Residential Property Developer Tax – HMRC guidance published

The Residential Property Developer Tax (RPDT) is a new tax on profits earned by corporates from the development for sale of residential property. Introduced by Finance Act 2022, HMRC guidance supporting the legislation was published at the end of March and is expected to evolve as the tax is implemented by business. While introduced as part of a package of measures in response to the Grenfell tragedy, it is not confined to those businesses whose developments have encountered cladding issues. At a rate of 4 percent on a measure of profits arising across a group in excess of £25 million, it is expected that only a small number of businesses will pay RPDT. The tax applies to profits arising after 1 April 2022. However, the basis of calculation, while derived from corporation tax, is different, and so the sector should consider carefully whether they have any obligations under this new legislation.

Our previous Tax Matters Digest articles ‘4 percent Residential Property Developer Tax confirmed’ and ‘Residential Property Developer Tax – draft legislation issued’ have outlined RPDT. While implemented largely in line with its initial drafting, HMRC guidance supporting the legislation has only recently been published.

What’s new?

Introduced by Finance Act 2022, HMRC guidance supporting the legislation was published at the end of March. While drafted following open and constructive discussions with industry and the finance profession, this guidance is expected to evolve as taxpayers deal with RPDT’s implementation.

Some potential judgement areas

As with any new legislation, the guidance cannot answer every question. Some areas that we are working on with clients include:

Financing costs – the tax base of RPDT is profit as calculated for corporation tax purposes, but critically, no relief for finance costs is allowed, nor is any offset for losses derived from other activities;
Allocation of costs and income – a transfer pricing style approach should be applied to ensure that the correct amount of profit is taxed;
Ancillary receipts – the application of the tax to such profits as land promotes and event fees, need careful attention. HMRC’s guidance provides much useful clarification, but does not cover every eventuality; and
Corporate joint ventures (JVs) – share JVs, particularly involving exempt organisations, will require a case-by-case review.

Priority actions

Businesses in the sector will be keen to remain compliant. Areas of focus may include the following:

Understanding scope of RPDT – there will be a range of affected taxpayers – those for whom all profits will be subject to RPDT, and those for whom only aspects of their profits will be taxable. It’s possible that the treatment of some sources will not be immediately clear. Engagement with HMRC is vital to secure clarification concerning areas of ambiguity;
Updating forecasts – modelling the impact of this additional tax, on top of the April 2023 increase of corporation tax, will be essential in cash flow planning and managing the expectations of stakeholders;
Payments on account – collected alongside corporation tax, the first payment of RPDT was potentially due on 14 April. The rules require HMRC to be notified of payment;
Tax accounting – early engagement with your auditor may be necessary; and
Measurement of deferred tax under RPDT could be complex – for example, should a given tax asset carried forward be measured at 29 percent (because it is RPDT effective) or should the base rate of 25 percent be used.

What’s next?

HMRC have been clear that their guidance may be revised as further consultations with business take place, but inevitably, the window for doing so will be short. Please speak to your usual KPMG in the UK contact if you have any questions on how RPDT will impact your business.

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