Following a consultation held earlier this year on the proposed Residential Property Developer Tax (RPDT) (see our blog post for more on this), on 20 September 2021 the government published further technical consultation on the draft legislation, which is accompanied by an explanatory note. This technical consultation closes on 15 October 2021, after which the final design will quickly be announced at the Autumn Budget on 27 October (although legislation will not be finalised until Finance Bill 2021-22 completes its passage through Parliament, expected to be around Spring 2022). This is when the rate of the tax will also be revealed. The tax will be included in the 2021-22 Finance Bill and will apply to profits arising in accounting periods ending on or after 1 April 2022. Given the impact that this tax could have on larger residential property developers, many of our clients may wish to respond to this consultation. What do we know so far about who will be liable to the tax and how it will be calculated?
Below we briefly set out the details of the proposed RPDT. However, it is first worth noting that, whilst we have previously been told that this is intended to be a temporary tax, the purpose of which is solely “to ensure that the largest developers make a fair contribution to help fund the government’s cladding remediation costs”, the draft legislation does not include specific reference to any temporary status, whether by reference to the purpose of the tax (which is only stated in the explanatory note) or a review mechanism.
This is what we do know from the draft documents:
- The tax is charged on the developer and administered as if it were an amount of corporation tax, not a tax on development.
- The RPDT will be charged on the profits of “residential property (RP) developers“, which are companies within the charge to corporation tax, carrying out “residential property development (RPD) activities“:
- RPD activities is widely defined by clause 3 of the draft legislation, covering all activities that are typically carried out during residential property development including dealing in residential property, designing it, seeking planning permission in relation to it, constructing or adapting it, marketing it, managing it and any ancillary activities.
- Mixed-use developers can be RP developers for the purposes of the tax because the definition is wide enough to encompass those who undertake, to any degree, RPD activities. However, it is only the RP developer’s profits from its RPD activities that will be taken into account for the purposes of the tax, and we note below that an allowance will apply.
- For the purposes of the tax, “residential property” includes:
- buildings designed or adapted for use as a dwelling, including gardens and general amenity land developed alongside residential property;
- land intended for development, which includes land for which a planning application has been made or granted; and
- properties under construction.
Excluded from “residential property” are:
- specialised institutions providing temporary or longer-term accommodation for a specific class of residents (for example care homes, accommodation for the armed forces, hospitals, prisons and hotels, temporary sheltered accommodation and purpose-built student accommodation); and
- buildings occupied under licence.
Note that it is not yet clear whether build to rent accommodation will be caught by the tax. The BPF has made it clear to the government that, in its view, it would be “disproportionate” to include it “when build-to-rent investor-developers remain fully liable for remediation work” (see here for their press release). However, HMRC have so far only noted that final policy on this is to be decided.
- An RP developer must have an “interest in the land” at some point for activity there to be RPD activities for the purposes of the tax. For these purposes, “interest in land” is widely defined to include beneficial interests in land where held as trading stock. An interest in land is included if it is held by any “related company”, which includes group companies and JVs (where the RP developer or a member of the group holds a 10% or more interest in the JV company). Details of how a “group” is defined for the purposes of the RPDT are set out in clause 18 of the draft legislation. The interests of mortgagors and licensees are excluded from the definition of “interest in the land”. Note that “land” for the purpose of this definition includes buildings or structures on the land, and “trading stock” includes “an estate, interest, right or power in or over land which will be disposed of in the ordinary course of the trade”.
- The tax will apply to profits arising in accounting periods ending on or after 1 April 2022. Profits from periods straddling 1 April 2022 will be apportioned. The legislation does not include any grandfathering provisions and will therefore apply to developments already underway. Anti-forestalling provisions are included in the legislation to prevent avoidance of the tax by “artificial” acceleration of profit recognition to an accounting period ending before 1 April 2022.
- Clause 6 of the draft legislation sets out the formula used to calculate the profits or losses of an RP developer and clauses 9 to 12 give further details of the elements included in the formula, including provisions for reliefs including loss relief and group relief. Note that the proposed rate of the tax is not shown in the draft legislation – this will be announced at the Autumn Budget.
- An annual allowance will apply. The amount of the allowance is not yet fixed but the details of how it will apply to group companies are set out in clause 13 of the draft legislation, and to joint ventures in clause 14.
- Finally, the tax will be collected by HMRC as corporation tax and “included within the provisions for quarterly instalment payments and group payment arrangements”.
Developers have until 15 October 2021 to respond to the technical consultation. The form and rate of the tax will then be finalised and announced at the Autumn Budget on 27 October 2021. If you would like further information on how this new tax could affect you, particularly if you intend to respond to the consultation, please get in touch.
For further information please contact: