Clause 34 - Meaning of “residential property developer”

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

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Photo of James Murray James Murray Shadow Financial Secretary (Treasury) 3:45, 5 January 2022

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.