The residential property developer tax ('RPDT') is proposed to be a new super-tax targeted specifically at the residential property sector. It is an interesting experiment in time-limited tax-raising. Funds generated by RPDT are to be hypothecated to reimburse Government for monies it has expended (and will continue to expend) on remediating unsafe cladding following the tragedy of Grenfell Tower.
At a policy level, the Government believes that the cost of remediating unsafe cladding should not sit with taxpayers generally (i.e. the costs should not be met from general tax revenue), but that the cost should sit with those companies that undertake residential property development on their own behalf. It does not matter, then, that those who actually installed unsafe cladding are not caught by the new RPDT; or that those who would be caught by RPDT have already spent money on replacing unsafe cladding. If it is of any consolation, the Government confirms that the introduction of RPDT "is not intended to imply responsibility on behalf of the payers for historical construction defects in relation to cladding".
RPDT will be charged in respect of accounting periods ending on or after 1 April 2022 for a period of 10 years. The aim is to raise £2 billion from RPDT over that period, and the 10 year duration will be extended if necessary to ensure £2 billion is raised from it. As the tax is charged on profits, RPDT is proportionate to economic returns - with (it is asserted) minimum market distortion.
RPDT is more properly a tax on residential property development. The target of the tax is any company developing residential property for sale or rent. RPDT will clearly capture profits made by house-builder companies. It will also capture investment companies who (to enhance returns) take on development risk for their residential development projects.
HM Treasury is currently consulting on the detail of policy design. This insight sets out the headlines of the proposals. Many questions are left unanswered by the document.
Some questions are left unanswered purposely (e.g., the rate of RPDT) and some through omissions or absence of detail in the document itself. It would have been helpful, for example, to say that a pension fund developing a Build-to-Rent scheme will be exempt from RPDT, as appears to be the intention; to say whether a liability to RPDT would be an allowable deduction for corporation tax purposes; and to confirm whether a development that completes shortly after 1 April 2022 would be caught on the entirety of the profit or time apportioned from the commencement date.
Many more questions are left unanswered because the document seeks views, which will inform the next steps in design and decision-making - and eventually provide those answers.
RPDT is aimed at those companies that make profits from residential property development activity in the United Kingdom ('RPDA'). To be caught by the tax, the profits generated from RPDA in an accounting period must exceed the annual allowance. That allowance is currently proposed to be £25 million. The effect is that profits from RPDA falling below this threshold are exempt from RPDT.
The tax base is RPDA. This requires a definition of 'residential property' and 'development' to work out what is within the scope of RPDT. It will also need a methodology to work out how to calculate profits within the scope of RPDT.
The core of the definition is proposed to be "a house or flat that is considered a single residence, generally together with grounds and garden or any other land intended to benefit the dwelling."
The definition is to be extended to include: any building suitable for use as a dwelling (whether or not it is actually so used at the relevant time); an existing building that is being adapted, restored or marketed for domestic use; and undeveloped land where a residential building is being or would be constructed on it. The definition is to be further extended to include any undeveloped land or land undergoing a change of use for which planning permission to construct residential property has been obtained.
Whether or not 'affordable housing' is to be included in the definition is an open question. Other open questions are around the inclusion of student accommodation (heavy hints are given that it will be) and retirement accommodation (albeit, where care is not provided, the Government believes profits from these activities should be in-scope).
Specifically excluded from the definition of residential property (such that profits from the development of these would be out-of-scope of RPDT) are 'communal' dwellings: hotels; residential homes for children or the elderly; purpose-built supported housing with communal facilities providing accommodation with care and/or support for the homeless, rough sleepers, people with a disability, drug or alcohol dependency, poor mental health, people with learning disabilities and/or autism and older people; boarding schools; prisons; residential accommodation for the armed forces; hospitals/hospices; and monasteries and nunneries.
There is no distinction between RPDA carried out solely in-house and RPDA carried out or by third party contractors. It does not matter whether RPDA is carried out for the purpose of sale (such that the land is held as inventory, stock or WIP) or as a source of rental income (investment); or whether the dwellings are newly constructed or converted; or whether sites are sold at bare land stage with planning, at 'golden brick' or on practical completion. All activities are in scope.
Build-to-rent activities are specifically in scope. So, where a corporate group has a development company which, on practical completion, sells dwellings to a group investment company, then an arm's length price is deemed to have been paid to the development company, and its RPDT profits calculated accordingly. If an investor company develops the dwellings itself, then a development profit is deemed to arise to it on completion based on a fair value of the development at an initial rent, minus the costs of development. In those circumstances, since no actual proceeds are generated, this would be a classical example of a 'dry' tax charge (generally "a bad thing" as the business has to find cash from elsewhere to pay the tax).
