In February this year, the government made a commitment to fund the cost of replacing unsafe cladding on all high-rise residential buildings in England. The introduction of a residential property developer tax was announced as being one of the key components of this plan although the specifics of what this new tax might look like were lacking at the time. A consultation document was produced at the end of April, setting out the proposed design, implementation and administration of the new tax and inviting feedback from stakeholders on the proposals.
The government describes the imposition of this new tax as "industry paying its fair share" although it acknowledges that a number of the developers who will be affected by the tax had little or no involvement in the development of those high rise buildings that are affected by the unsafe cladding. The government's stated position is that it is the largest residential developers that have "the broadest shoulders" and that the cost of remediation should not come from general tax revenue.
The essence of the proposals
The RPDT is unusual in that it is intended to be time limited and is due to apply from April 2022 for a period of ten years, with the intention of raising £2 billion during that time (although the government has made clear that it will consider extending this period if it falls short of its target). The RPDT will operate alongside a new "gateway 2" levy to be applied when developers seek permission to develop certain high-rise buildings in England. It should be noted though that, unlike the gateway 2 levy, the RPDT is not limited to development activity involving high rise residential buildings.
Significantly the rate of tax has not yet been set and is to be announced at a future date, most probably in the autumn budget as the government did not want to pre-empt the final design of the tax ahead of the consultation period closing on 22 July. The consultation acknowledges the planned corporation tax rise to 25% in 2023 and the potential impact on housing supply and related initiatives that the new tax could have. There are no plans to introduce a rate that will fluctuate year on year.
Who will be impacted?
The RPDT will affect developers with annual profits of in excess of £25 million, to be determined on a group-wide basis. Only excess profits above this level will be subject to the tax. Any unused allowance will not be capable of being carried forward into future years.
The new tax will also apply to developers of build to rent properties including where those properties are retained for investment purposes; this has come as something of a surprise to the industry with the rationale being that it was necessary to prevent developers from adopting different business models to avoid tax. The proposal is that the RPDT will apply to a deemed profit on these developments realised at the time of initial rental which will be the difference between the market value at that time and the development costs. The consultation document does not address how this charge might interact with UK corporation tax on sale and whether there will be some credit for the RPDT paid. We can expect to see some questions on this as part of the response to the consultation.
There are special rules for joint ventures and these involve a two-tier approach:
- Profits are to be subject to the RPDT for the JV structure as if it were a standalone group.
- The profits of the JV applicable to each member's ownership of the JV would also be taxed to RPDT subject to that member having a "relatively significant economic interest" in the JV.
To avoid double taxation, a participating group would receive a credit where the JV itself is liable to pay RPDT.
Scope of activity that will be captured
RPDT will apply to profits derived from UK residential property only. "Residential property" follows closely the definition used in the context of SDLT, i.e. "a house or flat that is considered as a single residence, generally together with the grounds and garden or any other land intended for the benefit of the dwelling."
Where land or property is under development or undergoing a change of use, "residential property" will include:
- any building that is suitable for use as a dwelling
- any existing building that is being adapted, restored to, or marketed for domestic use
- undeveloped land where a residential building is being or would be constructed on it, and
- undeveloped land or land undergoing a change in use for which planning permission to construct a residential property has been obtained.
Certain communal dwellings will be excluded from the definition of residential property such as hotels, residential homes for the elderly, for children or for specified vulnerable groups. Purpose-built student accommodation and retirement living buildings could potentially be included as they are considered to have similar characteristics to the wider rental sector. The consultation therefore invites views on whether certain types of retirement homes and student accommodation should be outside of the scope such as halls of residence or flats where amenities are shared rather than where accommodation is self-contained.
Profits made on the development of affordable housing, including shared ownership will be within the scope of the tax except where the activities are deemed to be charitable and therefore exempt from corporation tax, such as those of large housing associations that focus mainly on the development of affordable housing.
The RPDT will apply to the profits of developers regardless of whether the development is carried out by third party contractors or entirely "in house." Construction companies with no ownership of land and no connection to the landowner will be outside of the scope of RPDT. Non-UK companies carrying out residential development activities will be within the scope of the tax if they have a UK permanent establishment.
Options for the design of the tax
Two alternative models for the tax are being considered:
- Model 1 is a company-based approach which would involve taxing all of the company’s profits where that company’s activities include more than an "insignificant" amounts of residential property development. If the "significance" threshold is met, the whole of the company’s profits would be subject to RPDT. The consultation invites views on how "insignificant" should be defined.
- Model 2 would be an activity-based approach imposing RPDT on any company that undertakes any amount of UK residential property development, but the tax would only be applied to profits from the residential property development activities.
On the face of it, model 2 seems to be the fairer option but it is also likely to be the more complex of the two models to administer as it requires the identification of those profits that fall within the tax. In the case of either of the above models, there would be adjustments to the taxable profit as follows:
- Interest and other funding costs will be excluded from the calculation of profits for the tax allowance.
- Losses incurred pre-April 2022 will not be able to reduce profits subject to the RPDT going forward. The government is seeking views on allowing the use of carry forward RPDT losses recognising that profits can
fluctuate year on year mindful of trying to balance fairness with the need for the arrangements not to be too administratively burdensome. Deciding against this is likely to be controversial.
Reporting and payment
The intention is to use the incorporation tax rules as the framework for the reporting of RPDT so that the accounting period will coincide with the period covered by the company’s annual accounts. Those companies liable for the new tax will either have to self-assess through their corporation tax return or by using a new form that will be created. For groups, it may that a single nominated entity will be used to report and pay the tax. The likelihood is that the payment schedule will also mirror that for corporation tax.
Avoidance
The consultation acknowledges the potential opportunities for avoidance in relation to the operation of RPDT. For example, groups could seek to forestall the effect of the tax by accelerating the recognition of profits to periods before the implementation date of the tax or fragment activities across its group to allow profits to fall outside of the charge. Certain anti-avoidance rules are therefore being proposed to counter attempts to disguise or reclassify residential property development activities as something else.
Comment
The list of consultation questions runs to 43, and it is clear from these that the government is seeking to achieve a number of objectives within the framework of this new tax whilst trying to avoid bringing too much complexity into the arrangements. It is also keenly aware of the potential for the RPDT to affect future housing supply as developers will inevitably need to factor the cost of the new tax into their pricing which would ultimately impact on house prices. But it also wishes to raise significant revenue through this new tax. There are a lot of competing and, in practical terms, potentially conflicting priorities at play here, and it seems unlikely that they can all be achieved simultaneously: something will have to give.
The wider than expected list of assets that will be within scope such as build to rent, potentially student accommodation, and some affordable housing as well as the exclusion of relief for the cost of financing may see more developers being brought within the ambit of a tax that was conceived as being for the "super developers." It will capture profits made by house builders but also investment companies and those who build to rent resulting in a dry tax charge for the latter. How these profits should be calculated for the purposes of the RPDT raises a lot of questions.
There is to be a separate consultation process for the proposed gateway 2 levy which practitioners will also want to look out for. This is to be legislated through the Fire Safety Bill in due course. This tax will only apply when developers seek permission to develop high rise buildings (above 18 metres) but it is quite possible that some residential developers will find themselves in scope for the RPDT, the gateway 2 levy, as well as corporation tax. The consultations seeks views on the prevalence and potential impact of this overlap and also on the broader question of the extent to which developers might adapt their development plans and land acquisition strategy as a result of this new tax. It is this question, and the potential impact on housing supply, that is likely to provoke the most discussion in the coming weeks prior to the consultation
period closing on 22 July.
