The cladding crisis has grabbed the headlines since the tragic Grenfell Tower fire in June 2017 shone a light on how many buildings have dangerous cladding.
One of the ways in which the Government has proposed to pay for its removal is a Residential Property Developer Tax (RPDT), which we found out more about at the recent Budget.
Here’s what we know so far about the RPDT.
What is the background?
The new tax was originally announced in February 2021 by former Housing Secretary Robert Jenrick, with a consultation on the design of the new tax launched in late April 2021 and running until late July 2021.
A further technical consultation on the draft legislation was launched in September 2021 and lasted until October 15 2021. A response to the consultation was published at the Autumn Budget, where it was revealed that the tax would only apply to developers whose profits exceed £25 million annually, at a rate of 4%. As of 2019, only 31 developers breached the £25 million profits threshold.
Who will be affected by the tax and what is its objective?
The Government says companies or groups of companies undertaking UK residential property development with annual profits of more than £25 million are most likely to be affected by the measure, which has been designed to apply to the largest residential property developers on the profits they make on UK residential property development each year.
There had been some outcry after the initial government announcement from small and medium enterprise (SME) housebuilders and developers that a “cladding tax” could cripple them financially and potentially put them out of business.
The Government says the tax forms part of its Building Safety Package which aims to bring an end to unsafe cladding – which has caused misery and anxiety for thousands of homeowners – as well as to ‘provide reassurance to homeowners and support confidence in the housing market’.
With the substantial costs attached to the removal of unsafe cladding, the Government thinks it is right to ‘seek a fair contribution’ from the largest developers in the residential property development sector to help fund it.
When will it come into play?
The Government says the tax will apply from April 1 2022 to ‘profits arising from residential property development recognised in accounting periods ending on or after that date’.
However, where a company’s accounting period straddles April 2022, the profits of the accounting period will be time apportioned to ‘determine amounts falling before and after the start date’.
While the tax on profits arising from residential property development is a new law, the calculation of profits charged to the tax will be based on the existing rules for Corporation Tax.
What’s more, the Government says the tax will be reported and paid using the same return and systems as for Corporation Tax. As a result, the ‘administrative legislation in Schedule 18 to the Finance Act 1998’ will apply.
The Government has said that legislation will be introduced in the Finance Bill 2021-22 to establish the new tax. It has explained how the tax will work in the following way:
“The tax will apply to companies with profits arising from UK residential property development but will only apply if the group’s profits from that activity exceed £25 million per year. This will be achieved by providing a £25 million annual allowance for each group to use against their profits for a year.”
The policy paper goes on: “Where this allowance is not exceeded, there will be no need to report residential property development profits. The computation of profit will start from the same basis as for Corporation Tax before an adjustment is made to identify only the profits that relate to the residential property development activity. There will also be a restriction in respect of finance costs.”
The policy document adds that the £25 million allowance can be allocated by the group between its companies - profits greater than this allowance will be taxed at a rate of 4%, with any tax due reported and paid as part of a company’s Corporation Tax return.
According to costings estimates in the Autumn Budget, certified by the Office for Budget Responsibility, the tax will bring in £200 million for the Treasury in its first year of operation (2022-23), rising to £215 million in 2023-24, £225 million in 2024-25, £235 million in 2025-26, and £250 million by the 2025-26 tax year.
The Government believes the measure will not have any major macroeconomic impacts, with any impact on house prices and transactions expected to be ‘negligible’. That’s because new builds – where the cladding problem is predominantly found - account for a small share of overall market transactions, it says.
The government doesn’t expect the measure to have any impact on individuals, households, and families because it is only intended to directly impact businesses.
Even when it comes to business, the Government thinks there will only be a ‘negligible operational impact’ for a small number of large groups undertaking residential property development in the UK.
“It has been agreed that the tax will be delivered as an extension of Corporation Tax and therefore reported and paid in the same way as Corporation Tax, minimising the impact on the affected businesses as most of them already understand how to compute profits for the purposes of Corporation Tax,” the Government’s policy document said.
“These groups will be required to calculate annual profits arising from UK residential development activity, adjust the profits to take account of allowances and other deductions, then apply the RPDT rate to determine the tax due.”
The Government says guidance will be published to advise those affected of the changes, as well as to provide support in assisting their understanding of the new measure.
You can see the full policy paper here.
How much could the new tax affect developers?
While the government insists the impact of the new tax will be negligible on the country’s biggest developers, other recent findings suggest otherwise.
Research carried out by Sirius Property Finance found that the cladding tax could cost the nation’s biggest housebuilders £205 million a year.
The firm examined pre-tax profits for 11 of the biggest housebuilders to discover what impact the new tax could have.
The findings reveal that, pre-pandemic (2019), total pre-tax profits for these 11 housebuilders came to £5.4 billion. Based on the £25 million tax threshold, this would see a potential taxable value of housebuilder profits to the tune of over £5.2 billion, the research found. A 4% rate of tax on this figure would see Britain’s largest housebuilders paying more than £205 million in tax per year.
The UK’s biggest housebuilder, Persimmon, could on its own be in line to pay an additional £41 million per year in RPDT based on its pre-pandemic performance. Meanwhile, Barratt, Taylor Wimpey and Berkeley could also be paying more than £30 million.
Sirius’s research also found that, even during 2020, when Covid led to housebuilder profits declining by more than half (-52%), £2.6 billion in taxable value above the new £25 million threshold would have resulted in an RPDT bill of nearly £103 million.
“The confirmation of the Residential Property Developer Tax will come as a significant blow to Britain’s biggest housebuilders who have fought hard to overcome pandemic uncertainty, a decline in profits and a sharp spike in the cost of labour and materials,” Nicholas Christofi, managing director of Sirius Property Finance, commented.
“It’s clear that having promised £5 billion to address the cladding crisis, the government is now reliant on the nation’s housebuilders to pay the bill and it’s a little unfair, to say the least, to expect the entire sector to compensate for the poor practices of a few.”
He added that it’s likely this latest move could inadvertently stifle housing delivery: “The outcome of which is less stock reaching the market to address the current housing crisis, while high demand for those new homes that are delivered will push house prices ever higher to the detriment of the nation’s homebuyers.”
While sympathy and support for some of the biggest and richest housebuilders in the UK is likely to be thin on the ground, it is also the case that they build most new homes – and will no doubt be playing a key role in the government’s planned investment in brownfield sites to support its levelling up agenda. If these companies aren’t in a robust financial position, that could cause problems further down the line.
Equally, the need to act quickly and decisively on the cladding crisis is clear, and those affected by the scandal will likely want to see the government go bigger and faster.