Residential Property Developer Tax – Now in force

The Residential Property Developer Tax (RPDT) has been in effect since 1 April 2022 with the goal of getting residential property developers to pay additional tax to fund the cost of remediating cladding issues which is 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. Taxpayers need to ensure they remain compliant, especially if they have transactions or joint projects on the horizon.
 

Who is affected by the RPDT?

Despite being called the ‘Residential Property Developer Tax’, the reality is that businesses that do not own ‘residential’ property or undertake any development can fall within the scope of RPDT. 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 RPDT rules.
 

Understanding the £25m allowance

The RPDT was designed to target only the largest developers. To achieve this, it applies only where profits, determined under RPDT principles, are more than £25m. However, there are a number of ways in which the allowance can, in practice, be lower. For example:

  • The allowance is reduced proportionately where a property-owning company (PropCo) is owned by a tax-exempt entity. If a PropCo is 90% owned by a tax-exempt entity, then the allowance of PropCo becomes £2.5m
  • The allowance is, by default, equally spread across UK group companies, regardless of whether such entities are within the scope of RPDT. Unless you make RPDT filings to HMRC to allocate the allowance across your group, the allowance can be wasted
  • In joint venture scenarios, shareholders will have to agree which entity benefits from the allowance
  • Exposure to RPDT is determined after excluding a number of costs which would normally be deductible for tax purposes. For example, interest costs are non-deductible for RPDT purposes. Economic losses can arise on which tax will be due.
 

RPDT implications for joint ventures

Small commercial changes can result in big RPDT differences for joint ventures, with a number of unusual complications. 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.

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.

 

Compliance and Deadlines for RPDT

Businesses should already understand their exposure RPDT. However, maintain effective compliance is critical. Key points to consider:

  • RPDT is payable alongside corporation tax and is due under the quarterly instalment payment regime or the quarterly instalment payment regime for very large companies
  • HMRC charges interest on overdue payments of RPDT
 

How we can help you with RPDT

The scope of RPDT and the application of the £25m allowance are not straightforward. If your business is involved in residential property transactions, you should review your tax position regularly.

If you have any questions about RPDT, its scope or your ongoing compliance, please get in touch with Andrew Crossman.