Scottish Building Safety Levy: consultation

Part A: Principles

4. Strategic context for a Scottish BSL

As with efforts to remediate cladding in England, Scottish Ministers are committed to ensuring that the financial burden does not fall directly on homeowners, or on the general taxpayer.

In a Parliamentary Statement on the Cladding Remediation Programme in May 2022^[9], the then Cabinet Secretary for Social Justice, Housing and Local Government, Shona Robinson MSP, set out this Scottish Government’s position that “developers must play their part in making unsafe buildings safe wherever they are” and that “it is my clear expectation that developers linked to buildings with problematic cladding will fund remediation where this is identified”.

Discussions around direct sector contributions are ongoing. Where there are buildings where a developer no longer exists then any significant remediation costs may fall to the Scottish Government. The Scottish Government’s position is that it is appropriate to recover the costs of government intervention on cladding remediation from the sector where that intervention is required (i.e. the residential property development sector), consistent with the approach of the UK Government for intervention in England.

Sector-based levies have been used in the past to recover the costs of government intervention in a particular sector. Most recently, the UK Government’s Bank Levy was introduced following the 2007-08 financial crisis^[10].

A Scottish BSL would seek to complement and accompany the two existing strands of funding for the Cladding Remediation Programme:

• Direct remediation by the housebuilding sector
• Barnett consequential funding from the spending related to revenues from the UK Government’s RDPT

These strands are set out below.

4.1 Direct Remediation by the Housebuilding Sector

Following the signing of the Developer Commitment Letter by nine developers in 2023, work has been ongoing on the development of the Developer Remediation Contract, which will be a formal legal contract between developers and the Scottish Government and will underpin the scope, scale of assessment and the Scottish standards required for remediation and mitigation on buildings in scope with potentially unsafe cladding. The Scottish Government will continue to work closely with Homes for Scotland and developers on this.

The costs to individual developers will depend on the number of their buildings within scope of the Programme and the level of remediation required for each of their buildings. The UK Government estimated in 2023 that their individual contracts with the 39 developers who had signed at the time were likely to lead to additional contribution of at least £2 billion to address cladding remediation in England. As of 31 January 2024, a total of 55 developers have signed the UK Government’s developer remediation contract.

4.2 Residential Property Developer Tax

RPDT is a Corporation Tax supplement levied by the UK Government on the UK’s largest residential property developers, in operation since 1 April 2022. The UK Government’s aim for the tax is to obtain a contribution towards the cost of dealing with defective cladding in the UK’s high-rise housing stock.

The tax is limited to the largest residential property developers by each group having an annual allowance of £25 million, with only profits from residential property development activities above this amount being subject to the tax. Only residential development companies liable for UK Corporation Tax fall within scope of RPDT, which is charged at 4% on residential property development profits that exceed their annual allowance. The UK Government intends to raise at least £2 billion from RPDT over a ten-year period^[11]. In its first year of operation (2022-23), RPDT generated £200 million in revenue^[12].

As a UK-wide tax where revenues are used to fund spending on cladding remediation in England, the Scottish Government will receive Barnett consequentials, expected to be £194 million over the expected ten-year period. The Scottish Government has committed to spending all Barnett consequentials generated from RPDT on cladding remediation in Scotland.

4.3 The Building Safety Levy in England

The UK Government’s proposed Building Safety Levy is England only in scope. The powers to create and set the terms of the Levy are set out in Section 58 of the Building Safety Act 2022^[13].

Funding raised through a Scottish BSL will help to meet the costs of fixing historic building safety defects in buildings in England and ensure that the residential development sector makes a fair contribution to costs. The UK Government have publicly stated that the intention is to raise an estimated £3 billion from the Levy over a ten-year period.

In November 2022, the UK Government issued a consultation seeking views on the delivery of the Levy in England including how it would work; what the rates would be; who would pay; sanctions and enforcement as well as who would be responsible for collection. A further technical consultation^[14] was issued by the UK Government in January 2024 seeking views on methodology for levy calculation, the collection process, disputes and appeals and further exclusions. Further information on the UK proposal is set out in Annex A.

