Clause 34 - Meaning of “residential property developer”

Finance (No. 2) Bill – in a Public Bill Committee at 3:45 pm on 5 January 2022.

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Question proposed, That the clause stand part of the Bill.

Photo of Angela Eagle Angela Eagle Labour, Wallasey

With this it will be convenient to discuss the following:

Clauses 35 to 38 and 47 to 49 stand part.

That schedule 9 be the Ninth schedule to the Bill.

Clauses 50 and 51 stand part.

Photo of Lucy Frazer Lucy Frazer The Financial Secretary to the Treasury

Clauses 34 to 38 set out key definitions for the residential property developer tax, which collectively set out the conditions that need to be satisfied for a business to be in scope of the tax. Clauses 47 to 51 and schedule 9 address a mix of aims within the tax, including the definition of a group, excluding a deduction for the tax when calculating profits or losses for other tax purposes, and the application of transfer pricing principles for the purpose of the residential property developer tax.

Clause 34 defines a residential property developer, and confirms that to be in scope of the RPDT, a business must be a company that undertakes residential property development activities as further defined in clause 35. Clause 34 provides an exclusion for non-profit housing companies and their wholly owned subsidiary companies from being treated as residential property developers for the purposes of the RPDT. The clause defines a non-profit housing company by reference to existing legislation, and a power has been taken that allows the definition to be updated in future in line with any changes to regulatory frameworks.

Clause 35 provides a non-exhaustive list of what amounts to residential property development activities, and confirms that profits from these activities undertaken by the developer on or in connection with UK land in which it has an interest will form the tax base.

Clause 36 explains that a residential property developer or a related company will have an interest in the land for the purposes of the tax where it has an interest in or over the land that forms part of its trading stock used in its development trade. It explains the tax’s application to related companies and joint venture companies.

Clause 37 provides a definition of residential property and sets out the types of properties that will not be regarded as residential property. The clause excludes certain types of buildings from the definition of residential property, so that any profits or losses from their development are not taken into account when computing profits that are subject to the tax. These include, typically, specialised institutions that provide temporary or longer-term accommodation for a specific class of residents, and buildings that are occupied purely under licence to occupants who do not hold any lasting rights over the property. Finally, the clause sets out the criteria to be met in relation to buildings that are excluded from the definition of residential property as student accommodation. Clause 38 sets out the formula used to calculate the residential profits or losses from residential property development activity by a developer for an accounting period.

Clause 47 introduces an exit charge that applies when a non-profit housing company ceases to meet the conditions to be exempt from the RPDT, and sets out the operation of the exit charge. This rule has been welcomed by the non-profit sector.

Clause 48 provides the definition of a group of companies for the purposes of the RPDT, other than for the group relief rules in schedule 7. Since a group of companies is entitled to a single £25 million allowance, it is important to set out clearly what constitutes a group for that purpose.

Clause 49 introduces schedule 9, which introduces a rule preventing a residential property developer from obtaining any deduction for the tax when calculating any profits or losses for income tax or corporation tax purposes. Clause 50 sets out where the meaning of various terms used in the RPDT legislation can be found.

Clause 51 confirms that the RPDT will apply for an accounting period for UK corporation tax purposes of a developer that ends on or after 1 April 2022. It sets out the treatment of accounting periods that straddle the commencement date of 1 April 2022. The RPDT will be chargeable only in respect of profits calculated from 1 April 2022 to the end of the accounting period, with an apportionment being made of the profits for the whole accounting period on a time basis.

In summary, this group of clauses defines key terms needed for the RPDT to work and provides the essential framework for the administration of the tax. The clauses will be supported by guidance to provide further clarity for taxpayers.

Photo of James Murray James Murray Shadow Financial Secretary (Treasury)

As we have heard, clauses 34 to 38 concern the key concepts contained in the RPDT legislation. Clause 34 sets the basic conditions that, when satisfied, mean that a company is to be designated as a residential property developer, potentially within the charge of the RPDT. Subsection (1) defines an RP developer as either a company that undertakes residential property development activities or one that holds

“a substantial interest in a relevant joint venture company.”

The company’s interest in such a joint venture is aggregated with those of other members of the same group to determine whether that is a substantial interest.

