The Treasury has released a consultation on plans to introduce a residential property developer tax on certain profits from residential development activity, designed to raise £2bn
The new tax is set to raise at least £2bn from developers which would be used to contribute to the overall costs of the cladding remediation programme. The government proposes that the charge would only apply to the profits of a company or group which exceed an annual allowance of £25m.
This would be a group-wide allowance, which exempts the relevant residential property developer tax profits from liability to the tax and ensure that companies and groups with profits below this amount remain out of scope entirely. Any unused allowance cannot be carried forward to future years.
The government first announced in February that it would introduce a new residential property developer tax as part of its Building Safety Package. 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 Treasury said that ‘residential property developers must be part of the solution to these complex problems’. The government has announced a package of measures to support home owners affected by large bills to cover cladding replacement, but there is a funding gap which needs to be covered by developers.
To help pay for these interventions the government is introducing two revenue raising measures: a new Gateway 2 levy, which will be applied when developers seek permission to develop certain high-rise buildings in England, and a new tax on the residential property development sector.
The consultation focuses on the new tax for residential developers. The new tax would 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 in 2022 and is expected to raise at least £2bn over a decade.
The government believes that those undertakings should be taxed on a measure of profit that corresponds with their UK residential development activities. ‘Taxing profit helps to ensure contributions are proportionate to economic returns and helps to minimise distortions that might come from alternative tax bases,’ the Treasury consultation stated. ‘The tax would only be applied to profits that exceed an allowance to ensure that the tax is administrable and that the costs of business compliance are proportionate to liabilities.’
The Treasury has set out two alternative approaches to computing the tax liability. Option one suggests that 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 tax.
This could be determined by a de minimis percentage of, for example, profit or turnover. Views are sought on how the definition of insignificant is designed and calculated.
The tax would then be applied to the profits of those companies as computed for corporation tax.
Option two 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 option one, 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.
To prevent distortions of the tax base 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 residential property developer tax profits.
The government therefore proposes that interest and funding costs are excluded from the calculation of profits for the tax allowance and tax purposes under all of the models.
This is similar to the approach taken for the calculation of the Supplementary Charge applied to companies in the oil and gas ring fence regime.
Who will be affected?
The tax will be focused on residential development activities within groups that might have multiple activities such as commercial development or real estate investment, as well as developers of affordable housing.
Some developments will be excluded, including those with charitable status, and hotels, residential homes for children or the elderly, and hospitals and hospices. The government is still considering whether student accommodation will be included in the scope of the new tax and is asking for feedback from respondents on its possible inclusion.
Development is taken to include conversion of existing buildings as well as new construction.
The consultation closes for comment on 22 July 2021.
Treasury consultation, Residential Property Developer Tax