RPDT20215 - The charge to RPDT: adjusted trading profits and losses: legacy remedial works

This guidance is of particular relevance where a liability to undertake building remediation has been identified as a result of further investigation following the Grenfell tragedy.

Developers of residential property for sale are commonly required to hold insurance cover to back warranties for unknown defects. Typically, developers of dwellings for sale will be initially liable for any remediation costs for an initial period with liability for a subsequent longer period covered by an insurance policy.

The requirements differ in each part of the UK, but residential developers should hold appropriate documentation to demonstrate the periods within which they are liable to carry out any remediation work, and/or any insurance-based warranties they have entered into.

Developers may also have made provisions in their accounts to cover any uninsured claims, which may cover issues which are excluded from or above the financial limits of such polices, which may include cladding remediation.

Similar consideration will apply where the development is of properties that are sold to a residential landlord who will rent the dwellings.

Whether these costs when incurred can be deducted for RPDT purposes in a given accounting period will depend on the extent to which they are allowed as a deduction in computing trading income for Corporation Tax purposes in that accounting period.

Example

A residential property developer made a cladding remediation provision in 2018 that was allowable (as a specific rather than general provision) for Corporation Tax purposes in its accounting period ending 31 March 2019.  No actual costs were incurred until late 2022, and these were charged against the previous provision.  There will be no deduction in the Corporation Tax trading profits for that accounting period nor in any future period until the provision for which a deduction was claimed in 2019 is exhausted.  However, any further amounts will then become deductible for RPDT purposes along with any new or increased provision that is allowed against income from residential property development income that is allowed for Corporation Tax purposes.

The treatment of provisions is covered in HMRC’s Business Income Manual at page BIM46500 onwards.