RPDT20210 - The charge to RPDT: adjusted trading profits and losses: computation of adjusted trading profits and losses - section 39 Finance Act 2022

FA22/S39 provides for the calculation of a company’s RPD profits (or losses) in an accounting period. Put simply, this is just the amount of trading profits calculated for Corporation Tax purposes that is attributable to its residential property development activities, which are the activities set out in FA22/S35.

Following normal principles, there should be no disallowance of expenditure just because it is not incurred on the property directly. It is common for a developer to incur expenditure on infrastructure such as new roads, school improvements and contributions towards the provision of social housing. These works or payments may be mandated under planning conditions or be part of an agreement with the original landowner.

Where a company undertakes activities other than residential property development then an apportionment is to be made on a just and reasonable basis, FA22/S39(3).

The need for apportionment of the profits of a company within scope of RPDT is most likely to arise in the case of mixed-use developments: projects comprising both homes and commercial units or where residential units in a development are offered for both sale and rent.

What might be considered a just and reasonable basis for apportioning profits will depend on the circumstances. For example, a development may comprise a number of apartments and some commercial spaces, all of which are disposed of by sales of long leaseholds. An apportionment based on floor area may be appropriate but if, for example, the apartments are finished to a very high specification while the commercial units are more basic “shells” then an apportionment based on sale proceeds or carrying value of unsold units may be more appropriate. Where the residential and non-residential elements are already distinguished for accounting purposes then HMRC would normally expect this to be the starting point for the apportionment.

Where a developer incurs costs for the purposes of a development, such as “section 106” obligations to build a new school or road then these are deductible in computing the RPDT but should also be apportioned where there is a mixed-use development.

Where capital allowances are treated as a deduction in computing trading profits then they must be apportioned separately between RPD and other activities, FA22/S39(2)(a).

Corporation Tax reliefs that are given by way of deduction from trading income are allowable when calculating RPD profits where they are attributable to RPD activity and do not need to be “added back”. Examples may include land remediation relief and research and development allowances.

RPDT is based purely on trading profits rather than total profits for Corporation Tax purposes which means that no deductions for, for example, interest under the Loan Relationships rules or relief for charitable donations are to be included. Certain amounts that are treated as trading items under the Loan Relationships and Derivative Contracts rules under Parts 5 and 7 of CTA09 are also to be excluded when arriving at RPD profits, FA22/S39(2)(d) & (e). In addition, no account can be taken of relief for carried forward trading losses or group relief for trading losses under the normal Corporation Tax rules. RPDT has separate rules for such losses which are explained at RPDT20400 onwards.

Deferred consideration for land purchased by a developer may in part be treated as an interest expense for accounting purposes that is “unwound” over time. Such “interest” would not arise from a loan relationship from the perspective of the purchaser of the land and therefore does not need to be “added back” when calculating trading profits for RPDT purposes.

In a group of companies there may be member companies that provide services to those undertaking the physical development. It is possible that such a company has a trade of undertaking RPD activities being ancillary activities for the purposes of FA22/S35(2)(g). If so, its RPD losses could be surrendered as RPDT group relief.

Where such a service company is not trading it may instead be incurring Management Expenses. These are deducted in computing total CT profits rather than being a trading expense and so cannot be surrendered as RPDT group relief. Where these expenses are recharged to a group company undertaking RPD activity then the amount may be deducted in calculating RPD profits to the extent that it relates to that activity.

What are known as the “primary purpose” trading profits of a charitable company are not charged to Corporation Tax and so should also be excluded from RPD profits, FA22/S39(2)(b).

RPDT does not apply to capital gains. For example, a trading company may have surplus land such as a factory site that it wishes to sell. The company may undertake work in order to maximise its return which may include clearing the site and obtaining planning permission for residential development. Unless the nature and extent of the work means that there is a trading activity then RPDT will not apply. If, however, the company appropriates the land to stock or transfers it to another group company that will do so, then the activity will then be within the scope of RPDT.

Where a capital asset is appropriated to stock then there is a deemed disposal for capital gains purposes and it is possible to elect for the resulting gain to be treated as reducing the cost of the asset in computing trading profits, TCGA92/S161(3). The capital gain is effectively deferred until the asset is sold in the trade. An element of trading profit attributable under this rule is not derived from RPD activity and should not be included when arriving at RPD profits, FA22/S39(2)(a).

Example

J Ltd is the parent company of a group with direct 100% subsidiaries K Ltd, L Ltd, M Ltd and N Ltd. The group specialises in providing supported retirement living. Each company is undertaking trading activities.

• J Ltd is a holding company providing services to the group and also some services to residents such as arranging sales of apartments by their existing owners. It holds the property freeholds and receives ground rents. There are units in some of the developments that are let to independent traders such as hairdressers. J Ltd is responsible for seeking out new development opportunities, obtaining planning permission etc. An important element of its income is the receipt of “event fees” being care fees and other charges that are deferred until an apartment is sold by the leaseholder.
• K Ltd acquires freehold land on which it develops apartments for sale on long leases. It has the groups in-house design and project management team. Once an individual development is complete and the apartments sold, it transfers the freehold interest to J Ltd. Construction work is subcontracted and this company also designs and manages the construction work for L Ltd’s properties, charging a fee for this.
• L Ltd develops apartments that are let on shorter tenancies (“build to rent”) and receives rental income. As above, the construction of its developments work is managed by K Ltd.
• M Ltd manages the completed developments, operating communal facilities such as restaurants and gyms, maintaining the grounds and providing care. It receives service charges and other fees from residents and group companies.
• N Ltd is a care provider, providing support to clients in their own homes. Where the clients are owners of properties developed by the group, the services are charged to J Ltd which may defer recharge as part of the event fee arrangement.

What are the amounts that are chargeable to RPDT?

• J Ltd has a property rental business; this is not a trading activity and is not chargeable. It also has a trade of providing services and to the extent that this is ancillary to K Ltd’s property development trade it is an RPD activity. The services that relate to its own build to let activity and the “estate agent” services provided to residents are not RPD activities, nor is the receipt of event fees.
• K Ltd is clearly undertaking RPD activities and the sales of long leases are part of its trading profits liable to RPDT. When calculating its RPD profits it should exclude its profits that relate to arranging the construction of L Ltd’s build to rent developments. It may record trading profits on the disposal of retained freeholds to J Ltd. To the extent that those profits are attributable to the value of the retained communal facilities that provide a continuing source of income, and of the right to receive future event fees, it would be reasonable to exclude them when calculating RPD profits.
• L Ltd has a property rental business, this is not a trading activity and is not chargeable.
• Neither M Ltd nor N Ltd are involved in property development but have trades of providing services to residents and, in the case of N Ltd, to others.

RPDT01100 contains a general introduction to RPDT and a list of abbreviations used.