David Hannah, Principal Consultant at Cornerstone, helps housebuilders and developers 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 an overall lack of clarity, developers and housebuilders alike must pay greater attention to their tax affairs than ever before to ensure that they are not double – or even triple – paying unnecessarily.
Tax implications – and perhaps more commonly tax complications – can be an insurmountable barrier when it comes to delivering much needed housing across the UK. While government is increasingly calling ‘to get homes built’, they are arguably over-simplifying the process and failing to take into account the difficulties that are inevitably met along the way.
A common misconception, which is 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 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 all too frequently incurred unnecessarily, but are easily eliminated if the right structure is in place.
In all 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 neglected entirely. In an ideal world, and where a tax advisor can add tangible value, the financing should be considered alongside the tax legislation and the two should operate in tandem.
A particular example that I witnessed, which throws the consequences of a lack of due diligence into sharp relief, is on a recent site acquisition, in which three separate charges of SDLT had been applied and paid, when there should only ever have been one.
If a development finance partner takes on the freehold of a site and pays £2 million to acquire it, while the developer takes a lease to obtain site access, the developer with 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 cash flow within a deal – although this is happening all too frequently and 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 sees borrowers 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.
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 all together, 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 ongoing.