any further works to it will normally be charged at the standard rate. These further works include improvements, repairs and maintenance.

If further works are considered to be ‘snagging’, as part of the original construction or conversion of a building, VAT relief may be available at the appropriate rate. 

HMRC’s position on VAT treatment of remedial works

The definition of snagging 

HMRC defines snagging as the carrying out of remedial works to correct faulty workmanship or replace faulty materials. 

Normally, it is carried out by the original developer under the terms of the original contract. This means it is not seen as a separate supply of construction services. Snagging covers faults that are:

• found soon after the building is completed 
• still covered by the building contract 

Read more guidance about snagging. 

When works will be considered as snagging 

For HMRC to consider remedial work as snagging, the work must be undertaken as part of the original supply of construction services. The following conditions, supported by the appropriate documents, all indicate when remedial works are part of the original supply of construction services.

The conditions are: 

• there must be a fault to the original construction of a qualifying building that was constructed at the zero rate or reduced rate of VAT
• there is an obligation to correct the fault under the original contract
• a person with ‘person constructing status’ must undertake the remedial work to satisfy the link to the original construction
• there is no new or additional supply or charge made for the remediation by the original developer or the original contractor

Those holding ‘person constructing status’ include developers, social housing providers or original contractor.

If a property is considered as complete for VAT purposes, any future work would normally be considered as repair or maintenance of the existing building. This means it would normally be charged at the standard rate of VAT.

A latent defect clause within the building contract does not constitute an obligation to correct a fault. It allows the owner of the building to bring legal proceedings against the developer. An obligation is any legal obligation to correct a fault under the original contract.

Examples of how to apply the rules on VAT treatment of remedial works

Example of works needed due to changes in building safety regulations 

An apartment block was constructed and completed in accordance with the contract for construction and complied with building regulations at the time of construction. A certificate of completion was issued.

Following changes to the building safety regulations, remedial works were carried out some years later to bring the property in line with new building safety regulations.

These works are seen as a new supply of services, as the work complied with the building regulations at the time of construction of the apartment block, there was no fault with the original construction. Therefore, the conditions are not met, and they should be charged at the standard rate of VAT.

Example of works needed due to incomplete work in the original construction 

Construction of an apartment block was completed, and a certificate of completion was issued. The developer considered the works to be satisfactory and paid all retention money to the contractor. The developer then sells the building.

A few years later, the new owner commissions a safety report on the building and discovers that fire breakers need to be installed. These were included in the original plans but were never installed. The new owner raises the issue with the developer. The developer engages the original contractor, who agrees to install the fire breakers under a new contract.

The developer charges the new owner for the fire breakers and the standard rate of VAT applies. This work is not part of the original construction and is a new supply, as it is carried out under a separate contract, even though the plans were not followed for the original construction.

Example of works needed due to faults in the original construction 

A residential building has been constructed and occupied. Shortly after residents move in, a fault is discovered with the original construction, meaning that the building quickly overheats.

The developer, who still owns the building, raises the fault with the original contractor, who moves quickly to fix it. Work is carried out to bring the construction in line with its original plans.

In these circumstances, the remedial works would be subject to VAT at the same rate as the original construction, as they:

• correct a fault in the original construction
• have been supplied by the contractor to the developer
• have not been charged on by the developer

Although a certificate of completion had been issued and the building has been occupied, the property is considered to still be in the course of construction.

In this example we would expect the developer to have engaged the original contractor.  Where the developer engages a third party we would usually expect there to be a new standard rated supply.

Holding companies

Supplies through holding companies are case specific and you should contact HMRC with full details of the transaction.

When you can recover input tax 

If you’re a VAT-registered business, you can normally recover VAT on any goods or services you purchase, if they are used in the making of your taxable supplies. VAT does not automatically become input tax simply because it is paid by a VAT-registered person. 

To recover input tax, you need to consider if the cost has a direct and immediate link to the taxable supplies that your business is making.

To have a direct and immediate link to a supply, the cost of the goods or services received by the business will normally be a cost component of the price charged to the customer. In regard to remedial work, where it forms part of the original construction, there will be a direct and immediate link between the goods or services received and the supplier’s original taxable sale. Any VAT incurred can be recovered, subject to the normal rules. 

If remedial works are not part of the original construction, the VAT incurred may still be potentially recovered, where there is a direct and immediate link to the general business activity. This may include overhead costs of the business and will depend upon the specific situation. There must be a link between the expenditure and the ongoing sales carried out by the business for the cost to be treated as input tax. 

VAT incurred in the making of exempt supplies is not normally recoverable.

