Derek Gemmell: Residential property developers advised to take note of increased government attention

Anderson Anderson & Brown’s Derek Gemmell examines the proposed new Residential Property Developer Tax (RPDT) on profits made by large residential property developers.

Derek Gemmell

The government is proposing to introduce a new tax, the Residential Property Developer Tax (RPDT), from April 2022 on profits made by large residential property developers.

There is a simple objective to this new tax being introduced – to raise up to £2 billion to contribute to the cost of addressing unsafe cladding on existing buildings.

RPDT will not be an extension of Corporation Tax, instead it will be a new tax with its own collection and payment criteria.

It is expected to apply to profits pre-finance costs and will only apply where a company or group undertaking residential property development activities delivers profits in excess of £25million in an annual period of account.

With the rate of the tax unknown, and only suggestions around how the profits to be subject to RPDT will be determined, at present property developers who are involved in negotiating residential development sites face an unacceptable uncertainty. With this threat to profit, many projects will be delayed until more certainty of return is available.

Additionally, uncertainty around the timing of the tax payment required under this new tax regime makes planning the funding of the projects extremely difficult. Should there be an instalment basis applied to assist the cashflow needed to address the unsafe cladding, this will increase the cashflow requirements on development projects potentially throughout the project. Currently there is a great deal of difficulty accessing cashflow funding to allow developments to kick off and a new tax payable in instalments would augment this problem.

We await the Treasury’s thoughts around this new tax and recommend decisions on the introduction and its basis are made quickly to prevent projects being unnecessarily delayed due to uncertainty around their commerciality.

Additionally, government scrutiny of large residential property developers continues with an announcement that legislation is being considered to combat property developers building up banks of land with planning permission. Their proposal will see an introduction of time limits before which land with planning approval must commence to be developed or the planning approval will be revoked.

The government’s action spawns from its frustration that residential developments are not progressing as quickly as expected given no progress on developing land that would deliver over 1 million new homes. The suggestion being aired is that the delays are deliberate in order to maintain a steady increase in house prices given the constraint on supply.

There is also a suggestion that a levy may also be introduced where development of approved land is not progressed within a reasonable timeframe aligned to that disclosed when planning was sought.

To prevent these provisions driving small and medium sized property developers out of the market, it is proposed that these new provisions will only apply to larger land developments.

Normally there is more than price manipulation at play when developments are delayed but the government’s stated intention to deliver increased numbers of affordable homes into the market will undoubtedly see some unwelcome new obligations and possible taxes being levied on residential property developers. This will, in turn, add increased complexity when planning a route through the property development maze and we would encourage developers to speak to their accountants or business advisors for advice.

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