New Housing Developer Tax: the design of the tax

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Summary

In this blog, we take a look at the current conception of the Residential Real Estate Developer Tax (RPDT). Separately we have blogged about accountability triggers. This blog is based on the current bill published on September 20. The final design of the tax has not been decided and will be announced in the budget on October 27 (with the rate). A key outstanding issue is whether the tax extends to the rental construction sector (BTR), which is currently under review by the UK Treasury.

Who is responsible ?

The person liable for RPDT is a corporate residential property developer who undertakes residential property development activities in relation to UK lands. The developer must be subject to UK corporation tax for the RPDT to apply.

As explained in our blog on Liability Triggers (here), the definition of residential real estate development activities is broad and includes the application for planning permission, the marketing as well as the negotiation of a property or its construction. Significantly, the developer or a “related party” must have or have an interest in the land, so the RPDT does not apply to third-party developers. This can lead to a disparity of treatment between owners who develop themselves and those who use third party contractors. In addition, the interest in land must be part of the commercial stock (term defined in the bill).

How is the tax currently designed?

The tax applies to the profits of Residential real estate development occurring as of April 1, 2022. Thus, in a scenario of mixed use of the property, it only applies to the profits of the residential part.

The tax applies to business profit for corporate tax purposes, as adjusted (“adjusted business profit”) and after application of the RPD loss rules. Starting with the corporate tax figure to arrive at the RPD profit should provide some simplicity. The adjustments remove these characteristics, among others: profits from non-residential activities, interest charges (thus tax deductible interest is added) and corporate tax losses and capital allowances. Notably, HMRC did not agree with the many requests to exclude interest charges from the adjustment, so this is bad news for highly leveraged trades.

Elsewhere, there is some complexity (but fairness) with the proposed RPD loss rules. There is a set of rules that allow RPD losses carried forward to be used against RPD profits and RPD losses to be redeemed through group relief (whether current year RPD losses or losses carried forward). There are many similarities to the corporate tax loss rules, including a rule limiting the use of RPD losses carried forward to only 50% of RPD profits.

Tax is levied on all RPD profits in excess of an annual allowance. The allowance is there to ensure that only large residential real estate developers are taxed. Although £ 25million was mentioned in the consultation document, the bill does not mention the allocation. We expect the amount to be announced in the budget along with the rate. There are rules for allocating an allocation around group members, and a default provision applies when no group member has been designated to allocate. (Exceptionally, there are provisions dealing with the allocation of allowances between joint venture members and joint ventures, which we discuss below).

How are joint ventures managed?

In the consultation document, there was an ambiguous reference to joint ventures. HMRC is now much clearer in its proposals for joint ventures.

In the bill, joint ventures are affected in three ways.

First, a joint venture is considered to be “related” to a joint venture developer who owns at least a 10% interest in the company. This means that the RPDT can apply when a joint venture has an interest in the land while a member of the joint venture is developing it. This extends the definition of related party beyond a group.

Second, RPD profits from a joint venture are attributed to (and subject to RPDT in) a developer with at least a 10% stake if the joint venture is closely owned and does not pay RPDT because its profits are lower. to his allowance. .

Third, there are provisions for the operation of the allowance when a member of a joint venture is exempt from corporation tax.

Anti-avoidance rules

There are anti-anticipation rules that apply when a person tries to avoid RPDT by accelerating profits so that they fall into an accounting period ending before April 1, 2022. The rules try to prevent such arrangements to operate.

Tax management

The RPDT is assimilated to an amount of corporation tax. It is due for an accounting year subject to corporation tax. A set of administrative provisions that apply to corporation tax also apply to RPDT. A person making a RPDT payment must notify HMRC of the payment so that HMRC can track the tax.

HMRC listened to a number of comments made during the consultation, for example

  • using trading profit for corporate tax purposes as the starting point for calculating the RPDT, and
  • excluding student accommodation (which requires a planned occupation of at least 165 days per year) and rest homes of various types.

Elsewhere, RPD loss rules are complex, but provide fairness when profits fluctuate from year to year and are at least familiar.

The big outstanding points are the tax rate, the abatement and whether this will apply to the BTR.


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