4.4 Cost of Cladding Remediation in Scotland

The costs associated with the delivery of the Cladding Remediation Programme fall into a number of different categories: the cost of assessing risk; the cost of any urgent mitigations to manage that risk prior to remediation; and the cost of remediation. In addition, there are a number of associated costs, for example: the costs of engaging with residents and homeowners; costs associated with assurance of work undertaken; and costs of professional advice on mitigation measures.

It is estimated there are around 1,000 high rise and 5,000 medium rise buildings within the scope of the Programme based on data currently available. The Scottish Government is currently undertaking work to estimate the number of buildings within scope of the Programme. Until this exercise is completed the total cost for the Programme cannot be defined.

A Scottish BSL will not be introduced in Scotland before April 2026, by which point there will likely be greater clarity on the scale of the funding challenge.

As noted above, the UK Government has identified a need to introduce a Building Safety Levy in England in order to contribute to the funding needed to address building safety issues on buildings that require mediation. As the cladding remediation landscape in Scotland is broadly similar to the landscape in England, it is reasonable to expect that the Scottish Government will be required to meet an outstanding cost for its Cladding Remediation Programme, as has been identified for the UK’s programme in England. We, therefore, estimate that a Scottish BSL would seek to raise £30 million per annum.

Given the pressing need for a fully funded Programme to remediate cladding that may present a risk to life, work to prepare a proposed Scottish BSL is proceeding on the basis that the associated revenues will be required. Should the highly unlikely scenario transpire that no additional funds are required, then Scottish Ministers would be in a position to take an informed view on the future of a Scottish BSL at that stage.

4.5 Infrastructure Levy

The Planning (Scotland) Act 2019 (“the 2019 Act”) provides powers for the Scottish Ministers to make regulations to introduce an Infrastructure Levy, that is, a charge payable to a local authority on development in that local authority’s area, to be spent on the provision of infrastructure. This is intended to provide an additional stream of funding for infrastructure which is needed to support growth on a wider scale than individual developments.

The Scottish Government’s Programme for Government 2023-24 committed to a discussion paper on options for an Infrastructure Levy was published in June 2024^[15], with a view to implementing new Infrastructure Levy regulations by Spring 2026 – in advance of the next Scottish Parliament election.

Given it is likely that new housing developments would be within scope for a future Infrastructure Levy, its potential impacts on the residential development sector and viability of sites should be taken into account when considering a Scottish BSL.

4.6 Alternative Options

In assessing the need for a revenue stream for the Cladding Remediation Programme, the Scottish Government has considered alternative options to a Scottish BSL. The majority of taxes and duties remain reserved to the UK Government. No powers exist within the limited competence available to Scottish Ministers in respect of taxation which would meet the objective of ensuring that the costs of cladding remediation do not fall onto homeowners or the general taxpayer.

Question 1

Do you think a new tax on housebuilding, paid by developers, is a fair way to generate revenue to fund the Scottish Government’s Cladding Remediation Programme?

Please give reasons for your answer

5. Scope of the Tax

It is anticipated that the Order in Council will provide that a Scottish BSL can be applied to any step or application, or the issuing or submission of a document in connection with the building control process in relation to a relevant building or a proposed relevant building. For these purposes, “relevant building” is defined as a building in Scotland consisting of or containing (i) one or more dwellings, or (ii) other accommodation, (which includes temporary accommodation, for example in a hotel or hospital).

This definition, and therefore the potential scope of the tax will include, for example:

• new homes built by developers for onward sale
• purpose built accommodation, such as student accommodation or build-to-rent
• the redevelopment of existing buildings for the purposes of providing accommodation, irrespective of whether the existing building’s current or past purpose is/was for non-residential use

While this definition could also include individual homeowners who are improving their property, the Scottish Government has no intention to include them within the scope of the tax. Further detail on the proposed treatment of smaller developers is set out below.

