This consultation is on the second “tax measure” announced by the Treasury (“HMT”) in the March Budget – a new Gateway 2 Levy on high rise residential developments during the pre-construction stage. This is part of a package of measures intended to help pay for the remediation of certain buildings impacted by the cladding crisis, following the Grenfell Tower tragedy (the “Building Safety Levy”).
The first “tax measure” – a new Residential Property Developers Tax (the “RPDT”) – has already been consulted on formally and informal industry discussions with HM Revenue and Customs (“HMRC”) and HMT are continuing. This consultation is seeking thoughts on the design and impact of the new Building Safety Levy and its interaction with the RPDT, particularly on the impact on regeneration and housing supply.
While this consultation is being led by the Ministry for Housing, Communities and Local Government (“MHCLG”) not HMT, which is the case with the RPDT, helpfully, it does look like they are liaising. The consultation is a good opportunity for those potentially impacted by the Building Safety Levy to help mould the eventual charge.
- How long is there to respond?
- What is the Building Safety Levy?
- Are all high-rise buildings caught?
- What about the interaction with the RPDT?
- Interaction with the new Infrastructure Levy
- When would the Building Safety Levy come into effect?
- What is the proposed rate of the Building Safety Levy?
- Who would have to pay the Building Safety Levy?
- Other matters
- What does it all mean for real estate generally?
- Some reactions so far
- What next?
1. How long is there to respond?
The consultation was published on 21 July 2021 and formally closes on 15 October 2021. MHCLG has specifically stated that it would be interested in engaging with those interested DURING the consultation period.
More urgently, the consultation paper also expressly seeks industry views on the interaction of the Levy and the RPDT “as soon as possible”, so it is suggested that while the RPDT consultation is still fresh in mind, those potentially impacted should respond to this consultation paper now too, rather than waiting until the October deadline.
2. What is the Building Safety Levy?
The new Building Safety Levy (also sometimes referred to as the “Gateway 2 Levy”) is part of a new building safety regime set out in the Building Safety Bill (the “Bill”), (introduced to Parliament on 5 July 2021) to provide more stringent regulatory requirements regarding the design and construction of new residential buildings which are 18 metres or more in height or at least seven storeys tall.
The Bill contains a new “gateway” regime to ensure that building safety risks are considered at each stage of a building’s planning and design, construction, and pre-occupation. Gateway 1 covers the planning stage of a building, Gateway 2 is when the Building Safety Regulator must be satisfied that a building’s design meets the functional requirements of the Building Regulations, and Gateway 3 begins when construction of the building is completed, and the building control body assesses whether the work has been carried out in accordance with the Building Regulations.
The Building Safety Levy will be payable by developers of these buildings in England (unless excluded) during the pre-construction stage at Gateway 2. If not paid, construction would generally not be permitted to start (but see more on this below). The Building Safety Levy will be in addition to the usual fees payable to the Building Safety Regulator to cover their operating costs.
Importantly, while the Government’s aim is for the residential development sector to take “collective responsibility” and to make a “fair contribution” to building safety and unsafe cladding removal, there is no indication in the consultation paper that the Government is against high-rise buildings. On the contrary, it specifically states that the Building Safety Levy and the separate £5.1bn Government commitment for grants to leaseholders is specifically intended to help to secure a continued market for high-rise residential buildings.
3. Are all high-rise buildings caught?
No, the Building Safety Levy will apply only to “residential” buildings which are 18 metres or more in height or at least seven storeys tall. This definition will include:
- high-rise buildings which contain at least two residential units (meaning any unit of living accommodation);
- high-rise care homes or hospitals – this means that the definition could potentially apply to what is otherwise commercial or mixed-use property;
- office to residential conversions (although the consultation paper does not specify whether this includes such conversions under permitted development rights, as opposed to conversions requiring planning consent, so it seems to be looking at potential future use rather than just current use); and
- student accommodation (e.g. in the form of cluster flats), although there is little detail on this in the paper so we shall have to wait and see. The definition may or may not be aligned with the RPDT.
The definition may or may not be aligned with the RPDT.
It seems that refurbishments would not be caught, so not to deter improvements of existing residential buildings. Importantly, all affordable housing and hospitals – while within the definition – will also be excluded from the charge (on which see further below). There is, however, no express mention of any exclusion of care-homes in the consultation paper. Hopefully though, C2 use (residential with care), at least, would be excluded. The definition, whilst still in draft, merits some consideration as to what else could be or is likely not to be in scope. Notably, the charge does not sit alone, but is just part of the wider building safety measures which may still apply.
