New tax on property developers - consultation paper published
On 29 April the government published a consultation paper on the design of the new residential property developers tax (referred to as the “RPDT”), which is proposed to take effect from 1 April 2022.
The consultation seeks views on the design, implementation and administration of the new tax and will no doubt be read with interest by those in the industry. There are significant outstanding questions which represent a real opportunity to help shape the policy and prevent any unexpected casualties.
Unusually, the tax is very targeted and appears to be intended to be limited in time. It is being introduced in large part to pay for the remediation of unsafe cladding following the Grenfell tragedy. The government however has taken pains to point out (both in the previous announcement and again in the consultation) that the tax is industry wide and is not targeted at developers who were involved in buildings requiring remediation.
According to the consultation paper, the intention is to ensure that only the largest residential property developers are caught and in a way that will raise sufficient revenue to achieve the aggregate revenue target of £2 billion within a decade.
The consultation paper does not address the question of the rate, but recognises that many stakeholders will be concerned about the combined effect of the RPDT and the corporation tax rate increase from 1 April 2023.
Who will be caught?
It appears that the measure will only capture standalone companies or corporate groups but will take into account profit shares from development activities conducted through joint ventures.
There will be a threshold so that profits are only caught in excess of an annual allowance – suggested to be £25 million. This is welcome given the broad range of activities that fall within the proposed scope of the new tax, but means that the burden of the tax will fall on a fairly small number of taxpayers.
What activities will be caught?
The proposed scope of activities is broad: the tax will catch the conversion of existing buildings and new construction whether for sale or for letting. The tax will also apply where a development site is sold in whole or in part.
The proposed inclusion of build to rent activities is of particular concern. This is stated to be required to prevent housebuilders adopting alternative business models to avoid the tax, but seems likely to throw up a lot of complex questions as to how the profits should be computed for the purposes of the tax in that scenario.
What is “residential property”?
There are a number of definitions of this phrase in UK tax legislation. It appears that a new definition will be used for this measure that draws on principles from existing legislation but doesn’t adopt any of them wholesale. This will create further complexity in the UK taxation of residential property.
The definition will be expansive, including undeveloped land or land undergoing a change in use for which planning permission to construct has been obtained. As is the case with other taxes, most specialist communal dwellings (such as residential nursing homes and prisons) will be excluded. There is a question mark over the inclusion of purpose built student accommodation.
Profits from the development of affordable housing will be within the scope of the tax. Most developers will be unaffected by this given affordable housing is rarely delivered at a profit, but for those it will impact this seems particularly out of kilter with the government’s general aim to deliver more affordable housing in the coming years.
The fundamental design of the tax
The government is seeking views as to whether it is more appropriate to apply the tax on the basis of a company approach (i.e. companies / groups whose activities include residential property development, as long as it is not insignificant) or an activity based approach (i.e. taxing residential property development activity of any extent).
In the first approach, the entire profit of the company would be taxed but in the second approach only the residential property development activity would be taxed. The second approach seems fairer but is likely to give rise to a great deal of complexity in identifying the profits which fall within the scope of the tax.
Another thorny question raised by the paper is the treatment of losses. The government’s view is that losses incurred before the introduction of the RPDT should not be capable of being carried forward against profits subject to the RPDT. The question left open is whether losses realised after the introduction of the tax should be capable of carry forward.
The new rules regarding corporate losses are already fiendishly complex, but if the government avoids adding to that complexity then property developers are likely to lose out on the ability to carry forward losses, which could be punitive.
The government appears to be keenly aware that there is the potential for the RPDT to have unanticipated impacts and in particular to affect housing supply.
The paper specifically recognises that if developers factor the cost of the tax into the price they are willing to pay for land this may result in a reduced number of plots viable for development and therefore in due course fewer houses being completed.
Ultimately, it may be difficult to predict how behaviour may change in response to the tax, but it seems unlikely that the government will be able to deliver all of its stated aims: to avoid complexity, to avoid negatively impacting housing supply and to raise significant revenue.