How will the new Economic Crime Levy impact residential development joint ventures?

Background:

The war in Ukraine has created a renewed urgency and focus on economic crime in the UK, leading to the Economic Crime (Transparency and Enforcement) Bill being rushed through Parliament this month. This comes hot on the heels of the introduction of the Economic Crime (Anti Money Laundering) Levy in the Finance Act 2022, which received Royal Assent on 24 February 2022.

The Act requires entities caught by the AML Regulations to pay a fixed fee levy based on the ‘size’ band they belong to, determined by their UK revenue: medium (£10.2m-£36m); large (£36m-£1bn); very large (>£1bn). The first levy payments will be collected in the 2023/24 tax year based on size/UK revenue reported in accounting periods ending in the 2022/23 tax year.

The fixed fees set out in the draft legislation are £10,000 for entities falling within the medium band, £36,000 for large, and £250,000 for those in the very large band. While this is not a large sum of money compared to the turnover of the businesses concerned, when coupled with the residential property developer tax (which takes effect on 1 April 2022), it represents another chip away at the viability of residential development projects. It also represents yet another change for the industry, which has been forced to contend with an enormous amount of tax change in the last 24 months (including significant changes in respect of VAT and payments to contractors).

AML Regulations and housebuilders:

Housebuilders are not an obvious target for this measure. The problem arises when a residential property developer is marketing joint venture properties for sale, because running an “estate agency business” is a regulated activity under the AML Regulations. More and more businesses in the industry find themselves inadvertently falling within the AML Regulations following a clarification issued by HMRC in 2019 relating to the scope of an exemption from that regulated activity:

It is common practice for the housebuilder partner in a joint venture (often with a housing association or public body) to provide sales and marketing services to the joint venture vehicle and in doing so, it falls within the definition of estate agency work, which is broad.

The issue:

The question the sector is now asking is whether the levy will also apply to the housebuilder partner providing such sales and marketing services. The simple answer is that it will. The housebuilder partner is providing estate agency services to another entity – the JV – and so is caught by the AML Regulations. Therefore, by default, the housebuilder (and not the JV) will be charged the levy. The same rationale would apply to such services being provided to JVs that are in a “group” with the housebuilder and so on the face of it, a joint venture arrangement will struggle to “structure out” of the levy.

What next?

There seems to be a limited number of options to ease the impact on developers:

1. Housebuilder staff being employed by the JV: The JV could of course appoint its own staff to carry out the sales and marketing function itself, but this could end up costing more than the levy with PAYE and NIC considerations.
2. Explicitly passing the levy through to the JV: A fundamental issue with the levy is that the amount charged is by reference to the entire turnover of the entity providing the services and not the turnover generated solely by the activities that are caught by the AML regulations. As a result, a JV partner is likely to push back on bearing responsibility for the entire levy when it is also triggered by the housebuilder’s involvement in a number of projects. At the very least, we would expect the housebuilder to be required to apportion the levy between live projects to the extent possible.
3. Increasing fees charged to the JV: The most likely route through which the housebuilder partner will recover the levy is to generally increase its fees charged to the JV for providing sales and marketing and other development management services, effectively passing the levy through to the JV by the back door. This impact on residential development joint ventures will adversely affect the viability of much-needed housing projects across the country. It seems to be an unintended target of the new legislation and it is unfortunate that it is coming at the same time as the RPDT and soon after so many other disruptive tax changes. The industry is no doubt hoping that this will be the last tax change they see for a while. Watch this space…