Cladding Remediation: Capital or Revenue for Freeholders and RMCs?

Whoever ends up paying for cladding and fire safety remediation on a block, the freeholder, an RMC, or occasionally a leaseholder absorbing a cost the Building Safety Act didn't shield them from, the bill is rarely small, and the tax treatment of it is rarely obvious. Get it wrong and you either miss an immediate deduction you were entitled to, or claim one HMRC later reverses, with the capital gains position on eventual sale unpicked at the same time.

Why this question even has an edge to it

The general repairs-versus-improvements test we set out in our repairs and improvements guide normally does the job: replacing something worn out or defective with the modern equivalent is a repair, deductible against income in the year it's incurred, while adding something the building never had before is capital, relieved only against a future capital gain. Cladding remediation sits close to the boundary between the two more often than an ordinary repair does, because the works are large, the original material was frequently unsafe rather than simply old, and the project often bundles genuine like-for-like replacement together with upgrades that go beyond restoring what was there before.

The core principle: modern equivalent, not betterment

HMRC's long-standing position, built on cases like Conn v Robins Bros and the reasoning in Transco, is that replacing a defective component with the nearest modern equivalent doesn't turn a repair into an improvement just because building standards and materials have moved on since the original was installed. A building can't be restored using the same combustible ACM cladding it had before; it has to be replaced with a compliant, non-combustible modern system to meet current regulations. On this principle, that substitution, replacing a dangerous external wall system with a safe one that performs the same function, is capable of being treated as a repair, because the building is being restored to a safe, usable condition rather than being given a capability it never had.

Where that principle stops applying is the moment the works go beyond restoration. A remediation project that also adds a fire suppression system the building never had, extends balconies, or otherwise gives the building a facility or standard of amenity it lacked before the works began, is adding something new on top of the safety fix. That additional element is capital expenditure in the ordinary way, and a single invoice covering both elements genuinely needs apportioning between the two, rather than being pushed entirely into whichever category is more convenient.

Waking watch and other interim costs are straightforward

Waking watch patrols, temporary alarm systems and other interim safety measures put in place while permanent remediation is designed, funded and carried out sit much more comfortably on the revenue side of the line. They don't attach to the fabric of the building at all; they're a running cost of managing risk during a defined period, closer in character to insurance or security costs than to building works, and are deducted in the period they're paid in the normal way.

Grants and reimbursements: taxable receipts, not free money

Money received back under the Cladding Safety Scheme, a Building Safety Fund grant, or a remediation contribution order against a developer under the Building Safety Act doesn't sit outside the tax system just because it's earmarked for safety works. Where the underlying expenditure it reimburses was deducted as a revenue cost, the ordinary matching principle brings the reimbursement back into account as taxable income in the period it's received, on the same basis that an insurance payout covering a deductible repair is itself taxable. Where the original expenditure was capitalised instead, the more common treatment is to net the grant against the capital cost rather than tax it as a separate receipt, which changes the base cost carried forward for capital gains purposes on an eventual sale. Which of those two applies turns entirely on how the original spend was categorised, which is exactly why getting that first classification right matters well beyond the year the money is spent.

The Building Safety Act layer sitting on top

The Building Safety Act 2022 restricts what a "relevant landlord" can recharge to qualifying leaseholders through the service charge, which means costs that might once have been passed straight through to leaseholders now frequently land, in whole or in part, directly on the freeholder or the RMC itself. That's a service charge and leaseholder protection question rather than a tax one, and it sits outside what this article covers, but it directly determines who is actually incurring the expenditure we've been discussing, and therefore whose corporation tax or income tax computation the repair-versus-capital question needs to be run through in the first place. Where an RMC is the entity absorbing the cost, it's worth reading that alongside our guide to RTM and RMC corporation tax, since a company holding remediation-related grant income or interest on a ring-fenced fund needs the same non-mutual income analysis applied to it that any other receipt would.

VAT sticks on most residential blocks

Remediation works and the professional fees that go with them, surveys, fire engineering reports, project management, are standard-rated for VAT. Recovering that VAT depends on whether the income the building generates is taxable, and residential letting is VAT-exempt in the overwhelming majority of blocks affected by this issue, which means the VAT charged on remediation is usually an additional real cost rather than something recoverable through a VAT return. A freeholder or RMC budgeting for a remediation project needs to build that irrecoverable VAT into the total cost from the outset, not treat it as a rounding error discovered once invoices start arriving.

What we're actually telling clients

Get the works categorised properly at the point the contract is agreed, splitting genuine like-for-like safety replacement from anything that adds a facility the building didn't have before, rather than leaving it to be reconstructed from invoices after the event. Treat any grant or contribution order payment as a taxable event to check, not as money that falls outside the system because of where it came from. And build irrecoverable VAT into the real cost of the project from day one, because on a predominantly residential block it almost never comes back.

Common questions

Is replacing dangerous cladding a repair or an improvement for tax purposes?

It's generally treated as a repair where the works replace a defective external wall system with the modern, compliant equivalent and simply restore the building to a safe and functional state it's meant to have. Where the same project also adds something the building never had before, such as an upgraded fire suppression system or new balconies, that additional element is more likely to be capital, and a single remediation project can genuinely need splitting between the two treatments.

Are waking watch costs tax deductible?

Yes. Waking watch is an interim safety measure, a running cost of managing risk while permanent remediation is planned and carried out, not an addition to the building itself, so it's deducted as a revenue cost in the period it's incurred rather than added to any capital figure.

Is a Building Safety Fund grant received by a freeholder or RMC taxable?

Broadly yes, where it reimburses costs that were themselves deducted as revenue expenditure, under the ordinary matching principle that applies to any reimbursed cost. Where the underlying works were capitalised instead, the grant is more commonly treated as reducing the capital cost of those works rather than as a separate taxable receipt, so the correct treatment depends on how the original expenditure itself was categorised.

Can a freeholder recover VAT on cladding remediation costs?

Usually not in full on a predominantly residential block. VAT is charged at the standard rate on most remediation and professional fees, and input VAT recovery depends on whether the building's income is taxable, which residential letting normally isn't, so the VAT on remediation typically becomes a further real cost rather than a recoverable one.

This article is general information, not personal tax advice, and tax rules change. Your own position depends on facts we cannot see from here — please take advice before acting on anything above.

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