This week the government has published the draft legislation for the residential property developer tax (“RPDT”) for technical consultation.
RPDT is a new tax, intended to be imposed on companies carrying out residential property development from 1 April 2022, and described by the government as being introduced “to ensure that the largest developers make a fair contribution to help fund the government’s cladding remediation costs”.
The government had consulted on the policy design earlier this year and, at that time, the shape of the future tax was unclear. The draft legislation shows us the direction the government has decided to take and the breadth of development activities that will be caught by RPDT, but some key questions remain.
The shape of RPDT
Here are five key things we know about RPDT from the draft legislation (assuming it is enacted without significant amendment):
1. The tax will be imposed from 1 April 2022.
It will apply to profits arising in accounting periods ending on or after 1 April 2022, with profits from periods straddling that date being apportioned.
2. The tax will apply to certain profits exceeding an ‘allowance’.
It had initially been suggested that RPDT would apply only to businesses with relevant profits exceeding a group-wide annual allowance of £25 million and that, for those companies within this scope, only those profits exceeding this annual allowance would be subject to the new tax. Whilst the draft legislation provides for an allowance (and contains detailed provisions to apportion the allowance across groups and to join venture companies), the amount of the allowance is not stated within the draft legislation (which simply specifies ‘[£x]’). We can only assume the exact sum remains under government review – although we note there is still a reference to £25 million in the explanatory note.
3. Companies will be subject to the tax as ‘RP Developers’ if they:
• are within the UK corporation tax net;
• carry on ‘RPD activities’ relating to residential property development. This is extremely broadly defined and includes activities such as dealing in residential property, designing it, seeking planning permission in relation to it, constructing or adapting it, marketing it or managing it; and
• have – or had – any interest in the land on which the activities are carried out (excluding a licence or security interest).
As the Local Government Association has commented, the breadth of these provisions means that profits from land on which residential planning permission is secured will be caught by the tax, even where no homes are built. This will be of particular relevance to land promotors.
4. ‘Residential property’ is broad in scope.
The definition of ‘residential property’ is much wider than that encountered in other taxes such as Stamp Duty Land Tax and will capture not just ‘obvious’ residential property such as completed flats and houses, but also dwellings under construction or being adapted, and undeveloped land in respect of which planning permission to construct residential property has been obtained – or is being sought.
Although left open for further consideration in the initial policy consultation, the draft legislation has confirmed that student accommodation will not be included provided the students live there for at least 165 days a year.
Care homes which provide ‘residential accommodation with personal care’, for example to the elderly, will also be excluded.
5. Profits from non-RPD activities are not within the charge.
When the policy consultation was launched, two different models were being considered:
Model 1 would tax all of a company’s profits (including profits from commercial property development) where that company’s activities include more than an ‘insignificant’ amount of residential property development; whereas Model 2 would impose RPDT on any company that undertakes any amount of UK residential property development, but the tax would only be applied to profits from the residential property development activities.
It is now clear that Model 2 is being adopted, with profits from commercial property development, and profits from any other non-RPD activities, being outside the scope of the tax.
The missing detail
It will not just be the sharp-eyed readers among you who will be left asking the crucial question – how much are we talking about here? Unfortunately, the rate of RPDT is not going to be announced until the Autumn Budget on 27 October, which will prove frustrating to RP developers who are trying to make financial forecasts in the meantime.
One thing is clear, namely that any attempt to accelerate profits in an attempt to avoid RPDT will likely fail, due to the inclusion of anti-forestalling measures. These apply to any arrangements entered into since 29 April 2021 (when the policy consultation commenced).
Finally, we note that it was previously suggested by the government during the policy consultation earlier this year that the tax would be time-limited to a decade from 1 April 2022, with a possible extension if it does not raise a ‘fair contribution’ exceeding £2 billion over that period. However, the draft legislation makes no mention any fixed period, leaving the ‘end’ of RPDT an open question for future governments of the day.
The technical consultation on the draft legislation runs until 15 October 2021.