The new Housing White Paper declares that the UK must build more homes – and faster; but what does this mean for housebuilders and developers as they navigate the tax landscape?
As one of the greatest hurdles that a developer must overcome, tax is a primary inhibitor for the smooth operation of the UK housing market. Shrouded in common misconceptions and a lack of clarity, developers and housebuilders must pay greater attention to their tax affairs to ensure that they are not paying out unnecessarily.
Tax implications – and perhaps more commonly tax complications – can be an insurmountable barrier when it comes to delivering much needed housing. While the government increasingly calls builders ‘to get homes built’, they are over-simplifying the process and failing to take into account the difficulties that are met along the way.
A common area of confusion, particularly prevalent amongst developers, is whether the commercial rate of tax should be applied when development land is purchased with planning permission. From a legal perspective, several tax structures are available, but in many cases that is less than clear.
The tax landscape evolves at a rapid pace, so developers must stay abreast of changes.
The devil is in the detail and it is vital to pay rigorous attention to the intricacies of the transaction – as well as the finance structuring – to optimise the outcome and to mitigate against overpayment. In my experience, tax charges are frequently incurred unnecessarily, but are easily eliminated if the right structure is in place.
In too many instances, developers are consumed with getting a deal to the finish line, which is where the financing of the deal can often be overlooked and, in some cases, is entirely neglected. In an ideal world – and this is where a tax advisor can add tangible value – the financing should be considered alongside the tax legislation and the two should operate in tandem.
WHO PAYS WHAT?
A particular example that I witnessed throws the consequences of a lack of due diligence into sharp relief, was on a recent site acquisition, in which three separate charges of SDLT had been applied and paid, when there should only have been one.
If a development finance partner takes on the freehold of a site and pays £2million to acquire it, while the developer takes a lease to obtain site access, the developer will be responsible for paying an astronomical SDLT rate.
To negotiate the system with complete clarity, the developer must remember that they are only borrowing the site – it is a temporary lease – they aren’t purchasing it, therefore the developer is not responsible for paying the Stamp Duty as a cost attributed to the joint venture finance investment.
Tax should never be paid on the finance cashflow within a deal – though this is happening frequently – to all scales of developer. It is a result of lack of investment in the structure of the deal – rather than being down to the structure of the investment, which often means borrowers are effectively paying SDLT twice.
Perhaps most worryingly, this current climate is proving to be a barrier to the completion of new deals, ultimately having a negative impact on the volume of housing stock and end user prices. In recent years, this has been further exacerbated by the lack of traditional lending that is made available.
As an overriding impediment throughout the entire process, from site acquisition and in joint venture partnerships, as well as for the UK housebuilding industry as a whole, tax can be a conundrum for the most seasoned operators. From national housebuilders planning to regenerate 100 hectares of brownfield land, or a local developer committed to building homes for local people, the burden of property tax is often a major factor that will dictate whether a scheme will go ahead or not.
Although tax consequences hinge on facts, defining the desired tax outcomes at the outset can be helpful when structuring financial affairs and working towards that specific outcome.
While we cannot remove tax altogether, we can ensure that by paying the correct amount – which is so often an elusive outcome for many developers – we are minimising a significant roadblock, and ensuring that more homes are being built across the UK.
Of course, the tax landscape evolves at a frightening pace and it is critical that developers remain abreast of any changes that are made and implemented. Only by ensuring that they get advice from relevant experts can they stay apace of the latest changes, and ensure that the efficiency of their projects is maximised.