UK residential property developers might have to contend with a new tax next spring following the closure of a government consultation.
Plans are afoot to introduce a new residential property developers' tax from 1 April 2022, which would apply to developers' profits.
The proceeds would fund remediation works to remove unsafe cladding from high-rise buildings, following the tragic fire at Grenfell Tower in 2017.
Originally, the onus was on homeowners and developers to fund the costs of replacing the cladding without passing on costs to leaseholders.
The new tax should raise around £2 billion over the next 10 years, which the Government considers to be a "fair contribution" from developers.
Who might it affect?
The new tax would apply to the UK's largest residential property developers, typically companies and groups with annual profits of £25 million or above.
The Government said the new levy will have a time limit, although it stopped short of specifying how long that would be.
In response, the Chartered Institute of Taxation (CIOT) expressed concern for residential property developers in the build-to-rent sector.
Marc Selby, chair of property taxes committee at the CIOT, said:
"Developers in the build-to-rent sector will be exposed to ‘dry' tax charges on profits deemed to arise following completion of build-to-rent developments if this proposal for the new tax is implemented."
‘Dry' tax charges are when a tax liability arises, but there is no cash generated to meet that charge.
What classes as residential property?
The consultation set out that this proposal will apply to "a house or flat that is considered as a single residence, generally together with the grounds and garden or any other land intended for the benefit of the dwelling".
Residential buildings being constructed on undeveloped sites, or sites with planning consent to construct such buildings on these sites, could also potentially be within the scope of the cladding tax.
Further guidance from HMRC outlining what does and does not fall within scope of the residential property developers' tax will be required fairly soon to offer clarity for all companies and groups involved.
Is there enough time?
If the proposal gets the go-ahead, HMRC would face a race against time to issue guidance. Software providers would also be under similar pressure to update corporation tax software.
"The timescale for developing this wholly new tax ready for April 2022 is very short," added Selby. "For both the sector to adjust and for HMRC to implement this successfully."
"Ideally, this process should extend over a longer period to ensure effective implementation and readiness among companies.
"The limited timescale for development underlines the practical need to align this ‘cladding tax' to existing legislation and corporation tax systems as far as possible."
In its response to the consultation, the CIOT suggested an alternative to the new tax in the form of a super-profits corporation tax charge.
This could apply solely to entities with residential development profits in scope of corporation tax, rather than implementing a new tax altogether.
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