Subsection (3) clarifies that a non-profit housing association or organisation is not treated as an RP developer for the purposes of the tax. That is a very important distinction that we support. My colleagues in the shadow housing team pressed the Government on that point during Committee stage of the Building Safety Bill, and I welcome that being reflected in this Bill.

Subsection (4) is a logical extension of subsection (3), determining that wholly owned subsidiary companies of non-profit housing companies are also excluded from being treated as RP developers for the purposes of the tax. It makes sense to exclude non-profit housing associations from RPDT, particularly given that they have already made a much more substantial contribution to cladding remediation than private developers. Research by the National Housing Federation in October 2021 found that private developers and cladding manufacturers had allocated £643 million of future profits to remediate unsafe cladding, while non-profit housing associations have estimated that their remediations will cost in excess of £10 billion.

Subsection (5) allows the Treasury to amend the definition of a non-profit housing company by regulation, and to make any consequential changes to this part of the legislation. As we have heard, that allows the definition to be updated, in line with any changes to the regulatory framework for registered social housing providers. It may be understandable that the Government want to be able to adjust definitions to match any changes in the way that social housing providers operate, as well as to recognise the impact of any changes to the regulatory framework. However, so that we can better understand the Government’s concerns, I would be grateful if the Minister could indicate why it may be necessary to amend the definition of a non-profit housing company.

Clause 35 sets out the criteria and definitions of residential property development activities for the purposes of the tax, as well as setting the territorial scope of the legislation. Subsection (1) brings within scope anything that is done by an RP developer or in connection with land in the United Kingdom for the purposes of the development of a residential property. A developer must have an interest in the land at some point for the activity there to be RP developer activity for the purposes of the tax. Land in that respect is taken to include buildings or structures on a piece of land. The requirement for an interest in land means that profits from similar activities undertaken by companies acting purely as third-party contractors, who are not RP developers, do not come within the charge of the tax.

Clause 36 raises an important question about who the RPDT applies to. Subsection (1) sets out the definition of an interest in land for the purposes of the tax. Broadly, it sets out that, when an RP developer has an interest in land, it must have

“an estate, interest, right or power in or over the land”.

That estate, interest, right or power must form

“part of the RP developer’s, or the related company’s, trading stock”.

Subsection (4) elaborates what “trading stock” refers to and makes clear the importance of an estate, interest, right or power in or over land being disposed of. It is the point about disposal that I would like to probe further. Discussions with Clerks about whether new clause 19 was selectable drew out the fact that the residential property developer tax is aimed at developers that do development work in order to trade property once the work has been done. It seems clear to me that the RPDT would apply in the case of a developer who builds homes and sells their freehold interest once the development is complete, but what happens when the developer retains some sort of interest for a specific period of time, or indefinitely?

First, what about build to rent? We know that the RPDT is not intended to apply to build-to-rent developers. That point was raised during the consultation on the RPDT last year, and I understand that the Treasury confirmed in October 2021 that build-to-rent developers would be excluded. If I understand it correctly, the exclusion is achieved by clause 36(1)(b) and clause 36(4), which specify that the tax will apply only to developers whose “interest in land” is held as “trading stock”, thereby excluding those developers who hold it as a landlord.

Most build-to-rent developments are purpose-built and intended for long-term rent, but some developers could consider retaining for-sale developments as rented units for a specific period of time, and then selling later. That could be the case, for instance, where house prices suddenly drop, but the drop is expected to be short term. If a developer completed a development this autumn, say, they could chose to hold the units as build to rent for 10 years, thereby exceeding the expected lifeline of the RPDT, and then dispose of the units afterwards. Assuming that the RPDT is indeed a 10-year tax, as the Minister indicated, will she confirm that that developer could avoid the RPDT altogether in such developments?

Secondly, what would happen where a developer had built a block of flats and then retained the freehold while granting long leases to the leaseholders of individual flats? In that case, the developer might also retain a long-term interest in managing the building, maintaining the communal areas and so on. Technically, by virtue of the developer’s status as freeholder, it would be a landlord. Would it be subject to the RPDT?