Though the consultation paper does not contain any detailed discussion on exclusions for anything else, it appears that there will be powers to exclude certain developments or developers from the Building Safety Levy, so this will be where much interest will lie for those responding. There is no detail as yet as to the basis or policy by which these further exclusions would be determined.
4. What about the interaction with the RPDT?
The consultation paper, while focussing on the Building Safety Levy, expressly refers to the RPDT. It states that these two charges are targeting different things and that some developers may pay both, while others may pay only one of them (i.e. either the Building Safety Levy or the RPDT). While it notes that some developers have had limited involvement in the creation of historical building safety defects requiring remediation and that some have taken independent steps to cover the costs of remediation where applicable, there is a reiteration of the need for help from the largest developers and a statement that the new Building Safety Levy recognises that Government funding of removal of cladding helps to secure a continued market for the developments levied. We will have to see how this pans out. Potential double or even triple counting here will certainly be a concern for some.
Importantly, the consultation paper implies that the consultation on the RPDT has not closed despite the Government originally indicating comments were only welcome until 22 July 2021 – expressly asking, again, for industry views on the interaction of the two taxes – and to have this “as soon as possible”. So, this must be an immediate action.
5. Interaction with the new Infrastructure Levy
There is also some helpful discussion in the consultation paper on the interaction of the new Building Safety Levy for high-rise residential buildings with the proposed new Infrastructure Levy, which is intended to replace the current Community Infrastructure Levy (CIL) and all or some obligations currently contained within the scope of s.106 of the Town and Country Planning Act 1990, as part of the proposed reform of developer contributions to support provision of infrastructure for new homes (set out in the Planning for the Future White Paper in August 2020).
The new Infrastructure Levy would have a value-based minimum threshold, reflecting average build costs per square metre, and only be chargeable on the proportion of value above that, to prevent low viability development becoming unviable. Also, it would be charged on the final value of a development (or on an assessment of the sales value where the development is not sold) and be levied at the point of occupation (does this sound rather familiar?).
The two new levies are, however, again, aimed at different things, with the consultation paper saying that, when setting individual levy rates, they will take account of the cumulative impact of both, along with other prospective costs on the sector on development viability.
The Building Safety Levy would come in first though, due to the need for its contribution towards remediation of historical cladding defects.
6. When would the Building Safety Levy come into effect?
Assuming the Housing Safety Bill is passed as anticipated, the Building Safety Levy will come into effect in 2023.
7. What is the proposed rate of the Building Safety Levy?
Unlike the RPDT, this is not seeking to raise a target sum over a finite period. The rate will be fixed by regulations and can be varied over time. Two options have been proposed so far:
- a charge per square metre of the entire internal floor area, subject to certain exclusions; or
- a fee per residential unit in scope of the Levy (the choice here may vary here from one business to another, but this option does look simpler).
The timing of the Building Safety Levy, at Gateway 2, will also be relevant.
Consideration is furthermore being given to different rates to reflect property value disparities (for example in different locations) and to reflect timing of payments and its interaction with enforcement (if, for example, a schedule of payments is agreed).
Overall, it is recognised, however, that the Building Safety Levy needs to be transparent and simple to operate.
As mentioned above, there could be exclusions from the charge for certain types of developments or developers. Though, clearly, exclusions would reduce the amount able to be raised as a result and may impact on the charge itself, we are likely to see lobbying here as to what and who should come out of scope and how this would operate and where.
Helpfully, affordable housing would be excluded entirely from this Levy but may be incorporated into the proposed new Infrastructure Levy. The definition of affordable housing in the National Planning Policy Framework is proposed to be used here, defining it as “housing for sale or rent, for those whose needs are not met by the market (including housing that provides a subsidised route to home ownership and/ or is for essential local workers)”. This would include affordable for rent that is at least 20% below local market rents, discounted market sales housing that is sold at a discount of at least 20% below local market value and other affordable routes to homes ownership (eg shared ownership, relevant equity loans, low-cost homes and rent to buy).
9. Who would have to pay the Building Safety Levy?
This is key and still is not as clear as it could be. It is proposed that any person or organisation for whom a construction project is carried out including as part of their business (the “Client”) should pay the tax. This could be the principal designer or principal contractor. It would appear that a property owner could be caught, but this is not expressly stated, other that by being encompassed in the definition.
