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Residential Property Developer Tax (“RPDT”)

Following the government's announcement in February of a £5 billion package to fund unsafe cladding remediations, consultations have begun into one of the two measures they propose to fund the scheme. A residential property developer tax imposed on the largest residential property developers, alongside a new Gateway 2 levy, will help ensure developers "play their part and make a fair contribution".

The tax is one of the government’s measures to bring an end to unsafe cladding, provide reassurance to homeowners and support confidence in the housing market. The government recognises this tax is an issue of significance to businesses and the wider community. It is therefore consulting on the design and administration of the tax with a view to working with stakeholders, so it is proportionate and works as intended.

Government Consultation

The government published a consultation on the proposed tax as part of its Building Safety Package on 29 April 2021 to give developers the opportunity to voice their opinions, with comments welcomed by 22 July 2021. It is advised all who wish to be involved with the consultative meeting get in touch before 31 May 2021.

Key points

  • RPDT will be introduced in (April) 2022
  • no current end date for this time-limited tax
  • the government aim to raise £2 billion in a 10-year period
  • government proposes that the charge would only apply to the profits of a company or group which exceed an annual allowance of £25 million.
  • profits made in relation to the development of affordable housing should be in scope of the tax, as “residential property”
  • profits derived from the development of build-to-rent properties would be within scope of the RPDT

Justifications of the tax include residential developers benefitting from recent government intervention, such as reduced Stamp Duty rates, which they claim have boosted confidence and liquidity in the residential property market.

Definition of residential property?

The consultation defined residential property as "a house or flat that is considered a single residence, generally together with the grounds or garden or any other land intended for the benefit of the dwelling", alongside targeting undeveloped land or land undergoing change in use, for which planning permission to construct residential properties has been obtained.

Tax model to be applied

Two differing tax models have been proposed:

1. Model 1 – the 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.

This would be subject to a significance test. If the residential property development activity is insignificant then that company’s profits would not be included when calculating the profits liable to the RPDT.  Views are sought on how the definition of “insignificant” is designed and calculated.

2. Model 2 – the 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.

The government has identified two different ways of calculating the profits subject to tax under this model:

2a. Take the profits as computed for CT with potential various adjustments as set out below, or

2b. Take the consolidated accounting measure of profit computed in line with UK GAAP in relation to residential property development activity as a separate division and with potential various adjustments.

The government is consulting on the design of the tax ahead of its inclusion in the 2021-22 Finance Bill.

Scope and impact of the residential property developer tax

With consultations currently ongoing as to how the final tax system will be introduced, the next few months and the feedback provided could play a huge role in not just the scope of the tax and how it will impact on residential developers, but also what overall impact this could have on the housing market itself.

Time to have your say! Responses should be sent to rpdtconsultation@hmtreasury.gov.uk

Gateway 2 levy

In addition to RPDT the government also intends to introduce a levy to be applied when developers seek permission to develop higher risk residential buildings in England. The levy will be legislated through the Building Safety Bill in due course.

There will be a separate consultation process led by the Ministry of Housing, Communities and Local Government and more information with regards to the design of the levy is awaited.

For more information on the article above contact Rachel Tilley or Ben Morgan.

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