Clause 37 also deals with definitions. It describes the types of properties that will or will not be regarded as “residential property” for the purposes of the RPDT. The clause provides a general definition of residential property and then exclusions for specialised institutions or accommodation that are restricted in how and by whom they will be occupied. It defines a residential property as a building that is being constructed, adapted or is designed specifically for use as a dwelling, which includes land that forms gardens or grounds around the building. The definition also draws in other land over which the building owner has rights or is seeking planning permission. Thereafter, the clause cites a range of exemptions, wherein the function of the residential building removes it from liability to the RPDT.

It would be useful if the Minister could offer greater clarification on a number of the exempted purposes of residential buildings. Does the exemption for “accommodation with personal care” for people requiring care due to old age, disability, substance dependency or mental illness include permanent sheltered accommodation, where care is available but not routinely provided on a permanent basis? Does the exemption for student accommodation extend to privately owned properties that would otherwise be in scope, but which have been adapted to become houses in multiple occupation and are marketed to university students, which would mean, in effect, that they are privately owned student houses rather than purpose-built student accommodation? Clause 37(3) includes the condition that the occupants of student accommodation would reasonably expect to inhabit the property for at least 165 days a year for the purposes of education, but there is a grey area and we would welcome clarity.

We are also conscious of concerns raised by the British Property Federation about exemptions on build-to-rent properties. The federation notes that most models of build-to-rent developments are “outside the scope of RPDT”—as I mentioned—which it supports. However, it argues that build-to-rent developments that benefit from forward funding arrangements and those that are delivered through for-profit affordable housing developers are both within scope, and that having some build-to-rent models in scope and others out of scope creates an uneven playing field. Will the Minister clarify the intention behind the provision?

Clause 38 deals with the meaning of “residential property developer profits or losses”. It sets out the formula used to calculate the RP developer profits or losses that form the base for the purposes of the RPDT for an accounting period. We can see that the starting point is the company’s adjusted trading profits or losses for the accounting period, determined in accordance with clause 39. That amount is updated for any RP developer profits or losses from joint ventures that are attributable to the company, in accordance with clause 40. Certain losses and other reliefs can then be deducted, calculated in accordance with parts 1, 2 and 3 of schedule 7, where available, to give the RP developer profits or losses for the accounting period.

Clause 47 concerns the exit charge on non-profit housing companies. The clause provides for an exit charge when a non-profit housing company ceases to meet the conditions to be exempt from the residential property developer tax. The conditions for exemption are provided for in clause 34. The charge may also apply where a non-profit housing company ceases to be owned by another such company and is acquired by another company under the same control as that other company. The clause is aimed at preventing for-profit entities from benefiting from the exemption. It is an understandable clause to bring forward and it is right that for-profit entities should not benefit from an exemption aimed at non-profit entities.

Clause 48 provides the definition of a group of companies for most purposes of the RPDT, including the allocation of the allowance under clause 43. The meaning of a group for the purposes of RPDT group relief and RPDT group relief for carried-forward losses is separately provided in schedule 7.

Within clause 48, subsection (1) confirms that for the purposes of the RPDT, other than for the rules for group relief in schedule 7, a group means two or more companies that together meet the condition in subsection (2). Subsection (2) provides that the condition is that one of the companies is

“the ultimate parent of each of the other companies, and…is not the ultimate parent of any other company.”

Subsection (3) explains that a company is the ultimate parent of another if its parent and no other company is the parent of both of them. Subsection (4) explains that a company is the parent of another if the other company is its 75% subsidiary or it is entitled to at least 75% of the other company’s distributable profits, or would be entitled to 75% of its assets in a winding-up. For these purposes, the rules relating to corporation tax group relief are used, for example to define equity holders and how beneficial entitlement rules are applied to groups.

Clause 49 and schedule 9 contain a set of miscellaneous provisions. The first of these relates to a rule preventing a company that is liable to pay the RPDT from obtaining any deduction for the tax when calculating any profits or losses for income tax or corporation tax purposes. Similarly, the second paragraph of schedule 9 ignores any payments for RP developer losses of a joint venture company or RP developer group relief when calculating corporation tax, profits or losses, and any such payment will not be treated as a distribution.

Paragraph 3 of schedule 9 applies the arm’s length principle included in the transfer pricing rules in part 4 of the Taxation (International and Other Provisions) Act 2010 to an RP developer’s RP development activities and its other activities. The provisions in that Act are to be interpreted as if the activities were carried on by separate persons under common control.

