Original content provided by BDO UK.
The new Residential Property Developer Tax (RPDT) is now in place and taxpayers need to be taking action for both ongoing transactions and projects on the horizon.
Background
RPDT came into force on 1 April 2022 with the policy objective of requiring residential property developers to pay additional tax to fund the cost of remediating cladding issues which have already been, and will continue to be, borne by the government. The legislation was drafted over a short period and has resulted in a number of unexpected consequences explored briefly in this article.
Wider population of taxpayers than originally thought
Whilst termed ‘Residential Property Developer Tax’, there is no need for businesses to own ‘residential’ property or to undertake any development to be within the scope. For example, if a company seeks planning permission to construct residential dwellings and then sells the land, that activity is sufficient to bring the company within the scope of the rules.
£25m allowance is not guaranteed
RPDT is designed to target the largest developers only. To achieve this, it is intended to apply only where profits, determined under RPDT principles, are more than £25m.
However, there will be a number of reasons for which the allowance will, in practice, be less than this. For example:
- The allowance is reduced (proportionately) where a property-owning company (PropCo) is owned by a tax-exempt entity. For example, if PropCo were 90% owned by a tax-exempt entity, then the allowance of PropCo becomes £2.5m, not £25m.
- The allowance is, by default, equally spread across UK group companies, regardless of whether such entities are within the scope of RPDT. Without RPDT filings to HMRC to allocate the allowance across a group, the allowance is potentially wasted, and tax suffered when it wasn’t expected or necessary.
- In joint venture scenarios, decisions will need to be made about which entity benefits from the allowance, and this will need to be agreed between shareholders.
- Exposure to RPDT is determined after excluding a number of costs which would normally be deductible for tax purposes. For example, all interest costs are non-deductible for RPDT purposes. Economic losses can arise on which tax will be due.
Small commercial changes can result in big RPDT differences for joint ventures
There can be a number of unusual complications for joint ventures. One such example is explained below.
Where a construction company (ConstructionCo) provides services to a property-owning company (PropCo) that is a member of another company’s group (InvestorCo), then ConstructionCo is not subject to RPDT on its construction profits from those services. This will be the case regardless of whether ConstructionCo has a shareholding in PropCo or not.
However, if PropCo leaves InvestorCo’s group, then the position for ConstructionCo changes significantly. If, by virtue of that leaving, PropCo becomes a ‘relevant joint venture company’, then ConstructionCo potentially becomes subject to RPDT on its construction profits earned from PropCo. Additionally, ConstructionCo is subject to tax on a proportion of PropCo’s RPDT profits below the annual allowance.
The commercial change (PropCo leaving the group) may have happened entirely at the behest of InvestorCo, yet it significantly impacts upon ConstructionCo’s net returns.
Tax may be payable very soon, including on profits earned before 1 April 2022, and RPDT is retrospective
RPDT does not apply solely to profits earned on or after 1 April 2022. Instead, RPDT profits that span 1 April 2022 are subject to the tax in proportion to the number of days in the accounting period after 1 April 2022. For example, if a company has a year end of 30 September 2022, it will be subject to RPDT on 50% of its profits. This will be the case even if all RPDT profits were earned before 1 April 2022. RPDT is therefore a retrospective tax.
RPDT is payable alongside corporation tax and is, therefore, due under the quarterly instalment payment regime or the quarterly instalment payment regime for very large companies. This could result in this new tax being payable very soon. For example, a company with a 31 January year end may need to pay a quarter of its RPDT liability on 14 April 2022 in respect of the year ending 31 January 2023. Interest will be charged for late payment.
Next steps
As the targeted population for RPDT has evolved during the legislative process, it would be easy for RPDT to be overlooked by many affected businesses in the residential property supply chain. Complexities around the headline allowance figure of £25m and the assumption that RPDT would only apply to profits generated after 1 April 2022 could also mean businesses misunderstand their obligations.
For these reasons, all such companies should review their obligations now to avoid unexpected liabilities later. If you have any questions on how RPDT will affect your business, please get in touch.