Tax analysis: HMRC has launched a consultation on the draft legislation for the Residential Property Developer Tax (RPDT) ahead of its inclusion in the 2021–22 Finance Bill. This follows the government holding a consultation seeking views on the policy design of the new RPDT between 29 April and 22 July 2021. Ian Zeider, knowledge counsel at Travers Smith and Cathryn Vanderspar discuss the draft legislation and possible issues.
HMRC has launched a consultation on the draft legislation for the Residential Property Developer Tax (RPDT) ahead of its inclusion in the 2021-22 Finance Bill. The consultation closes on 15 October 2021.
What is the background to this draft legislation?
This is a technical consultation on draft legislation for a proposed new tax on residential property developers (RPDT). The draft legislation was published on 20 September 2021 and subsequently modified on 8 October 2021. The consultation closes on 15 October 2021.
The tax is part of a five point plan to remove unsafe building cladding and restore confidence in that part of the leaseholder housing market adversely impacted by remediation costs, following the Grenfell tragedy. The draft legislation follows an earlier industry consultation.
Broadly, the tax applies to the profits of corporation taxpayers, above an annual allowance, arising from residential property development activities in relation to UK land in which they (or a related company) have (or have had) an interest and which they hold (or held) as trading stock. Profits are calculated as for corporation tax (CT), but with some significant differences, for example, special rules for joint ventures and, more controversially, with finance costs being non-deductible.
The tax rate has yet to be set and the amount of the annual allowance has not been confirmed (and so it remains to be seen whether it will be the £25m mooted in the original consultation document on the design of the tax).
The final design of the tax will be announced in the Autumn Budget on 27 October 2021.
Who is within scope?
The tax applies to residential property developers (‘RP developers’). These are entities within the scope of CT which undertake ‘residential property development activities’ (‘RPD activities’) and are not ‘non-profit housing companies’ (broadly, registered social housing providers and their wholly owned subsidiaries).
‘RPD activities’ are activities carried out by the RP developer:
- on, or in connection with, UK land in which it has (or had) an interest, and
- for the purposes of, or in connection with, the development of residential property
The legislation provides a non-exhaustive, wide-ranging list of when activities will be carried out ‘for the purposes of, or in connection with, the development of residential property’: dealing in, designing, seeking planning permission in relation to, constructing, adapting, marketing and managing residential property, plus any activities ancillary to any of these activities.
The situations when an RP developer will be considered to have an ‘interest in land’ are wide-ranging and include where the interest is held by a ‘related company’ (see below). This ensures that activities are caught even if the ownership of land and the carrying out of works on it are split between sufficiently associated entities.
However, importantly, only interests held by the RP Developer or a related company as ‘trading stock’ of a trade which includes residential property development activities are included. This is key to the scope of the tax.
Clearly, a developer for sale would be caught. While a third party contractor should not be caught, as not having the requisite land interest, the inclusion of an RP developer (or related company) which has previously had an interest in land, does, however, mean that the common situation, where a developer has sold its entire interest in undeveloped (or partially developed) land to a third party, but then carries out (or one of its related companies carries out) works on the land, could be.
Given that build-to-rent (BTR) developers would not hold the relevant land as ‘trading stock’, on the other hand, they are effectively excluded from the scope. When the draft legislation was first published the government had not finally decided whether BTR would be within scope and so there was a possibility that the ‘trading stock’ requirement would be removed or amended. However, we understand that the government has recently decided, as a policy decision, that BTR activities will not be within scope, with the existing drafting effectively reflecting this exclusion (via the ‘trading stock’ requirement). Certain types of model, such as shared ownership, will need to be considered carefully to determine whether the trading requirement (for being in scope) is met.
Security interests and licences to occupy are also excluded from being relevant land interests.
What is a related company?
This sets a fairly low bar. A company is related to an RP developer if it is:
- in the same group, or
- is a ‘relevant joint venture company’ (RJVC), and the RP developer or a member of the RP developer's group holds at least 10% of its ordinary share capital (OSC) or, (if the RJVC does not have OSC), is beneficially entitled to at least 10% of its profits available for distribution to equity holders (Available Profits)
A company is an RJVC, broadly, if it is an RP developer that is not a 75% subsidiary of another company and there are five or fewer persons (treating group members as one) who between them hold 75% or more of its OSC or, if it does not have OSC, are beneficially entitled to 75% or more of its Available Profits.
What is residential property?
Residential property’ also has a wide meaning. Broadly:
- a building that is designed or adapted (or in the process of being constructed or adapted) for use as a dwelling, or land forming part of such a building's garden or grounds (or an interest in land that subsists for the benefit of such building or land), and, notably
- land in respect of which planning permission for residential use is being sought or has been granted
Are there any express exclusions from the scope?
The latest version of the draft legislation contains an express exclusion for non-profit housing companies (NPHCs) from the definition of ‘RP developer’. In addition, a charitable company's profits are carved out from the calculation of in scope profits and losses (see discussion of amount ‘A‘ below). These provisions will take some (though clearly not all) affordable housing providers out of the scope of the tax. For those not in this category, the normal rules will need to be considered.
The exclusion for NPHCs is itself backed up by an ‘exit charge’ which applies where either (i) a company ceases to be a NPHC and has not distributed all its assets to other NPHCs within a prescribed period, or (ii) a NPHC ceases to be a wholly owned subsidiary of another NPHC and an interest in it is acquired by a company that is not an NPHC but controls, or is under common control with, that other NPHC.
