Residential property developer tax: consultation

Update: the government has now published draft legislation. See Residential property developer tax: draft legislation.

The government has published a consultation on the introduction of a new tax on the developers of UK residential property. The consultation sets out the government's intention to raise at least £2bn to help fund remediation work in relation to cladding. The new tax is intended to apply to residential property developers that are operating in a market that will benefit from the substantial amount of funding the government is providing to address building safety defects and the impact that will have on market confidence and liquidity. As such, the government considers that it is fair to seek a contribution from residential property developers to the overall costs of the remediation programme. However, the government recognises this tax is an issue of significance to businesses and is therefore consulting on the design and administration of the tax, so it is proportionate and works as intended.

It is proposed that this new tax will be time-limited and apply to the largest residential property developers in relation to the money they make from UK residential development. The new tax would be introduced from April 2022 and seek to raise at least £2 billion over a decade.

Background

The new residential property developer tax (RPDT) will be one of two measures the government intend to introduce to help raise funding as a contribution to the cost of cladding remediation works. The other measure proposed by the government will be a "new Gateway 2 levy, which will be applied when developers seek permission to develop certain high-rise buildings in England" (to be the subject of a separate consultation). However, the consultation published on 29 April 2021 ("Residential property developer tax: consultation on policy design") focusses solely on the proposed new tax on residential property developers.

The consultation seeks views on the design, implementation and administration of this new tax, including:

• the definition of residential property and development activity, and two potential models for the tax

• approaches to setting the rate and allowance

• the interaction with the new Gateway 2 levy

• administration (reporting, payment and compliance)

• wider potential impacts of the tax, including on housing supply and provision of affordable housing.

The tax base

The government intends for the tax to be targeted at companies or corporate groups, which in an accounting period:

• undertake UK residential property development activities; and
• generate profits as computed under models proposed in the consultation, that exceed the annual allowance available to them in that accounting period.

Residential property is already defined in several areas of the tax code and the government confirms that it will use these existing principles to define "residential property" for the purposes of the RPDT. The essential element in these definitions is: "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". The government proposes to extend the definition to include any undeveloped land or land undergoing a change in use, for which planning permission to construct residential property has been obtained.

There will be exemptions for many communal dwellings since these are seen as having different characteristics relative to the broader housing market and will not derive benefit from the government's interventions. Accordingly, communal dwellings such as hotels, residential homes for children or the elderly, boarding schools, hospices and other purpose-designed supported housing with communal facilities will not be included.

The government believes that a case can be made for the development of purpose-built student accommodation being in scope of the tax given that this accommodation can have similar characteristics to, and be in competition with, the wider rental sector. However, this issue is put out for consultation with the possibility of differing treatment based on the exact nature of the accommodation. Equally, the consultation will consider retirement housing with differing levels of care provision included.

The RPDT will be applied to the profits of companies and corporate groups that undertake residential property development on their own behalf. The intention of the tax is to apply to the developer group's profits from residential property development, irrespective of whether development is carried out solely 'in-house' or whether it utilises the services of third-party contractors to undertake that development.

The primary focus of the tax is on the development of residential properties located in the UK for either sale or rental as individual dwellings. Development will include conversion of existing buildings as well as new construction. The tax will apply regardless of whether residential property is being developed with a view to disposing of leasehold or freehold interests. The tax will apply where a site, or part of a site, in development is sold as well as when the original developer sells the individual dwellings. The government will also include any profits derived from the development of build-to-rent properties within the scope of the RPDT.

Accordingly, companies whose activities are wholly unconnected to UK residential property development would be outside the scope of the tax. Similarly, activities carried out as a third-party contractor in relation to residential developments of an unconnected developer are not intended to fall within the scope of the tax.

Where companies carry on a mixture of activities, only some of which amount to UK residential property development, then the treatment would be based on one of the policy models set out in the consultation. Equally, where a company's activity includes mixed-use development projects that include elements of residential property development with commercial development, the policy models again set out proposed treatments.

Model 1: company-based approach

The RPDT would apply to standalone companies and groups of companies that undertake any amount of UK residential property development or support that work. In relation to groups, the tax would be applied to companies within the group that either directly undertake or contribute to the group's UK residential property development activities, subject to a significance test. If the residential property development activity is insignificant, then that company's profits would not be included. This could be determined by a de minimis percentage of, for example, profit or turnover.

This model would mean that where a company's activity includes more than an insignificant amount of residential property development activity then all of its profits would be subject to the tax.

