In Sept 2021, the HM Treasury published draft legislation and guidance for consultation in regards to a new residential property developer tax, which shall now be charged on profits of any companies involved in residential property development.
The consultation ended in mid-October 2021, with the aim that the draft legislation will be a part of the Finance Bill, 2022. This article explores some of the key elements involved in the proposed new Residential Property Developer Tax, and the companies and activities which it will affect the most.
What is the new Residential Property Developer Tax?
The newly proposed Residential Property Developer Tax (RPDT) will now be charged on any profits companies make while undertaking residential property development projects across the UK. It will apply to company accounting periods that either end on or begin after April 1, 2022. The tax will apply to company profits which have above a specific determined annual allowance.
Why was RPDT introduced to begin with?
The HM Treasury guidance has published the purpose of the newly proposed residential property developer tax: “To ensure that the largest developers make a fair contribution to help fund the government’s cladding remediation costs”. This falls in line with the Housing Secretary’s February 2021 announcement: “To bring an end to unsafe cladding with multi-billion pound intervention”, which aims to raise at least £2B through RPDT over the next 10 years. –Source
How RPDT has affected Residential Property Developers
The British Property Federation (BFT) has already issued a press release, asking the UK government to not include built-to-rent properties in the draft legislation, citing the fact that the built-to-rent sector has ensured that tenants are fully protected from any financial impact. They further cited that build-to-rent investors and developers remain responsible for any remediation and maintenance costs, and don’t under, any circumstances, pass on the burden to tenants.
Without question, more views will surface, given the tax rate and the amount of maximum allowance threshold which is still not known; there’s a strong chance that this level of uncertainty will likely lead to some residential developers and investors delaying schemes – that is, until complete clarity can be gained around project returns.
Specific details of Residential Property Developer Tax explained
The new Residential Property Developer Tax will apply form April 1, 2022 to the profits of all UK residential property development projects. From an administrative standpoint, RPDT operates along the same lines as Corporation Tax rules – in effect, it is the same as corporate tax, where a surcharge is applied on the trading profits of residential developments.
In order to help the UK Government hit its revenue-raising targets, the rate of RPDT is currently 4%, which is higher than many developers had expected.
However, standalone development companies and groups will be granted an “allowance” at the start of the accounting period in order to cut down their RPDT liability – this was confirmed to be £25M annually in the Budget.
The administrative arrangements in regards to the allocation of allowance between the respective group companies that are subject to residential property developer tax will work along the lines of the CIR allowance procedure – which also includes electing a nominated company the same way and the drafting of an allowance allocation statement.
In the event that a nominated company is not appointed, the £25M allowance will be distributed among all group entities and subject to Corporation Tax – this is, in fact, a punitive treatment by design in order to encourage the appointment of a nominated company.
How does calculation of profits and losses work under RPDT?
Profits and loses for Residential Property Developer Tax 2021 must be prepared while keeping Corporation Tax principles in view, with the below key amendments:
- Profits and losses pertaining to RPD projects only are to be brought into account
- Allowances cannot be claimed with regard to capital expenditure
- Claims cannot be made under group relief, loss relief or carried forward losses for those losses which have not arisen as a direct result of RDP projects*
- Debts or credits may not be brought into account regarding loan relationships or against fair value movement of any derivative contracts.
It must be noted that interest expenses not being included in this calculation will probably have the most sizable impact on expanding profits which are liable to Residential Property Developer Tax and, in turn, to the total number of groups that are subject to this tax.
*The draft legislation allows residential property developers to claim relief against losses due to RPD activities which took place in past periods against current period profits. With that said, there are several restrictions in place which may defer the utilisation of carried forward losses regarding RPDT profits in future periods. Current year group relief claims for RPDT are not restricted, which is in line with Corporation Tax rules.
How will development companies pay RPDT and what are the next steps?
As we’ve discussed, Residential Property Developer Tax is to be seen as an extension of Corporation Tax and not as a standalone tax. Therefore, any amounts due will be a part of your Corporation Tax returns. As a transitional measure, however, the initial Residential Property Developer Tax payment will be due after April 1, 2022 which is the first quarterly Corporation Tax payment date.
The details released thus far on RPDT have provided a fair amount of clarity in terms of understanding the overall scope of the tax, although full compliance details have not been released as we speak. Consequently, between December 2021 and April 2022, we expect a volley of anti-forestalling and anti-avoidance measures to be announced by the Government.
The final legislation will likely be published in the Finance Bill 2021-2022, and if you wish to read up on the detailed response on the consultation which ended last month, you can find it here.
If you have any queries at all about how Residential Property Developer Tax works or how it may affect you as a residential property development company, please contact us for a free, no obligation consultation on: 01753 373 505 or complete our Contact form and we will get back to you..