Residential Property Developer Tax confirmed at 4%

The rate of the Residential Property Developer Tax (RPDT) has been confirmed at 4% on developers' profits derived from UK residential development which exceed £25m per annum. RPDT was announced in February as part of a package of measures designed to help fund the replacement of unsafe cladding on high-rise residential buildings.

RPDT is separate to the proposed Building Safety Levy which will be applicable to those developers seeking Gateway 2 approval from the Building Safety Regulator under the Building Safety Bill to build certain high-rise residential properties. The RPDT is not targeted at any one area of UK residential development but will apply across all sectors unless excluded from scope.

What is the background?

HM Treasury consulted on the design of the RPDT in the early summer (as discussed in our previous briefing), and on the draft legislation from 20 September to 15 October 2021.

With the publication of updated draft legislation in the Finance Bill and the Treasury's response to these consultations, there is greater clarity around the policy and model chosen for the tax. Detailed guidance is also expected to be published in due course.

When will the new tax apply?

The RPDT will apply from 1 April 2022, with profits being time apportioned where a company's accounting period straddles that date. There is no grandfathering for developments that are already underway when the tax comes into force; such developments will therefore be caught if profits accrue post-1 April 2022. Anti-forestalling rules will be enacted to prevent profits being accelerated to an accounting period before this date.

Although the RPDT is intended to be time-limited, seeking to raise £2bn over a decade, the government has resisted calls for a "sunset" provision which would have automatically repealed the tax after 10 years or when the £2bn target was reached. Instead, the RPDT will be repealed "once sufficient revenue has been raised".

Scope of activity captured by RPDT

RPDT applies to developers within the charge to corporation tax that undertake residential property development activities on UK land that they (or a related party such as a group company) hold an interest in as trading stock. A building contractor will therefore be out of scope, but a non-resident developer company is capable of being caught.

The legislation provides a non-exhaustive list of residential property development activities including dealing, designing, seeking planning permission, constructing or adapting, marketing and managing. Where developers are undertaking mixed-use development, a just and reasonable apportionment will need to be made between residential and non-residential elements.

What is excluded from scope?

There will be several exclusions from the scope of RPDT. These include:

certain communal dwellings, such as hotels, hospitals and hospices, hostels, armed forces accommodation, boarding schools, monasteries/nunneries and prisons. Following consultation, communal dwellings have been extended to include temporary sheltered accommodation, such as emergency shelters and respite care, and accommodation for members of the emergency services
care homes for the elderly or for children. However, despite calls to extend the exemption to retirement homes providing supported accommodation, such developments are within scope as these are more akin to mainstream residential housing and exemptions could introduce distortions in the market between competing retirement models
purpose built student accommodation which is expected to be occupied for at least 165 days per year
affordable housing. Non-profit registered providers of affordable housing and their wholly owned subsidiaries will be exempt from the scope of RPDT, although an exit charge will apply where a corporate body benefitting from the exemption ceases to qualify. Although there were calls for all registered providers of affordable housing to be out of scope, the government did not think it justifiable to exempt those providers making a profit
build to rent (BTR) sector. The government has confirmed that the BTR sector is excluded from scope "at this point in time" in view of the challenges faced in assessing an unrealised development profit which in turn would impose a "dry" tax charge.

How is the RPDT calculated and paid?

The RPDT is effectively an "extension" of corporation tax, with profits to be calculated in line with existing corporation tax rules. Interest and other funding costs will not, however, be deductible in calculating the tax, to prevent distortions of the tax base due to different funding models.

Any losses incurred before the introduction of the tax will not be capable of reducing RPDT profits. However, it will be possible to set off post-commencement carried forward RPDT losses, and group relief from ring-fenced RPDT activities, against RPDT profits. These carried forward losses will be subject to a 50% restriction, in line with existing corporation tax rules for large businesses.

A group-wide annual allowance of £25m will ensure that groups with RPDT profits below this threshold are not subject to the tax (and will not need to file an RPDT return). The allowance will apply to profits after any carried forward RPDT losses have been deducted. It will not be possible to carry back or carry forward any unused allowance.

Any tax due will be reported and paid using the corporation tax return and administrative framework. In the case of a group, RPDT will be included within any group payment arrangements for corporation tax. Although the existing corporation tax quarterly instalment payment rules will apply, transitional arrangements will provide that the first RPDT payment will be due in the first quarterly instalment payment after the commencement of the tax.

Joint ventures (JVs)

As proposed during the consultation process, where the JV is a corporate body, the RPDT will apply at the JV level. Those holding interests in the JV will not be subject to RPDT on their share of profits to the extent that those profits have been subject to tax at the JV level.