Taxes for towers - righting the wrongs of the past?

Hogan Lovells

Hogan Lovells

Last week, Robert Jenrick, the housing minister, announced a new industry wide levy and tax to "contribute to righting the wrongs of the past". Rightly or wrongly, the development industry is being singled out to foot part of the bill for the £3.5 billion of extra grant funding designed to solve the current building safety and cladding crisis precipitated by the Grenfell Tower fire in 2017 – referred to by some as the "hidden housing scandal".

Following the announcement of a new industry wide levy and tax, the following proposals are in the pipeline:

A residential development tax to be introduced from 2022 designed to raise at least £2 billion over 10 years and to be levied on the largest residential developers; and       

The "Gateway 2 developer levy" which is to be paid when developers seek permission to develop certain high rise buildings in England.

The detail remains a mystery with no indication as yet as to how the taxes are to apply or what rules will determine which developers are to shoulder the burden; all we know is that the government will consult on the design of both tax schemes "in due course".

Whilst the government has clearly determined that leaseholders should not be required to shoulder the burden of cladding replacement costs through service charges, it is notable that the government has set its sights on developers rather than on contractors responsible for the original construction of problem buildings.  There will clearly be concern that the new proposals may stifle investment in new schemes and/or result in higher rents or prices for houses.  There is a real risk that at least some developers will pass the cost of the tax onto occupiers. 

According to data collated by the Construction Index, the top 200 UK housing developers made (collectively) profits of £4.6 billion in 2019 and £5.8 billion in 2018. Assuming the tax burden were to fall exclusively on the top 200 UK house builders therefore (which is thought highly unlikely), and assuming further that profits remain at similar levels, the £200 million yearly tax charge would amount to a 4% annual levy on profits. Whether the tax charge, coupled with the developer levy, will disincentivise the largest developers from constructing the tallest towers in high population density areas where there is greatest demand for more housing stock, remains to be seen. Changes in working locations and patterns, as well as in preference for certain types of housing, resulting from the COVID-19 pandemic will clearly also have an effect on the popularity of high rise developments.

Everyone agrees that these are costs which should not be borne by leaseholders, there are some questions around the message given by this blanket approach. Not all developers will have buildings needing to rely on the scheme, and indeed many may have already taken steps to  remedy the position on their own buildings. Recovery based on depths of pockets, instead of how much – or indeed whether - someone has contributed to the problem, doesn’t seem to incentivise exemplary behaviour going forward.

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