Cladding tax: latest updates
A little over a year ago, the government announced the introduction of two new taxing measures, the proceeds from which would be used to fund cladding and building remediation works. Firstly, there was a new tax, to be applied against residential development generally (now referred to as the Residential Property Developer Tax, or RPDT). Secondly, there was to be a new levy, more focussed than the RPDT and applicable to certain “high-rise” residential builds (now referred to alternatively as the Building Safety Levy (BSL) or the Gateway 2 Levy).
Over the course of the year, there has been much discussion in the market around these two taxing provisions, not least as a result of two separate consultations, and some draft legislation which has now been published for the RPDT. We have rounded up below the latest developments in respect of both.
RPDT – further details
We have previously set out the proposals for the RPDT, as were contained in the government’s consultation document.
The RPDT has always been an emotive topic which has sparked much discussion in the market, and there has been a significant amount of feedback given to the government following the consultation. This has led to some updated legislation, which takes account of input from various professional and trade bodies, and there are a few notable changes to the suggestions in the initial consultation.
As compared to the original proposals, the scope of the RPDT has been somewhat narrowed in some key areas:
- Genuine property investments will not be included in the scope of the RPDT, which will be applied against profits arising from development of residential property where the property is held as trading stock by the developer (rather than as an investment asset);
- Pure third-party contractors should also not be caught, as the RPDT requires there to be a holding of the relevant land interest (although certain types of development, where the contractor has held the land and subsequently disposed of it, would still be caught – the prime examples being a forward funding or forward sale arrangement);
- The tax will apply to companies, meaning smaller scale individual developers should not be caught;
- It has been confirmed that certain not-for-profit companies will not be subject to the tax, so long as the charitable purpose of the not-for-profit company is to provide social or affordable housing.
- There are certain other welcome carve-outs in relation to supported housing and purpose-built student accommodation (although please note that these carve-outs are subject to certain conditions). In each case, it will be necessary to check whether a general carve-out applies to any particular development, and that all conditions which need to be met actually are.
The narrowing of scope has generally been welcomed in the market. However, the intention of the RPDT was always to raise an estimated £2bn of financing for property rectification and remediation work, during a finite lifespan of 10 years. Therefore, with the number of potential taxpayers reduced, the rate of the RPDT has been set at 4%, which is higher than was anticipated. It has been estimated, based on the updated legislation and application of the tax, that the top 10-or-so housebuilders could be due to pay an aggregated £200m per year. The actual revenue figures will only become apparent some time after its introduction in April 2022.
BSL – an outline
Information and consultation on the BSL has followed behind the RPDT, but the application of the levy now looks a little clearer as some of the key terms have been published and responded to.
The levy will be applied as part of Gateway 2 in the build process, being one of three “key stage gateways”. Stage 2 is the point of a development post-planning application, but before building work has started. Before construction can begin, a Building Safety Regulator will need to approve the building control application, and where a levy is payable, that approval will not be signed off until it is paid (subject to some possibility that it could be paid in instalments, to be further clarified in due course).
The rate of the levy is still to be determined, and it is expected to be introduced in 2023. Like the RPDT, it is currently expected to be finite in duration, although it has not as yet been given a fixed 10-year lifespan as was for the RPDT.
The calculation basis for the levy is also still to be determined, with two suggestions being; a charge based on internal floor area, or a fee per residential unit. Further consideration is also being given to applying different rates to reflect valuation differentials (such as geographic location), although it’s noted that a key feature of the levy is that it should be easy to apply, so some balance is clearly still needed as to how it is applied in practice.
As previously published, the levy will apply to “high-rise” residential developments (meaning developments over 18m or seven storeys). Much discussion has centred around what “qualifies” in this general category – and it’s proposed that the definition will include care homes, hospitals and student accommodation (all subject to the height/storey requirement, and further refinement post-consultation). It is however anticipated that pure refurbishment will not be caught, and there will be carve-outs for things such as affordable housing. As with the RPDT, the key will be to check exactly whether a specific development will be excluded or included in the levy at an early stage in the project.
The levy will apply in England only (although there is scope for devolved administrations to implement something similar).
Despite clarifications being made to both the RPDT and the BSL there are still a number of gaps. There are also nuances and conditions for Developers to navigate to understand whether the levy/tax will apply to them and their proposed development. Our experienced tax team can help you with this. Please do get in touch or request a consultation.