Third party residential construction companies with no actual ownership of land and unconnected with the landowner will have no liability to RPDT. Purely commercial property activities are outside the scope of RPDT, but mixed-use residential development projects are in-scope (though how much depends on the model to be used for measuring profit - see below). A UK tax-resident company carrying out only residential property development activities outside the United Kingdom is not in-scope. A non-UK company carrying on UK RPDA is in scope where it has a UK permanent establishment, or where it falls within scope of the offshore developer rules (subject to the terms of any bilateral double taxation treaty).
Identifying and measuring profits subject to RPDT
Different models to measure profit are proposed for discussion - a company-based approach and an activity-based approach.
With a company-based approach, RPDT would apply to companies and groups that undertake any amount of RPDA or support that work (but excluding a company whose residential property development activities are insignificant - views are requested on the what is (in)significant). If a company carries on more than an insignificant amount of RPDA, then all its profits are subject to RPDT. RPDT would then be applied to total profits as computed for corporation tax purposes, subject to some specific adjustments (see below).
With an activity-based model, only profits arising specifically from residential development activities are subject to RPDT. Total profits are calculated as for corporation tax, and they are then adjusted to identify profits relating only to RPDA (with further specific adjustments - see below). Alternatively, profits are found by using the consolidated accounting measure of profit computed in line with UK GAAP in relation to the RPDA as a separate division, subject to some specific adjustments. Either measure would require apportionment of total income and expenditure to RPDA. An activity-based model would be more complex to calculate and administer, and so increase compliance costs.
What specific adjustments?
- Accounting principles - These may not recognise the full extent of profits on practical completion of the development, and adjustments will be needed to address this (relevant in particular to capturing build-to-rent profits).
- Losses - Losses incurred before 1 April 2022 cannot be brought forward to reduce profits subject to RPDT. It is an open question whether or not losses from 1 April 2022 should be carried forward to reduce profits in later years, but the additional complexities that this would bring to RPDT are considerable.
- Group relief - Losses arising from non-RPDA should not be used to reduce profits subject to RPDT.
- Interest and other funding costs - Such costs are not to be allowed as a deduction against RPDT profits (to prevent distortion of the tax base through different financing methods).
The annual allowance
An annual allowance of £25 million is proposed such that only relevant profits in excess of this allowance would be in the charge to RPDT. It would be a group-wide allowance, and relevant profits arising from joint ventures would be included. An unused allowance cannot be carried forward.
The rate of RPDT
There is no clarity on what the rate might be. A decision will be made based on the final design of the tax, bearing in mind the need to raise £2 billion over 10 years from RPDT profits (and bearing in mind the context of an increase in the standard rate of corporation tax to 25% in 2023).
Reporting, payment, compliance and anti-avoidance
It is likely that RPDT self-assessment reporting would be done through the existing corporation tax return. If a separate report is needed, then a new registration regime will be introduced. It is expected that payment of RPDT will be made within the same timescales as corporation tax (e.g., very large businesses would pay in quarterly instalments). It may be that, for groups, a single nominated entity would be used to report and pay RPDT on behalf of the group.
Anti-forestalling rules (to prevent avoidance of RPDT by accelerating recognition of profits to before commencement of RPDT through, for example, a change in accounting standards) and anti- fragmentation rules (fragmenting activities amongst group companies so profits fall outside RPDT) will be introduced. Anti-avoidance rules will be introduced to counter attempts to disguise or re-classify RPDA as something else.
We are involved in responding to the consultation.
It will be interesting to see whether RPDT ends up being properly a tax on 'super-profits' made by residential developers, or whether (in seeking to maintain their profit margins) developers will simply pass on RPDT costs. If the latter, then the actual economic incidence of RPDT will fall on others - e.g., on landowners (who will realise lower pricing from their sales to house-builders) or on home-buyers (by adding more to house price inflation). Landowners selling to house-builders may not accept the price reduction, and the supply of housing land may be constrained - or sales postponed until RPDT has expired (as has happened with other taxes such as the development charge, betterment levy and development land tax).
It will also be interesting to see if RPDT is truly a time-limited tax for the residential property sector. If a sectoral (or, as here, a sub-sectoral) approach is seen to be successful, then hypothecated sectoral super-taxes may become a permanent feature of the modern tax landscape.
It remains to be seen whether the proceeds raised from RPDT will be restricted to £2 billion given the significant escalation of the costs of remediating unsafe cladding.
Residential developers should also be aware of a further level of new tax through the imposition of a planning-related Gateway 2 levy. This levy is to be charged where developers seek permission to developer high-rise (18m+) residential buildings in England (and the levy to be introduced in the Building Safety Bill). There may be an overlap, such that the developer has to pay corporation tax, RPDT and the levy on the same residential property development activity.