While a sanction to non-payment would be to prevent construction, the consultation paper does recognise that there may need to be some sort of payment-by- instalment process to assist smaller businesses within scope. However, to ensure that this could not be pushed back, Gateway 3 consent would not be forthcoming until the scheduled Building Safety Levy payments had been met.
Should the Client change while Building Safety Levy payments are outstanding, the new Client would take on the responsibility for payment – so this is one to add to a due diligence enquiry list.
10. Other matters
A key concern of the Government is to ensure that the operation of the charge does not adversely impact on the supply of housing. However, it recognises that there may be other implications that it needs to take into account. There is some interesting discussion (para 50) on how it thinks developers may react (by, amongst other things, passing the cost onto buyers). But this must be a key matter generally.
Non-payment of the charge will be likely to result in withholding of Building Control approval, preventing construction and completion of the building by the developer. The intention is that the basis of the calculation should be clear and simple. Self-assessment by the developer will be verified by a collecting agent. The Government is seeking feedback on when sanctions might apply, such as mistakes in calculations within the self-assessment process, failure to assume liability for payment, missed payments and fraud in addition to the scope of appeals against sanctions relating to calculations of the charge and application of exclusions.
The consultation paper furthermore sets out considerations on assessment, sanctions, appeals etc, and asks for particular anecdotal evidence of business plans at Annex A – which will help inform the outcome.
11. What does it all mean for real estate generally?
This is another step in the planning process under which negotiated obligations and financial contributions are being replaced with an increasingly formulaic approach, opening the door to a cumulative building block approach, with new levies for different purposes being bolted on to particular kinds of development.
So long as the kinds of development to which each levy applies is clear and the trigger point as to when it applies and the amount payable can be easily determined, then this creates certainty for developers, consistency in application and is administratively simpler, including for enforcement purposes.
There must be no double counting, however, and so the purposes behind specific levies, as well as more general levies (in the case of CIL, the charging schedule,) should be clear.
At some point, there will need to be a calculation of the cumulative amount chargeable on the targeted developments. It is this calculation which will reveal whether these levies, in the round, will financially impact certain kinds of development disproportionately, particularly in relation to housing. The care home sector will need to be vigilant here, as it already faces affordable housing requirements on the C3 elements of care home developments, and incurs higher costs of construction to meet the needs of their occupiers.
This approach is a significant departure from the traditional method of planning obligations – namely negotiation through s.106 agreements. This levels the playing field somewhat, but makes the position less malleable, so some developers may find it less easy to avoid or reduce their ‘sentences’. It increases transparency, which some developers may also regret, but is rather more democratic.
12. Some reactions so far
It is still early days for reactions as people assess the proposals. The following sets out a few comments that we have seen so far from various industry bodies:
- The Local Government Association have expressed concerns that: (1) fewer planning applications will come forward for taller buildings than would otherwise, resulting in a stifling of new housing supply, particularly in urban settings; (2) 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 sector; and (3) because the Building Safety Levy will be payable when developments pass through Gateway 2 of the new Building Safety System, which will not exist until the Building Safety Bill becomes law, the announcement about the introduction of the Building Safety Levy might encourage developers to seek planning permissions as soon as possible and to seek to technically commence construction before the Building Safety Levy can be introduced.
- Some architects and other professionals in the construction and real estate sector are afraid that some developers may try to trickle down some of the new costs arising from the new Building Safety Bill on to their books.
- Some in the real estate sector have also called for product designers and installers to be asked to contribute to the costs of remediating the cladding crisis as well as property developers and leaseholders.
13. What next?
This is another significant consultation paper for developers. It is helpful to see the Government considering these proposals in conjunction with other proposed levies, rather than in isolation. This appears to reinforce the general trend towards a more formulaic, standardised and tax-based means of ensuring that developer contributions are forthcoming. Whilst it levels the playing field for developers, certain kinds of development and developers may be more affected than others, particularly when the cumulative effect of all the levy proposals are considered together.
One result of the more formulaic approach to planning and building control is the foregrounding of opportunities for public and sector engagement – at the point that proposals are introduced or plans are made, rather than at the point of the brining forward of individual developments. This underlines the importance of responding to this and other consultation papers promptly and fully.