When introducing a Scottish BSL, it may be necessary to remove certain types of developments from the scope of the tax in order to support the Scottish Government’s priority areas of:

• Eradicating child poverty
• Growing the economy
• Tackling the climate emergency
• Improving public services

5.1 Removing certain types of developments from charge

Although their effect can in essence be the same, there are important distinctions between an exemption and a relief. In general, the availability of an exemption means that tax is not due in the first instance and that a tax return may not need to be made, as such, the revenue authority does not have to be notified, unless this is specifically legislated for. In contrast, the availability of a relief, either partially or wholly, means that tax which would otherwise be due does not need to be paid or can be reclaimed, and needs to be claimed on a tax return (thereby notified to the revenue authority), even if no tax is ultimately due.

The UK Government’s technical consultation on the UK Levy sets out proposals to exclude certain types of developments from charge to ensure the development of community facilities is not impacted by the additional cost of the tax.

The Scottish Government sees no reason to deviate from the approach taken by the UK Government to this aspect of the UK Levy and therefore intends to remove the following types of developments from charge:

• NHS Hospitals, NHS Medical Centres and NHS GP practices.
• non-NHS hospitals and hospices
• Supported Housing, Residential Care Homes, Children’s Homes.
• Conversions, improvements to owner/occupied homes and refurbishments.
• Refuges and residential domestic abuse facilities for example, rape crisis centres.
• Criminal Justice Accommodation.
• Military Barracks and other Military establishments.

• Hotels.
• Monasteries, nunneries or similar establishments.
• Seminaries and other religious colleges which include accommodation.
• Drug and/ or alcohol treatment centres.
• Temporary accommodation for homeless people.
• School premises to be used for the sole or primary purpose of housing its students

5.2 Removing affordable homes from a Scottish Building Safety Levy

The Scottish Government is committed to delivering 110,000 affordable homes by 2032, of which at least 70% will be available for social rent and 10% will be in our rural and island communities. To support this commitment we propose to remove affordable housing delivered through the Scottish Government’s Affordable Housing Supply Programme from charge under a Scottish BSL.

The Affordable Housing Supply Programme comprises a range of funding mechanisms to enable affordable housing providers to deliver homes for social rent, affordable rent, and affordable home ownership in communities across Scotland to support local authorities’ Local Housing Strategies.

The Scottish Government wants to ensure that the Affordable Housing Supply Programme is not unduly impacted by the introduction of a Scottish BSL, and will seek to provide an exemption or relief to support this position.

Question 2

Do you agree that homes delivered through the Scottish Government’s Affordable Housing Supply Programme should be removed from the Scottish Building Safety Levy?

Please give reasons for your answer

5.3 Exclusions for small developers

The Scottish Government is mindful of introducing a new tax on business in the current economic climate. Any new tax will be developed by following the Better Regulation principles, ensuring that any regulation is:

• proportionate
• consistent
• accountable
• transparent
• targeted only where needed

In particular, we are aware that smaller housebuilding businesses may be disproportionately impacted by the introduction of a Scottish BSL, due to the resource needed by businesses to understand, plan, and absorb any additional costs. Initial engagement with industry stakeholders has also highlighted cashflow concerns for small businesses. In recognition of this, the Scottish Government believes it is appropriate to consider exemptions or reliefs to protect smaller businesses. In doing so, the Scottish Government is seeking views on the most appropriate way of removing smaller developers from charge.

5.3.1 Developers landscape in Scotland

According to research undertaken by Homes for Scotland (HfS) in 2024^[16], SME developers have since 2019 accounted for less than 20% of annual new home sales^[17]. Crucially however, the HfS research notes that more than a third of homebuilding in rural and remote areas are undertaken SME developers. In addition, over 90% of SME development is undertaken on brownfield sites in Scotland’s main urban centres, compared to 70% for large homebuilders.

5.3.2 UK Government proposals to exempt small developments

In its most recent consultation for the UK Levy, the UK Government proposed an exemption for developments of fewer than 10 units and set out its rationale for this number:

“The intention here is to protect the smaller builders who work on small developments. This is a common differentiation and there are different rules under Building regulations for the planning of small developments. This will also cover individual homeowners who are improving their property. We are alive to the fact that excluding smaller developments may open opportunities for fraud and gaming, for example parcelling up sites into smaller blocks to avoid the levy being applied. We will consider how we can best mitigate that.”

