This potential new tax is called Residential Property Developers Tax (RPDT), as set out in a consultation paper issued in April 2021.
The aim of the tax is to assist the Treasury fund remediation works to remove unsafe cladding from high-rise buildings, following the tragic fire at Grenfell Tower in 2017. Originally the onus was on building owners and developers to remedy the unsafe cladding without passing on costs to leaseholders.
RPDT aims to ensure the works are completed on properties where the owner or developer has not performed the works or has ceased to exist.
In addition to the RPDT the government is seeking to introduce a new “Gateway 2 levy”, which will be applied when developers seek permission to develop certain high-rise buildings in England. However, this article will focus solely on RPDT.
Exemptions
Companies and groups with relevant profits below £25 million per annum are currently exempted from RPDT. Therefore, the tax is expected only to apply to the largest residential property developers.
The government’s reasoning is not to impose responsibility for the cladding defects but instead works on the basis that the largest developers are operating in a market that will benefit from the substantial funding the government is providing to remediate building safety defects.
How much?
Although the rate has not yet been set, speculation is it will be set between 1% to 2% of profits above the annual allowance threshold of £25 million, however this is not confirmed. RPDT is intended to apply from April 2022 and will be in place for at least a decade until a target of £2bn is raised.
The RPDT will apply to companies developing UK ‘residential property’. The tax will be calculated as part of a company’s corporation tax return and will be based on realised and unrealised residential property development profits. This means companies will be required to ensure their activities are correctly split to avoid over or under payments of the tax.
Questions raised
The Chartered Institute of Taxation (CIOT) has raised vital questions and suggested alternative measures in its response to the RPDT consultation. I believe the most notable alternative is the implementation of a supplementary corporation tax charge (super profits charge) solely on entities with residential development profits in scope rather than implementing a new tax.
Boundaries of the tax
The definition of residential property within RPTD (including some communal dwellings such as student accommodation and retirement homes) intends to combine definitions from a number of other taxes. If this method is implemented it will likely cause confusion in the industry and within HMRC. The CIOT rightly point out that it should mirror existing legislation rather than a hybrid of paraphrased definitions.
Furthermore, it has been proposed that undeveloped land where a residential building is being constructed or would be constructed, will also be within the scope of RPDT. This could cause confusion where land is sold without planning consent, as without strict guidance on the parameters any land sale could potentially fall within the scope of the tax.
If companies develop properties for rent rather than sale, they could also be subject to the charge. The government intends to include build-to-rent activities to ensure fair treatment in the industry. If these activities were excluded it could ignore properties which are rented for a short period before sale. However, including these activities may cause uncertainty for property owners and HMRC, as RPDT would apply to purely the development profits of the residential element of a project and these may be difficult to identify during the development phase.
The CIOT propose utilising the clearance facility within HMRC to confirm profits which fall within the scope of RPDT. If advance clearance can be obtained HMRC would need to allocate appropriate resources to ensure timely and meaningful responses are issued.
When will it apply?
The expected implementation date is in April 2022 which gives a relatively short period for HMRC to issue detailed guidance, and for software developers to update corporation tax software.
As consultation period has ended, we await for an announcement from HMRC on its timescale and details on how it will operate.