Finally, paragraph 4 of schedule 9 applies the arm’s length principle included in the transfer pricing rules in part 4 of the 2010 Act to transactions or provisions between companies under common control, where the provision or transaction would be taken into account when computing the RP developer’s profits or losses for only one of those companies.

Clause 50 provides definitions for the legislation that ensure consistency of terminology. Finally, clause 51 provides commencement provisions for the RPDT, which apply to profits arising from 1 April 2022. It also provides an amendment to the usual rules for payment of tax by quarterly instalments, where these would otherwise apply to payments before that date.

To that end, subsections (2) and (3) of clause 50 require pre and post-commencement profits to be time-apportioned where a company’s accounting period straddles the commencement date of 1 April 2022. For a company with a 31 December 2022 year end, if it sells a development pre-commencement in, for example, January 2022, part of the profits will be brought into the charge, whereas the same profits for a company with a 31 March 2022 year end will fall out of scope.

In summary, we will not oppose this group of clauses, but I hope that in her reply the Minister will be able to answer the questions that I have set out. In particular, I would be grateful if she could fully address the questions that I have raised in relation to clause 36: specifically whether RP developers would be liable to the RPDT if they either held the units on a piece of land for 10 years as build-to-rent or if they retained a long-term interest as a freeholder landlord.

Photo of Alison Thewliss Alison Thewliss Shadow SNP Spokesperson (Treasury) 4:00, 5 January 2022

A happy new year to you, Dame Angela, and to all colleagues.

I have just a few queries about these clauses. First, I want to touch on the issues relating to exempting registered social landlords. During the consultation, the Scottish Federation of Housing Associations asked the Government to exempt all non-profit housing providers and wholly owned subsidiary companies. It highlighted the social housing sector’s concerns that developers would look to pass on costs where properties are purchased off the shelf, as it were, rather than housing associations doing it themselves, and it was very pleased that it had that exemption as part of the rules that the Government are introducing. That is very welcome, and I am glad that has been the case.

A “registered social landlord” is defined in clause 34(4)(b), and paragraph (c) refers to the Housing (Scotland) Act 2010. Does the Minister intend to keep in touch with the Scottish Government should there be any further changes to Scottish legislation that might be impacted by the Bill? The definition of a registered social landlord in Scotland is slightly different from that in England. An RSL is not allowed to be for-profit in Scotland, and that is very clear in the legislation. I understand that on the English register there are 1,625 providers of registered social housing, 60 of which are classed as for-profit.

Out of curiosity, has the Minister or her colleagues had any discussions with the for-profit organisations? Looking at some of the names, I think that some of the people they seek to provide housing for appear to be reasonably laudable causes—people we would wish to support—even though it is through for-profit social housing. I am curious about what the impact might be on the sector as a result.

On clause 34(5) and the point made by the hon. Member for Ealing North, it is important that a lot of the measures are going to secondary legislation and we will lose sight of any future changes that the Government make to the definitions of non-profit and any other definitions that they seek to make. How does the Minister intend to report that back to the House in a way that allows Members to ensure that there will be no unintended consequences from things that happen once the Bill leaves Committee?

On the definitions of residential property in clause 37 and the exemptions in subsection (2), I was interested to see that student accommodation is a part of this. In many respects I agree with student accommodation being exempted, particularly accommodation run by universities themselves for no profit. Universities looking not to make a profit but simply to make the accommodation pay for itself are very different from the rapacious student accommodation providers that seek deliberately to make profits from students. Some of the fees that they can charge and the developments that they create are sizeable.

There are huge accommodation providers in Glasgow Central. They have a worthy goal in providing accommodation for students, but students have to pay through the nose for it and they are not quite in the same classes of accommodation. What conversations has the Minister had with student accommodation providers, both those working on a non-profit basis and those working on a commercial basis? It is clear that there are implications from cladding on student accommodation. Unite was mentioned in the press as having in its portfolio 22 high-rise buildings that are affected by cladding. I understand that it is meeting the cost of removing the cladding but, as I say, it is a profitable business in many respects. What more can the Government tell me about their conversations on that?

