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.
IBA Annual Conference
The IBA heads to Miami for its 2022 Annual Conference bringing together thousands hundreds of lawyers from around the world.
Joint Venture Opportunities
Join our panel where we will discuss various topics including Joint Venture structuring and Partner procurement.
Mind your business: Safeguarding your business against loss of mental capacity
Practical considerations to safeguard your business against loss of mental capacity.
PART 36— A move towards greater flexibility?
Discussing the possibility of the Part 36 regime opening up with recent developments.
FT Wealth quotes Sarah Anticoni on forum shopping
"Being the first to file for divorce is not a foolproof way of securing an English hearing"
What can UK investors interested in Life Sciences learn from their more experienced, including US, counterparts?
The recent tie-up between Canary Wharf and Kadans demonstrates the enthusiasm to access the lucrative UK life sciences market.
The hurdles in establishing retrospective validation of post-petition dispositions
A discussion on the key takeaways from ICC Judge Barbers recent case ruling.
Helen Coward writes for Tax Journal on the main purpose test for SDLT group relief
Mainly ignored? The main purpose test for SDLT group relief
The Ayes have it - Collateral Warranties can be a ‘Construction Contract’
The Court of Appeal handed down its judgment in the case of Abbey Healthcare (Mill Hill) Limited v Simply Construct (UK) LLP
Charles Russell Speechlys advising Battery Ventures on the sale of SPT Labtech for £650 million.
Battery Ventures has raised over $9 billion to invest in software and services, enterprise infrastructure, and much more around the world.
Windrush Day 2022 – supporting access to justice
Charles Russell Speechlys is proud to continue supporting survivors of the Windrush scandal in their fight for justice.
The Leasehold Reform (Ground Rent) Act 2022: Landlords and developers beware serious sanctions for non-compliance
The Leasehold Reform (Ground Rent) Act 2022 received Royal Assent on 8 February 2022 and will come into force on 30 June 2022.
EG quotes Emma Preece on the Picturehouse and BNY Mellon rent arrears cases
“The case is being closely watched by landlords and tenants alike as the impact of the pandemic lives on in the commercial property sector”
Charles Russell Speechlys has advised long-standing client Stonegate on a series A investment into Peckwater Brands
Stonegate is one of the largest pub companies in the UK with a rich portfolio that covers over 4,500 sites.
Pro bono support for major office premises move for charity in Stoke-on-Trent
Emmaus entities provide safe homes, community support and meaningful work to formerly homeless people across the UK.
Reporting Restriction Order (reprised) - "Where there is no publicity there is no justice."
Financier Worldwide quotes Rachel Warren on the UK’s Economic Crime Act
Evaluating the UK’s Economic Crime Act
Julia Cox and Felicity Chapman write for International Adviser on the rise of pre-nups in the UK
Julia Cox and Felicity Chapman write for International Adviser on the rise of pre-nups
Property Patter: Reasonable Endeavours
What does it mean to use ‘best’, ‘all’ or ‘reasonable’ endeavours?
Could the UK’s Life Sciences Vision be restricted by its Immigration Policy?
We explore some of the visa options that may be open to businesses in the sector and their relative pros and cons.