Investigations into the Grenfell Tower tragedy in 2017 have identified a need to replace defective cladding on many high-rise residential tower blocks across the UK. However, while there is a zero-rate VAT relief available for these remedial works, this is subject to strict conditions that, in practice, few property companies will be able to meet. They will therefore incur a 20 per cent VAT charge on the cost of the remedial works which, for blocks of privately owned flats, is ordinarily passed on to the leaseholders.
HMRC has agreed that these remedial works could be viewed as ‘snagging’ and should be zero-rated where the original construction of the building met the zero-rating conditions (such as in the case of constructing a new residential property). While HMRC’s policy to grant this zero-rated relief might be intended to support the affected leaseholders, as the law stands it is only available where the company commissioning the remedial works has ‘person-constructing’ status. This restricts the zero-rating to instances where the company commissioning the original construction many years ago is the same company commissioning the remedial works today.
In most scenarios, ownership of these properties has changed hands for one reason or another. It is common for developers to sell the freehold or reversionary interest in these newly built apartment blocks post-completion and wind up the development company that originally commissioned the works. Even if the development company that originally commissioned the works still exists, the responsibility for carrying out the remedial works may fall on a management company rather than the company with ‘person-constructing’ status.
The relief in its current form is therefore unlikely to extend to the typical corporate structures employed by many property development companies, meaning the remedial works will be subject to VAT at the standard rate.
The significant costs of these remedial works, and the ongoing difficulties in determining who should bear them, have been matters of contention with little resolution in the three and a half years since the Grenfell disaster occurred. The cost of remedial works for residential properties is often ultimately passed on to the leaseholder by way of a service charge and usually justified through ‘upkeep and maintenance’ clauses written into their leases – the same clauses that are invoked to cover the costs of window cleaning, lift maintenance, and so on. However, the costs of replacing the cladding can run to tens of thousands of pounds per household, representing a potentially crippling cost for many. If labelling works to the building structure itself as ‘upkeep and maintenance’ is a serious wound to the leaseholders, an additional 20 per cent VAT charge is surely the salt rubbed into it.
Now that the Brexit transition period is over, it is within the government’s power to extend the VAT zero-rating provisions to relieve leaseholders from this additional, irrecoverable VAT burden. We have already seen HMRC broadening legislative VAT reliefs for the greater public good, such as the zero-rating of e-books and women’s sanitary products. Perhaps a similar decision will follow for post-Grenfell remedial works, relieving at least some of the potentially ruinous costs facing countless leaseholders. After a year where public spending has soared to unprecedented levels, it is not immediately clear how frugal the government will choose to be.