On 29 April the government published a consultation on the design, implementation and administration of the new residential property developers tax (the ‘RPDT’), which is proposed to take effect from 1 April 2022.
While it is welcome that the government appears to be consulting at a very early stage, the timetable for delivery seems challenging in view of the complexity and importance of the points that remain outstanding.
The tax is being introduced in large part to pay for the remediation of unsafe cladding. This means that (unusually) the tax is very targeted and intended to be time limited. According to the consultation paper, the intention is to ensure that only the largest residential property developers are caught and to raise £2bn within a decade.
The consultation paper does not address the question of the rate, but it recognises that many stakeholders will be concerned about the combined effect of the RPDT and the corporation tax rate increase from 1 April 2023.
There will be a threshold so that profits are only caught in excess of an annual allowance – suggested to be £25m – but with any unused allowance in a particular year not being capable of carry forward. The threshold 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.
The suggestion is that the tax will catch (in respect of residential property only):
new construction of buildings for sale;
new construction of buildings for rent;
the conversion of existing buildings for sale or rent; and
the disposal of a development site (in whole or in part).
The definition of residential property will replicate the ‘essential element’ of the various definitions of that phrase across the UK tax code, but it will have differences, leading to yet more complexity in the taxation of residential property. As is the case with SDLT, the definition will specifically include buildings being converted to residential use and land on which residential property is being constructed. The definition will also extend to undeveloped land and existing non-residential buildings for which planning consent for residential development has been obtained.
Most specialist communal dwellings (such as residential nursing homes and prisons) will be excluded, but there is a question mark over the inclusion of purpose built student accommodation, which is already a complex area. Profits from the development of affordable housing will be within the scope of the tax but most developers will be unaffected by (or benefit from) this given affordable housing is usually delivered at a loss.
The important question of what profits will be liable to the tax remains outstanding: the consultation paper seeks views as to whether it is more appropriate to apply the tax on the basis of a company approach (i.e. companies or 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. 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, especially if there is a significant departure from existing corporation tax principles. This could be particularly difficult for certain taxpayers such as joint ventures and the build to rent sector.
The treatment of losses is another area of difficulty. 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 of whether losses realised after the introduction of the tax should be capable of carry forward is left open: the risk of adding complexity to an already difficult area needs to be balanced against the unfairness of developers being unable to carry forward losses, which could be punitive.
The consultation remains open until 22 July 2021 and the government will be holding a series of roundtable sessions with stakeholders. Draft legislation will then be published for further consultation.
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The proposed residential property developers tax
On 29 April the government published a consultation on the design, implementation and administration of the new residential property developers tax (the ‘RPDT’), which is proposed to take effect from 1 April 2022.
While it is welcome that the government appears to be consulting at a very early stage, the timetable for delivery seems challenging in view of the complexity and importance of the points that remain outstanding.
The tax is being introduced in large part to pay for the remediation of unsafe cladding. This means that (unusually) the tax is very targeted and intended to be time limited. According to the consultation paper, the intention is to ensure that only the largest residential property developers are caught and to raise £2bn within a decade.
The consultation paper does not address the question of the rate, but it recognises that many stakeholders will be concerned about the combined effect of the RPDT and the corporation tax rate increase from 1 April 2023.
There will be a threshold so that profits are only caught in excess of an annual allowance – suggested to be £25m – but with any unused allowance in a particular year not being capable of carry forward. The threshold 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.
The suggestion is that the tax will catch (in respect of residential property only):
new construction of buildings for sale;
new construction of buildings for rent;
the conversion of existing buildings for sale or rent; and
the disposal of a development site (in whole or in part).
The definition of residential property will replicate the ‘essential element’ of the various definitions of that phrase across the UK tax code, but it will have differences, leading to yet more complexity in the taxation of residential property. As is the case with SDLT, the definition will specifically include buildings being converted to residential use and land on which residential property is being constructed. The definition will also extend to undeveloped land and existing non-residential buildings for which planning consent for residential development has been obtained.
Most specialist communal dwellings (such as residential nursing homes and prisons) will be excluded, but there is a question mark over the inclusion of purpose built student accommodation, which is already a complex area. Profits from the development of affordable housing will be within the scope of the tax but most developers will be unaffected by (or benefit from) this given affordable housing is usually delivered at a loss.
The important question of what profits will be liable to the tax remains outstanding: the consultation paper seeks views as to whether it is more appropriate to apply the tax on the basis of a company approach (i.e. companies or 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. 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, especially if there is a significant departure from existing corporation tax principles. This could be particularly difficult for certain taxpayers such as joint ventures and the build to rent sector.
The treatment of losses is another area of difficulty. 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 of whether losses realised after the introduction of the tax should be capable of carry forward is left open: the risk of adding complexity to an already difficult area needs to be balanced against the unfairness of developers being unable to carry forward losses, which could be punitive.
The consultation remains open until 22 July 2021 and the government will be holding a series of roundtable sessions with stakeholders. Draft legislation will then be published for further consultation.
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