Consultation is underway on the UK government’s proposed residential property developer tax (RPDT), published in April and closing on 22 July 2021. The stated intent of the new tax is to raise revenue to fund remediation work in the housing sector, particularly in areas of safety, which were highlighted by the Grenfell Tower tragedy.
The tax aims to raise at least £2bn over a 10-year period to contribute towards costs the government has committed to for remediation works to date. While the consultation document is clear, it is not implying responsibility for historic construction defects on cladding. It is equally clear that it believes the industry should be ‘paying its fair share’ of these costs.
Only those involved in residential development, and only the largest property developers with profits exceeding £25m, are expected to pay the tax. Inevitably this brings complexity in establishing what type of development is included, how groups with diverse activities should be treated, and how the relevant profit should be calculated, particularly in the build-to-rent sector.
A key concern is the effect the tax has on affordable housing. There is a housing shortage across the UK and both devolved administrations and the Westminster government have announced steps to increase availability, particularly of affordable housing. The consultation notes that organisations carrying out charitable activities currently have an exemption from corporation tax on those activities, and there are no plans to disturb that.
Despite this, the consultation also states that the government considers profits made on the development of affordable housing should be within the scope of the tax. However, it notes that developers make contributions towards affordable housing through planning gain obligations and suggests this is largely done on a cost only return basis. Government therefore thinks developers would be unaffected by an approach which targets profit rather than an operating surplus.
But is this too simplistic? Will the addition of a tax on other residential property affect the viability of marginal sites with a knock-on effect on planning gains for local areas? Will developers simply pass on the tax to purchasers, therefore adding an inflationary element to house prices and making some even less affordable? Corporation tax is already due to increase by 6 per cent from April 2023. And what about the additional administrative burden on the largest housing associations, who may fall within the scope of the tax in developing their own projects?
As a consultation document, raising questions is part of its purpose, but the sector has questions of its own. Will the tax really end after 10 years? If it doesn’t raise the £2bn required, it could be extended. Will the profit allowance stay at £25m or could it be reduced? If it is very successful, will it be made permanent? And finally, can the sector and HMRC realistically be ready for an intended start date of 1 April 2022?