Model 2: activity-based approach

The RPDT would apply to standalone companies and groups of companies that undertake any amount of UK residential property development or support that work in other companies in the same group. In relation to groups, the tax would be applied to the profits of companies within the group that undertake activity in relation to UK residential property development.

Unlike model 1, which would apply the tax to the total profits of companies, this model would require identification of residential property development activities only and would base the tax on the amount of profit in a company that relates to those residential property development activities only. The tax could not be avoided by fragmenting the development activity between different group companies some of which are not primarily residential property developers.

Accordingly, Model 2 would require identification of those profits realised from UK residential property development activity only. Model 2 would also require apportionment of income and general corporate expenditure where it only partly relates to activity that is within the scope of the tax. For example, where construction costs relate to a mixed-use development the apportionment could be on a basis of the values of the residential element and the non-residential element of the project. The consultation seeks views on the best way to achieve an apportionment that is not unduly burdensome.

The consultation goes into some detail concerning possible approaches to the identification of the profits under both Models and possible adjustments. In particular, it makes the point that where a completed property is retained and leased under relatively short-term leases either for the long-term by a build-to-rent developer, or as an interim measure until the developer's interest in a development is sold, then it will be necessary to adjust the measure of profit in order to ensure that development profits are properly recognised for RPDT purposes. There is also significant consideration of the extent to which losses might be used and carried-forward for RPDT purposes. For example, the government is clear that losses incurred before the introduction of the tax should not be used to reduce profits for the purposes of the calculation of the tax and that profits within scope should not be reduced by group relief from losses incurred by the group in connection with activities that that are not part of the residential property development activities.

To prevent distortions of the tax base for RPDT depending on differing models of how interest is allocated, the government proposes that interest and other funding costs would not be allowed as a deduction against RPDT profits.

Annual allowance

The government proposes that the charge would only apply to the profits of a company or group which exceed an annual allowance of £25 million.

This would be a group-wide allowance, which exempts the relevant RPDT profits from liability to the tax and ensure that companies and groups with profits below this amount remain out of scope entirely. Only excess profits over £25m would be subject to RPDT. Any unused allowance would not be carried forward to future years.

Joint ventures

In order to treat development profits fairly, regardless of how investors structure their investments and to cope with this variety of structures the government believes that a two-tier approach is needed for joint venture arrangements:

a. Profits would be subject to the RPDT for the JV structure as if it were a standalone group.

b. The profits of the JV applicable to each JV member's ownership of the JV would also be taxed to RPDT as part of that group's RPDT profits.

The government proposes that a company or group would only be liable to tax in respect of a joint venture in which it has a relatively significant economic interest. To ensure double taxation is avoided a participating group would receive the appropriate credit where the joint venture is itself liable to pay the tax.

Rate

The rate of the tax will be considered once the final design of the tax is clearer. That is because the government does not want to pre-empt the final design of the tax without stakeholder consultation, and this consultation covers multiple options in terms of the tax's design, including the tax base.

However, the broad intention is that the rate should raise £2bn over a ten year period and the government has indicated that it will consider extending the period of the operation of the tax if it does not achieve this aim.

Anti-avoidance

The consultation recognises that there will be a number of opportunities for avoidance or tax planning in the following areas in relation to the introduction and operation of RPDT. In particular, groups may seek to forestall the effect of the tax by accelerating the recognition of profits to periods before the commencement of the tax on 1 April 2022. Secondly, there may be an incentive to fragment activities across members of a group so that profits fall outside the charge to RPDT. Thirdly, the government is concerned that companies or groups may seek to disguise or reclassify residential property development profits.

The government therefore proposes to introduce anti-avoidance rules to address these risks. These rules would apply where there are arrangements with a main purpose of obtaining a tax advantage in respect of the RPDT. In particular, in relation to anti-forestalling, it is proposed to include a rule in the relevant provisions in the 2021 Autumn Finance Bill to the effect that if certain arrangements have been entered into between the date of issue of the consultation document and Royal Assent with the effect that profits that would have arisen after 1 April 2022 arise before, and the main purpose (or one of the main purposes) of such arrangements was to avoid the new tax, then the effect of the arrangements may be counteracted with the result that the tax would apply.

Comments

The RPDT is in many respects a unique element of the UK tax landscape, in that as well as being very clearly sectoral in target, the government has indicated that it will be time limited and has indicated how much the tax is intended to raise before that time limit expires. These points are relevant to the both the selection of the tax base and the tax rate for the RPDT.

Comments on the consultation should be submitted by 22 July 2021 and sent to: rpdtconsultation@hmtreasury.gov.uk. The government will publish draft legislation for technical consultation ahead of the inclusion of the measure in an Autumn 2021 Finance Bill.