More generally, the definition of ‘residential property’ excludes various forms of specialist accommodation, for example:
- as expected, retirement homes that provide accommodation with personal care. (However, there is no more general exclusion for senior living and quite how the line is drawn for different models is unclear), and
- purpose built student accommodation (PBSA), provided it is reasonable to expect that the building will be occupied by students on at least 165 days a year. (This is a helpful development from that in the consultation which indicated that PBSA would be in scope)
How is the tax calculated?
We are still not told the applicable rate of tax. Given the aim to raise a fixed sum, this will only be able to be determined once the scope is finalised.
Subject to that, the tax is a percentage (currently unspecified) of the RP developer's ‘RPD profits’ for an accounting period (‘AP’) to the extent the profits exceed an annual allowance (the amount of which is yet to be confirmed).
RPD profits (and losses) are equal to: A + B – C – D – E where:
A is the developer's adjusted trading profits/losses. These are calculated in the same way as corporation tax trading profits/losses but, broadly, ignoring (i) profits and losses (and allowances from capital expenditure) of non-RPD activities, (ii) loan relationship and derivative contract debits or credits, (iii) loss relief or group relief that would otherwise be available and (iv) a charitable company's profits from a charitable trade that are applied for its charitable purposes.
B is joint venture profits/losses for the AP attributable to the developer. These are the developer's share of profits/losses of an RJVC that fall within the RJVC's own allowance (so it is not charged to RPDT on them). Profits/losses are attributable to the developer if (as above) it holds at least 10% of the RJVC's OSC (or, if the RJVC does not have OSC, is beneficially entitled to at least 10% of its Available Profits), and, in the case of losses, if the developer and the RJVC make a joint election. The RJVC's profits/losses attributed to the developer is an amount equal to the percentage of its Available Profits to which the developer is entitled.
C is the amount of carried forward RPDT loss relief the developer is given for the AP. (RPDT losses for an AP that are not surrendered under the RPDT group relief rules (see below) can be carried forward and used against RPDT profits in the next AP (and potentially later APs)).
D and E are, respectively, the amount of RPDT group relief and carried forward group relief claimed by the developer for the AP. Rules, similar to those for corporation tax, apply to allow RDPT losses to be surrendered within a group.
There are caps on the amounts of carried forward losses available as C or E. In particular, if a company's RPD profits/losses plus its share of joint venture profits/losses (i.e. A + B) exceed its annual allowance, the maximum is 50% of the excess less D (group relief claimed).
To ensure profits cannot be allocated elsewhere, transfer pricing applies to provisions between a RP developer's RP activities and its other activities, as well as in relation to transactions between (i) a RP developer (in relation to its RP activities) and (ii) a company with which it is under common control (in respect of that company's non-RP activities).
From an administrative perspective, RPDT is treated as an amount of corporation tax and, so, is within the provisions for quarterly instalment payments and group payment arrangements. There are, however, some amendments to the usual corporation tax rules, including additional information to be included on the company tax return and an obligation to notify HMRC of an RPDT payment.
RPDT is not deductible for the purposes of corporation tax or income tax.
How does the annual allowance work?
RP developers are entitled to an allowance for an AP, the amount of which has yet to be confirmed. The allowance is shared between group members. Where a body that is not liable to RPDT other than by virtue of being a NPHC (such as a sovereign immune entity) holds at least 10% of a RJVC's OSC (or, if the RJVC does not have OSC, is beneficially entitled to at least 10% of its Available Profits), broadly, (i) the RJVC's allowance is reduced by a percentage equal to the body's entitlement to its Available Profits (the relevant percentage), but (ii) the body is given a ‘notional allowance’ and can choose to allocate a proportion of that (up to relevant percentage) to the RJVC.
Are there any particular concerns or issues with the legislation?
The disallowance of deductions for finance costs, although expected, will mean that developers are potentially subject to RPDT on amounts in excess of their commercial profits.
While the new tax was announced to last for ten years, notably the legislation does not contain any express sunset clause.
When can we expect final legislation and when will the tax apply?
It is anticipated that final, or nearly final, legislation will be contained in the Finance Bill 2022, which is expected to be published in late November or December.
The tax will have effect for APs ending on or after 1 April 2022. An AP that straddles that date is deemed to be two separate periods; the first finishing on 31 March 2022 and the second starting on 1 April 2022. Amounts are apportioned on a time basis, and only amounts within the second deemed period are within the charge to tax.
The timetable is therefore tight, both for the legislation to be finalised and for businesses to prepare, especially given that (based on current drafting) the RPDT will potentially apply to activities in current APs ending on or after 1 April 2022. However, it seems that the government is not minded to push back implementation, despite calls from industry to do so.
There is, however, an anti-forestalling rule that applies to profits that arise in relation to an AP ending before 1 April 2022 instead of a later period as a result of arrangements entered into on or after 29 April 2021, a main purpose of which is to secure a tax advantage as a result of the profits not being within the scope of RPDT. If the rule applies, the profits are taken into account for the purposes of the developer's first chargeable AP.
As mentioned above, the consultation closes on 15 October 2021 and we expect the final design of the tax to be announced in the Autumn Budget on 27 October. The final legislation may therefore differ from the current draft rules.
Interviewed by Tom Inchley