Costs may be incurred by a business as a result of commitments made to make sure the business is able to either:

• operate in the future
• prevent reputational issues damaging future sales

This could include, for example, avoiding limits being placed upon the size of future planning permission or development rights.

Where such costs are incurred, there may be a direct and immediate link to the general activities of the business, provided the costs of remedial works are component of future taxable supplies to be made by the business. This means that VAT could be recovered in line with the business overheads, subject to the normal rules.

Find out more about direct and immediate links and cost components.

Example of works that are linked to ongoing supplies 

An apartment block was constructed and the developer (who is the freeholder), commissioned the construction, made an initial supply of a taxable long lease. They have since been receiving VAT-exempt lease payments.

The developer hires a contractor to carry out remedial works on the apartment block to bring it in line with current regulations

This work is not a part of the original contract of construction and is charged at the standard rate of VAT .

The remedial work has a direct and immediate link to the current lease payments, which are exempt from VAT. Subject to the normal rules, this VAT cannot normally be recovered by the developer, as it relates to exempt supplies. 

Example of works linked to an initial freehold grant 

A developer hires a contractor to build an apartment block.

When it’s completed a year later, the developer supplies a zero-rated freehold grant to a landlord. The landlord then leases apartments on short leases to tenants.

The contract of the grant between the developer and the landlord contains a warranty advising that the developer will remedy any faults in the original construction for 2 years.

The following year, the landlord identifies that repair work is needed on the building. This work is covered by the warranty. The developer hires a new contractor to complete the work, fulfilling its contractual obligations to the landlord.

The remedial works are carried out under the original freehold grant contract between the developer and landlord.

The supply to the developer has a direct and immediate link to the original taxable supply (the freehold grant) which is zero rated. There is no VAT charged and there is no VAT to be recovered.

Example of works with a direct and immediate link to the general activities of the business 

 A fully taxable developer commissioned the construction of a block of flats, more than 11 metres in height. They were completed, sold and occupied a year later. 

Safety issues are soon discovered relating to certain materials used in construction. Although the developer sold the flats, they agree to replace the materials. This is to protect their reputation and potential impact on future trade. The cost of this work will be recovered through their ongoing sales.

The developer hires a contractor to replace the material and is charged VAT. 

There is no direct and immediate link between the VAT charged and the original taxable supplies of the flats. However, there is a direct and immediate link between the cost and the general activities of the business.

As the developer is fully taxable, this VAT can be recovered in full.

Next steps

Check which documents and evidence you should keep 

You should have the correct documentation to support any VAT claims made in relation to your supplies. Without this documentation, HMRC may reject your claims.

Documentation for determining VAT liability may include:

• certificates of completion
• documents showing when affected buildings were first occupied
• the original plans for construction 
• documents showing the detail of any disputes related to the completeness of a building
• fire and safety report demonstrating a latent defect
• planning permission certificates
• any relevant contracts of construction

If you’re a supplier and you do not have copies of the documents needed, you should get copies from your client. It’s your responsibility to determine the correct VAT liability.

Documentation for VAT recovery includes:

• contracts
• invoices (you must hold a valid VAT invoice to deduct input tax) 
• documents showing how costs link to any supplies that you make 

Correct a submitted return 

If you need to correct a submitted return in relation to this issue, you must fill in form VAT652 — Notification of errors in VAT Returns. You’ll need to email: vatremedialworks@hmrc.gov.uk with your completed Notification of errors in VAT Returns form and write ‘VAT Remedial Works GfC11’ in the subject line of your email.

If you think you may have failed to meet your obligations, read the HMRC compliance factsheets on penalties to find out about:

• penalties HMRC may charge
• when these penalties may apply

Where customers fail to meet their obligations, they may be subject to:

• penalties
• interest
• both

Further questions 

If you’re not sure of the correct VAT position after reading these guidelines and linked guidance, you should apply for a non-statutory clearance. If you’re applying for a non-statutory clearance, write ‘VAT Remedial Works GfC11’ in the subject line of your email, or at the top of your letter.

Find out about applying for a non-statutory clearance.

If you have previously received advice direct from HMRC on the VAT treatment of remedial works and it’s different to the information given in these guidelines, email: vatremedialworks@hmrc.gov.uk. You’ll need to write ‘VAT Remedial Works GfC11’ in the subject line of your email. 

You must make sure to use the correct advice and information going forward.

Find out about when you can rely on HMRC advice and guidance. 

Further guidance 

The main sources of HMRC guidance relating to the VAT treatment of remedial works include:

• the VAT Construction Manual
• Buildings and construction (VAT Notice 708)