My other points were covered by the hon. Member for Ealing North, but I have one final point about the preparedness of HMRC to implement the significant and complex new tax. My hon. Friend the Member for Gordon mentioned the complexity. When legislation starts to get into equations, we are talking about something that is quite complicated, especially when we look at the detail in the clauses and the schedules that follow them. What preparations is HMRC meant to be making for this? HMRC has had a busy couple of years, given all the things it has had to do as a result of coronavirus. A lot of that was done at pace, with other stuff put to the side, and I wonder whether this might be one thing that was put to the side while HMRC dealt with coronavirus.

It is clear from some of the press coverage of the coronavirus schemes that HMRC did not have the staff to check up on where the money was going, and that it has been trying to claw back some of that money without the staff complement to do that properly and fully. I would like to know from the Minister the size of the team that has been working on this and what more needs to be done to ensure that this goes smoothly in April 2022.

Photo of Lucy Frazer Lucy Frazer The Financial Secretary to the Treasury 4:15, 5 January 2022

There are quite a lot of points to address. I will deal with those that are easy to deal with orally, and I will get back to the hon. Member for Ealing North in writing on some of the more detailed points he raised. I am very grateful to him and to the hon. Member for Glasgow Central for welcoming our decision on affordable housing and the not-for-profit sector. We had obviously thought about that very carefully. I think it is the right decision, and I am pleased that it has cross-party support. I welcome, as does the hon. Member for Ealing North, the work that has already been done to reduce cladding by that sector.

The hon. Member for Ealing North asked why we will not extend the definition beyond that to not-for-profit providers. It is because this measure relates to a charge when people have made a significant profit of more than £25 million. He also asked why we need flexibility to come back, by way of regulation, and change the definitions. The definitions are based on legislation from the devolved Administrations, and if those definitions change, we need the flexibility to change them here as well.

The hon. Gentleman also asked about different scenarios for disposals of land. He will know that, when coming up with this policy, we thought carefully about what should and should not fall within it, and what was right to fall within it. We excluded build-to-rent because it is a very different sector in which profits are earned in a different manner at a different time. It was not comparable to the build-to-sell sector. He posited a number of scenarios in which commercial entities might change their activities in order not to pay this charge over the period of time but may ultimately sell properties in due course. We of course considered the possibility that people might change arrangements in order not to pay the tax, but we took the view, having discussed the issue, that significant change in commercial behaviour or business models in order simply to avoid the tax would be unlikely. I will get back to him on some of his specific points.

The hon. Gentleman also made a point about student accommodation, which I will answer from a broad perspective. Those who build properties and are able to pay the levy, because they have an income of more than £25 million, are subject to the tax. It is on house sales of a particular kind, where the purpose of the sale is essentially a sale of a property but it so happens that some other services are provided at the same time. It is essentially competing with the build-to-sell sector, which is why it is included in the legislation.

The hon. Member for Glasgow Central asked whether we would keep in touch with the Scottish Government, which we of course will and are very happy to. She asked what happens when people provide good services, for example in the affordable housing sector, but are profit making. I want to reiterate that the levy will catch significant property developers earning in excess of £25 million—it is that type of company that will be caught by the levy. We will of course keep everything under review, and the same point relates to the point that the hon. Member for Glasgow Central made about student accommodation. This is about big providers that are selling property to individuals, rather than renting the accommodation in short order.

I am really pleased that the hon. Member for Glasgow Central recognised the successful work that HMRC has done over the course of the pandemic in pretty short order. The furlough scheme and all the grants have largely been administered by HMRC, and it has done a tremendous job, delivering at pace. She is right to point out that HMRC has been stretched at times and that there is a significant amount of work coming its way in due course with the social care levy, but I want to reassure her that it is fully aware that this legislation is coming down the path and that it will be ready to deliver. For those reasons, I commend the clauses to the Committee.

Question put and agreed to.

Clause 34 accordingly ordered to stand part of the Bill.

Clauses 35 to 38 ordered to stand part of the Bill.

Photo of Angela Eagle Angela Eagle Labour, Wallasey

The decisions on clauses 47 to 49, schedule 9 and clauses 50 and 51 will be dealt with later in our proceedings.