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LGA submission to the HM Treasury consultation on a Residential Property Developer Tax

The Government is consulting on the policy design for a new tax that is proposed for the UK residential property development sector. The residential property developer tax (RPDT) will be introduced in 2022 and seek to raise at least £2 billion over a decade.

1. About the Local Government Association (LGA)

  • 1.1 The Local Government Association (LGA) is the national voice of local government. We are a politically-led, cross party membership organisation, representing councils from England and Wales.
  • 1.2 Our role is to support, promote and improve local government, and raise national awareness of the work of councils. Our ultimate ambition is to support councils to deliver local solutions to national problems.

2. General comments

  • 2.1 The Government is consulting on the policy design for a new tax that is proposed for the UK residential property development sector. The residential property developer tax (RPDT) will be introduced in 2022 and seek to raise at least £2 billion over a decade. The purpose of this tax is to help fund the remediation of buildings that have dangerous cladding systems.  The tax is intended to ensure that the largest property developers make a fair contribution to the remediation programme, reflecting the benefit they will derive from restoring confidence to the UK housing market. We welcome the opportunity to respond to this consultation. Rather than responding to every question in the consultation, our response focuses primarily on concerns about the potential impact of the tax on affordable housing delivery.
  • 2.2 In particular, we would like to see an additional ‘core principle’ inform the final design of this tax. This should be that the new tax will not lead to a reduction in the delivery of affordable homes (both to rent and to buy). We would also like reassurance that the new tax will not lead to a reduction in the quality, sustainability standards or overall size of new dwellings as developers seek to reduce the overall cost of development, and/or an increase in house prices, in order to maintain profit margins.  This could be achieved by designing the tax in such a way that would allow developers to factor the increased tax burden into the price they are willing to pay for new sites - for example by deferring the start date for the tax and/or a mechanism to exclude development projects which have commenced or have received planning permission before the legislation is introduced. On the latter, this would avoid a potential rush of applications seeking to re-negotiate previously agreed affordable housing contributions on viability grounds. As a broader point, our view is that what is really needed, rather than a new tax, is an effective means of holding to account and punishing those responsible for putting residents in danger in the first place.
  • 2.3 Alongside the consultation on the residential property developer tax, the Government will also consult separately on a new ‘Gateway 2’ developer levy. This will be payable when developments pass through Gateway Two of the new Building Safety System (GW2). GW2 will not exist until the Building Safety Bill becomes law and will only apply to ‘high risk’ residential buildings (currently defined as those over 18m). GW2 is the beginning of construction. The LGA has raised concerns that the announcement about the GW2 levy will encourage developers to seek planning permissions as soon as possible and seek to technically commence construction before the levy can be introduced. This would be unfortunate, given that the purpose of GW2 is to ensure buildings are built safely.
  • 2.4 The Government has not yet set a rate for the property developer tax. This makes it very difficult to understand the immediate impact on the residential property sector, including on both overall supply of housing and build out rates, but also critically the delivery of affordable housing. However, evidence already suggests that the proposals as currently outlined will have a detrimental impact on the provision of affordable housing, for example by some housing associations and in the build to rent (BTR) sector. This is a real concern to councils, who want to see the delivery of affordable housing – to rent and to buy- to meet the needs of local residents who cannot afford to rent or buy on the open market. With an excess of one million households on council waiting lists and more than 95,000 households in temporary accommodation, there is a need to significantly scale-up, not scale-down, affordable housing delivery.
  • 2.5 A Government policy that could have the unintended consequence of reducing affordable housing delivery would also be at odds with other Government priorities to increase the revenue under the current system of developer contributions (including for affordable housing) as proposed in the Government’s Planning for the Future White Paper.
  • 2.6 Whilst again we are yet to see the detail, we have concerns that the proposed Gateway 2 Levy could, when combined with the RPDT, exacerbate further the impact on the provision of affordable housing, as well as overall housing supply and build out rates. An unintended consequence of reducing the viability of higher density developments could be that fewer planning applications come forward for taller buildings than would otherwise, resulting in a stifling of new housing supply, particularly in urban settings.
  • 2.7 The consultation rightly seeks to understand how developers are likely to respond to the tax in terms of adjustments to development plans, build out strategies or land acquisition strategies. Before introducing the tax through legislation, the Government should publish the proposed rate along with the final design and give sufficient time to stakeholders to properly assess and feedback on the impact.
  • 2.8 For reasons of transparency the Government should also, as part of its response to the consultation responses, publish a detailed summary of the likely behavioural responses from developers. If the evidence shows that the introduction of such a tax is likely to impact on housing delivery and build out rates, we would urge the Government to suspend the ‘presumption in favour’ sanctions in relation to five-year housing land supply and the Housing Delivery Test for the duration of the time that the tax is in place.  A slow down in delivery and/or build out rates could put councils and their communities at risk of being subject to the national presumption in favour penalty because they cannot meet national Housing Delivery Test requirements and/or their 5-year housing land supply is compromised, for example, if anticipated delivery rates fall on ‘deliverable’ sites. This leaves them exposed to speculative planning applications for development outside of the Local Plan. This could potentially result in homes that do not meet local needs, in places where they are not needed and undermine community trust in the planning system.
  • 2.9 Many local authorities are also now directly engaged in delivering housing, with a 2019 RTPI report showed that this figure was around 69 per cent. Whilst, the consultation is clear that charities will not pay RPDT on profits which would be exempt from corporation tax, there is no indication that local authorities, which are currently exempt from corporation tax, will not have to pay the tax. We would want to see confirmation that local authorities, including local authority housing companies, would also be exempt. Whilst most local authority housing companies are likely to fall under the £25 million threshold for this tax, there is a risk that over time more may be caught by this tax as they scale up development of both affordable housing but also homes for market sale which can help to cross-subsidise affordable housing.