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Taxation of commercial property under the coalition government

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We’ve now had a year to get used to the coalition government, so this feels like a good time to look at how tax law, as it affects the property industry, is evolving.

And I mean ‘evolving’: the Brown years were a period of unusual stability in terms of the men in Number 10 and Number 11, but tax policy often seemed to be in a state of permanent (and sometimes pointless) revolution.

Well, the new government has certainly rung some changes, and (in the tax world, at least) not just for the sake of it.

Tax policy: a new government and a new approach

At the policy level, the hallmark of the coalition’s first 12 months was the unremitting focus on deficit reduction.

The property industry had already endured a tough couple of years, with persistently weak occupier markets and serious refinancing and European regulatory challenges ahead; the last thing it needed was to fall victim to tax raids in the new government’s first emergency Budget on 22 June 2010.

Thankfully, the worst that happened was an announcement of further falls in capital allowances rates, and there were some real positives in areas where we had lobbied on behalf of the industry: real estate investment trusts (REITs) would be allowed to count scrip dividends towards their distribution obligation; the new 5% rate of stamp duty land tax (SDLT) for residential property would not apply to the very different commercial property market; and welcome confirmation followed that proposals to restrict the tax deductibility of financing costs, which could have done real damage in the property industry, would not be taken forward.

The new approach to tax policy making announced at the emergency Budget was another promising development.

The government’s performance on this front has generally been good, with a slower pace of change and some signs of better consultation – but the jury is still out.

On the negative side, we saw the carbon reduction commitment (CRC) effectively turned into a tax with virtually no warning, and the temporary relief from business rates for low value empty property was ended with no consultation or impact assessment.

While CRC and business rates may technically belong to other government departments and may not be most tax advisers’ daily fare, as far as business is concerned, they are still tax.

In Budget 2011, the government’s focus shifted from deficit reduction to encouraging growth, and there was more good news.

Years of industry lobbying finally delivered both an SDLT relief for purchases of multiple dwellings to support the residential private rented sector, and an extensive package of reforms to grow the REIT regime.

It’s enough to make one regret that the new approach to tax policy making means the REIT changes will only become law when Finance Bill 2012 receives Royal Assent ...

Tax administration: working with officials

Fascinating though policy developments can be, for most businesses, the day to day management of their tax affairs and their relationship with the tax authorities are of more immediate concern.

After the UK introduced REITs in 2007, the BPF has regularly brought together relevant members of HMRC’s Large Business Service (LBS) with tax managers at some of the larger REITs and advisers drawn from our tax committee.

Just as the successful customer relationship manager (CRM) model has been extended beyond the LBS, we have sought to replicate our very successful format for collective engagement by organising similar meetings for HMRC local compliance officials with some of the smaller REITs and their advisers.

The very positive and constructive relationships here, which rely on openness and good faith from both sides, are a worthy continuation of the excellent engagement that brought REITs to the UK.

It is vital that public sector cuts and other political challenges do not undermine the contribution that experienced CRMs who get to know their customers can make to the smooth and efficient operation of the UK’s tax system – this, too, is a measure on which tax jurisdictions compete.

The wider policy and regulatory landscape

While sanity may be returning to tax policy making, however, the government’s new focus on growth and its interest in localism have brought revolution to other policy areas of great importance to the property industry.

After extensive industry and local government lobbying, the coalition has confirmed that it will introduce tax increment finance (TIF) in the UK, allowing future business rates revenues to finance investment in infrastructure.

However, TIF has got caught up in broader, complex proposals being rushed through for radical reform of local government finance, which in turn must interact with local enterprise partnerships, enterprise zones and potentially major changes to the planning system.

Exciting times – but no sign of a new approach to policy making here.

Peter Cosmetatos, Director of Policy (Finance), British Property Federation