The Scottish Government has considered whether an equivalent exemption for small developments could be applied to a Scottish BSL. In English planning law, housing developments are categorised into ‘major’ and ‘minor’ developments. Major developments are applications with provision of more than 10 units (or covers a site area of 0.5 hectares if the number of units is not known). A housing development application of 9 units or less is considered a minor development.

By contrast, in Scotland housing developments fall into two definitions:

• Major housing developments - those with 50 or more dwellings or with a site area of 2 hectares or more where the main use is for housing; or
• Local housing developments - those that have fewer than 50 dwellings and a site area that is less than 2 hectares

In 2022-23, there were 4,194 applications for local housing developments, compared to 97 applications for major housing developments. The Scottish Government does not currently hold information on the breakdown of the number of units by local and major housing development. Given that the vast majority of housing developments are local developments, it is likely that a large proportion of dwellings will be contained within local development applications. An exemption or relief on all local developments could therefore restrict the tax base to a minority of developments, which could significantly reduce the revenue generated from the levy, or place a higher tax burden on a small number of developers.

An exemption or relief based on site size could also incentivise behavioural changes from the housebuilding industry (such as the splitting up of sites) and reduce viability of larger sites. It is also not clear from our initial engagement whether an exemption or relief based on site size would sufficiently capture small developers as opposed to small developments, as large developers utilising small development sites would inadvertently be eligible for a relief or exemption under this method.

5.3.3 Alternative measures for excluding small developers

As noted above, the approach proposed in the last UK Government consultation for the UK Levy does not seek to exclude a developer from the charge but instead seeks to exclude small sized developments that the developer is undertaking.

An alternative measure would be to exclude small developers in totality. One option to achieve this would be to consider a relief or exemption based on the total number of units built annually by individual developers, independently of the size of developments. For the purposes of gathering research, Homes for Scotland define a small developer as one which builds between 3 and 49 units per year. A similar threshold based on annual units built may be a more appropriate way to identify and exclude small developers from a Scottish BSL. Another option would be to consider excluding developers using an annual operating profit threshold. The Scottish Government is, therefore, seeking views on using this alternative method for excluding small developers.

Question 3

What are your views on the principle of removing smaller developers from charge of the Scottish Building Safety Levy?

Question 4

If you agree that small developers should be removed from charge under a Scottish Building Safety Levy, what are your views on the method of determining who is a smaller developer?

5.4 Other exclusions

The Scottish Government is also seeking views on any other types of developments not listed above that it would be appropriate to remove from a Scottish BSL. For example, it may be considered appropriate to remove developments in rural areas and on islands, in recognition of the distinct housing delivery challenges in these areas of Scotland, and in support of the Scottish Government’s commitments in our rural and islands housing action plan^[18]. Other examples to consider could include specialist provision such as wheelchair accessible homes.

Question 5

Are there any other exemptions from the Scottish Building Safety Levy that you think should be considered by the Scottish Government?

Question 6

Are there any types of development listed in the exemptions above that you think should not be exempted from the Scottish Building Safety Levy?

Question 7

Do you have any comments on exemptions not covered by the previous questions that you wish to raise?

6. Calculation

The Scottish Government is seeking views on the most appropriate method of calculation for a Scottish BSL. In considering this, the principles of proportionality, certainty, efficiency and convenience will be of importance. The method should be easily understood and calculatable, allowing for accuracy in reporting information through tax returns and reducing the compliance risk. In considering a suitable approach, our aim is to base the calculation on an existing methodology or valuation, rather than to create a bespoke calculation process solely for a Scottish BSL.

6.1 The new house build landscape in Scotland

When considering a method of calculation for a Scottish BSL, it is important to consider the housebuilding landscape in Scotland.

In the 2023-24 financial year there were 19,632 all-sector new build home completions, a 17% decrease on completions compared to the previous financial year^[19]. Of these, 14,589 were private sector led housebuilding completions, accounting for over two-thirds (74%) of all homes completed in 2023-24. The remainder of completions were by housing association and local authority (26%).

