October 2021 Budget - impact on viability testing of local plans

date Released On 15th Nov 2021


In the October Budget and associated papers the government announced a number of measures which will impact on construction costs and developers profit margins.  How will these proposals affect negotiations between developers and local authorities and how should they be taken account of in local plan and scheme specific viability appraisal?

Proposals include:-

  • Residential Property Developer Tax effective from April 2022
  • Building Safety Levy effective from 2023
  • Changes to Domestic Building Standards from June 2022

Residential Property Developer Tax

On 27 October the Government published its response to consultation on the proposed  Residential Property Developer Tax (RPDT). This provides detail on how RPDT will operate.

  • Rate: The rate of the RPDT will be set at 4%. In its consultation response the government stated that  the impact of the tax on housing supply will be marginal, and the impact on rents or house prices negligible, given that developers are generally price takers.
  • Tax base and allowance: this is a profits-based tax. In essence it will be a Corporation Tax (CT) surcharge, with certain adjustments to CT profits. Government intends to maintain the group-wide annual allowance of £25 million, which will exempt £25 million of RPDT profits per year and ensure that groups with RPDT profits below this amount remain out of scope of the tax. The allowance will apply to profits after any carried forward RPDT losses have been deducted. In line with most other taxes, the allowance will be annual, and it will not be possible to carry back or carry forward any unused allowance.
  • Commencement date: the commencement date will be 1 April 2022.
  • Duration of the tax: it should be time limited and will be repealed once sufficient revenue has been raised. However there is no specified date for repeal.
  • Definition of “in-scope residential property development”; the RPDT will be applied to the trading profits from in-scope residential property development activity (RPD activities).

The legislation gives a wide definition of RPD activities that are carried out by the developer on, or in connection with, land in the UK in which the developer or a member of the developer’s group has an interest. This includes activities that are typically carried out during the development process such as designing, constructing, adapting, marketing, managing or dealing in residential property.

The developer must have an interest in the land at some point for the activity to amount to RPD activities. This includes circumstances where a developer has a beneficial interest in the land, and that interest is held as stock for its trade.

The definition will cover:

  • buildings designed or adapted for use as a dwelling
  • land that is intended for development where planning permission is being sought or has been granted for residential property development 
  • land upon which residential property is being constructed.

It is irrelevant for the purposes of the definition of residential property whether the land has multiple planning permissions so long as one is residential. Any land that is intended to be provided along with a residential property, or general amenity land developed alongside the residential property, falls within the definition of residential property for the purposes of the tax. In response to respondents’ concerns, the government has removed reference to undeveloped land where a residential property “would be” constructed.

Build to rent: the Government will not tax profits from build to rent, at least for the time being. This is believed to be because profits from build to rent come over time and are not available for taxation at the point when the development is completed, potentially making this a “dry tax” where there is a tax liability but no cash to pay it.

Administration: the tax will be treated as an extension of CT, rather than as a separate tax with its own collection and payment criteria.

Transitional arrangements: the existing CT quarterly instalment payment rules may result in some companies having RPDT due before the legislation is finalised. The government will therefore introduce transitional arrangements which provide that the first RPDT payment is due in the first quarterly instalment payment after commencement of the tax on 1 April.

Implications for viability: RPDT is a variation to Corporation Tax and it applies to companywide operating profit, not to scheme specific returns.  Corporation Tax is not taken into account when testing viability so it is Three Dragons opinion that the introduction of RPDT  should also not be taken in to account.

The Building Safety Levy

However Government has also consulted on plans for a scheme specific cladding tax, the Building Safety Levy, which will be applied to all residential development and care homes of 18 metres or 7 storeys and over with the possible exceptions of affordable housing and some low value developments and will come in to effect in 2023.  No rate has yet been set for the Building Safety Levy but the consultation acknowledges that it will interact with affordable housing requirements and payments towards local infrastructure provision.  The Building Safety Levy will therefore have to be taken into account in local plan and scheme specific viability appraisal and could have the effect of reducing affordable housing supply and CIL and S106 payments.

The Building Safety Levy is being taken forward within the Building Safety Bill.

Domestic building standards

 In 2019, the Government announced the introduction of a Future Homes Standard for England by 2025. The standard will ensure that new-build homes are future-proofed with low-carbon heating and high levels of energy efficiency. It is expected that homes built to this standard will produce no operational carbon dioxide (once the supply has been decarbonised), with 75% to 80% lower emissions than those built to current Building Regulations standards.

As a stepping-stone to the Future Homes Standard, government announced plans in the Heat and Buildings Strategy to introduce an interim uplift in standards for England, effective from June 2022, that would result in a 31% reduction in carbon emissions from new homes compared to current standards. This would appear to be Option 2 of the options appraised in the 2019 Impact Assessment which quoted likely costs of £2,260 for a flat and  £3,130 for a house (see para 2.4 of the impact assessment).  Three Dragons would expect these costs to be taken in to account when carrying out a local plan or scheme specific viability appraisal.

Other measures are also proposed  including a transition to using heat pumps rather than gas boilers in new homes from 2025, but no costings are currently available for what this will mean for build costs so we do not include this item in viability appraisals at present.

For more information contact kathleen.dunmore@three-dragons.co.uk

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