The government has set out a five-step plan to tackle the use of unsafe cladding. One of the points raised was the proposal of two new taxes in the form of a new Gateway 2 levy applicable when residential property developers seek permission to develop high-rise buildings in England, as well as a new tax for residential property development companies.
The consultation document issued is focused on the introduction of the RPDT to apply to the largest residential developers and the government is currently consulting on the design of that tax proposed to apply from April 2022. The consultation runs until 22 July 2021.
We are expecting a separate consultation from the government with regards to the design of the Gateway 2 levy in due course.
The government intends for the new tax to be a time-limited measure in order to raise £2 billion over a decade to help fund the government's planned remediation work. Additionally, the government aims for the tax to be applicable only for the "largest residential property developers". How the relevant developers will be determined will be based on their profits and an annual allowance of £25 million.
The fundamental design of the tax would be in the form of one of the following models:
The government proposes that the tax would only apply to the profits which exceed an annual allowance of £25 million. This would be a group-wide allowance, which ensures that companies and groups with profits below this amount remain out of scope of the RPDT entirely. However, any unused allowance cannot be carried forward to future years. The aim of the annual allowance would appear to suggest that the tax would only be a concern for companies with relatively high profits.
There is currently no commitment from the government on a specific rate of tax, however a set of principles have been set in the consultation which will be used to determine the final tax rate. These principles include:
The potential RPDT could have numerous commercial implications on larger companies in the residential property development industry. Although the consultation states the RPDT aims "to ensure that those with the broadest shoulders contribute the most", the implications of the new tax could be wider-reaching than the government’s plans.
It will be important to monitor the government consultation as planned housing developments which would have been viable in the planning process will now need to consider the potential economic impact of the new tax. Similarly, planned developments may be deferred due to the uncertainty surrounding the new tax and how it will be applied.
Additionally, it is worth noting that some of the proposed adjustments will mean that the profits subject to RPDT could be significantly higher than their accounting or usual taxable profits. As a result, it may be difficult for some companies to establish if they will need be subject to the new tax.
Overall, we expect the form of the tax to be much debated over the next few months. Clearly the intention is to target both property development in the widest sense, so it will be irrelevant whether the property is held for sale or as an investment, and the class of assets involved. One of the biggest challenges will be that profit relating to property development can be ‘lumpy’ and therefore whilst the tax is aimed at the larger companies, there is a risk that others will find themselves within its remit.