Updated draft legislation has clarified many issues but there are still areas of uncertainty. 

As explained in our article in June 2021, the Government’s policy objective for Residential Property Developer Tax (RPDT) is to collect additional tax from residential property developers to fund the cost of remediating cladding issues which has been/will be borne by the Government. HM Treasury has been clear throughout the consultation process that it sees RPDT as ‘time limited’, with the goal of raising c £2b of revenue over a 10-year period. 

Narrowed scope

Based on the draft legislation released in September 2021, RPDT will apply to profits arising from the development of residential property and predominately applies when the land/property is held as trading stock by the developer or a related entity. Accordingly, under the current version of the draft legislation, property investment activity is excluded from RPDT – welcome news for businesses originally facing the prospect of a ‘dry’ tax charge.  

Importantly, the definition of residential property is such that property dealing activities, even in the absence of breaking land, will be within the scope. 

On 12 October, further updates to the draft legislation have confirmed that RPDT will not apply to ‘build to rent’ profits. There is also to be a specific exemption for entities that qualify as ‘non-profit affordable housing providers’ (this will include their for-profit subsidiaries). 

Specific details

In a major change to the original proposals, happily, it has now been confirmed that RPDT is to align with existing corporation tax rules and is, in effect, akin to a corporation tax surcharge on the trading profits of residential developments. This will be much easier for taxpayers to administer, although the rate of the tax has not yet been confirmed. 

Standalone companies and groups will have an ‘allowance’ available at the start of the accounting period to reduce their liability to RPDT or exclude them entirely. That said, even those that expect to be outside the scope of the rules due to the allowance will, nevertheless, need to do some work to convert their corporation tax results into RPDT results. The original consultation noted that the allowance could be £25m, but this is yet to be confirmed.

Calculation of profits and losses under RPDT

Although RPDT will be based upon corporation tax principles, companies will need to make the following important amendments in their calculations:

• RPD profits are only taxed above the ‘allowance’.
• Unsurprisingly, only profits and losses relating to RPD activities (including those of interests in JV developments) are brought into account, with other profits and losses excluded.
• The normal, and understood rules that allow losses from earlier years to be used and by way of group relief are replaced with a special regime – see below.
• No debits or credits may be taken into account for loan relationships or on the fair value movement of derivative contracts. In practice, this means that no interest deductions or finance costs (ie, costs of obtaining borrowings), whatsoever, will be available. This was largely expected following the June 2021 consultation and will, in practice, mean that the effective tax rate is higher than the headline rate. It also means that, in due course, scenarios could arise in which a developer does not make a cash profit, but is nevertheless liable to RPDT. Particular care will need to be taken when modelling tax cash flows given the different ways in which interest can be accounted for by developers.

Loss relief

Losses determined under RPDT principles (ie, after adding back all interest deductions, for example) can be carried forward against future RPD profits, group relieved in the current year or in future years. In line with corporation tax provisions, there are certain restrictions and there are ‘change in ownership’ rules that will need to be monitored in M&A transactions.

Next steps

Ongoing consultation will hopefully lead to more simplification of the proposals, but property sector businesses should take a keen interest in the budget on 27 October, when the rate of RPDT and the allowance are expected to be announced. Given the greatly reduced scope of RPDT, far fewer entities will end up paying it: therefore, if the Government is to meet its revenue target, the rate of RPDT may have to be set higher than many developers had expected.