In terms of geographical spread, new housebuilding is concentrated in the Central Belt, with Edinburgh (2,049), Fife (1,440), West Lothian (1,258), and South Lanarkshire (899) accounting for just under 40% of all new build home completions in 2023-24. The local authorities with the highest proportion of new build completions per head were Midlothian and East Lothian, which had rates of more than 78 homes per 10,000 population.

Property sales also provide us with further insight into the housebuilding landscape. Data from the Registers of Scotland^[20] tells us that in 2023-24 there were 9,867 new build properties sold in Scotland, making up 11% of total residential property sales. The median property price of a new build property in Scotland was £300,000 in 2023-24, which was 62% higher than the overall median for Scotland of £185,000 £300,000.

6.2 UK Government proposals

The UK Government has considered the basis of the charge and regional differences in its proposals for a UK Levy. The UK Government’s second consultation on the UK Levy asked respondents for their preference between a per unit basis and a per square metre basis. Of those that responded to the question, 66% supported a charge based on a per square metre basis, with the remaining 34% supporting a per unit basis. It is worth noting that the UK Government proposal for local authorities to act as collectors for the levy in England will have influenced their decision to consult on these two options, as both contain data linked to the English building control process.

The UK Government response to the second consultation proposes that a UK Levy is to be charged on a per square metre basis (subject to further work on how floorspace would be measured and levy rates set):

“We have carefully weighed the arguments and consider a per square metre charge is fairer as it will reflect the difference in value between different sizes of new developments and avoid for example a 5-bedroom house being charged the same levy amount as a 1-bedroom flat within the same area.”

The UK Government has also consulted on a proposal to include regional variation into a UK Levy. From the second consultation, 84% of those that responded to the question agreed on having differential levy rates based on geography based on the different land values and house prices in different areas. When offered the choice, 86% of respondents preferred differential levy rates to be based on local authority boundaries, compared to 14% who preferred a regional basis.

There are 32 local authorities in Scotland, a substantially smaller number than England’s 317 authorities. However, there are significant variances in average house prices within local authority areas in Scotland. A method of calculation which does not account for these variances risks disincentivising developments in areas where house prices are lower as the costs of the tax based on square meterage would represent a greater proportion of overall development costs.

6.3 Basis of the charge

To date, the Scottish Government has considered the following options for calculating a tax rate:

• Rate based on market value of the property
• Rate based on the size of the property
• Flat rate per unit
• Rate based on the number of bedrooms

These options are set out below.

6.3.1 Rate based on market value of the property

The Scottish Government’s initial preference on the calculation is for a Scottish BSL to be calculated as a proportion of the market value of the property. In particular, for a Scottish BSL to be calculated as a proportion of the sale price where possible. Using market value has a number of advantages: it is easy for taxpayers to understand and calculate; it allows for a progressive approach to taxation; it will naturally reflect disparities in house prices across Scotland; and it will be proportionate to any revenue generated through sale of the property, thereby minimising cashflow issues for the developer in the majority of cases. In addition, initial engagement with industry stakeholders has indicated a preference for a Scottish BSL to be calculated as a proportion of the market value.

Using sale price as the market valuation has additional benefits. As all residential property sales are recorded by the Registers of Scotland, using the sale price would benefit from a comprehensive set of existing data to support administration and compliance of the tax. Using sale price would also align with the proposal to designate Revenue Scotland as the collection authority for the tax, as Revenue Scotland will hold data on residential property sales.

It is worth noting that not all new residential buildings will be sold on the open market, and therefore have a sale price attached to the property. This includes properties that are build-to-rent, as well as purpose-built student housing. The sale price may also not be known at the time of issuance of a completion certificate (which is one of the possible tax liability points). In these cases, an alternative method would be required to calculate a market value rate for those that are not sold or where a sale price is not known.

In recognition of the points above, the Scottish Government proposes that the lead option for calculating the tax should be based on the sale price of the property, or where no sale price is available, on the market value of the property. The Scottish Government is therefore seeking views on whether a tax based on the market value of a property is the most appropriate method of calculation. We propose the simplest way of achieving this would be to use the price as sold on the open market. Where the property is not sold (or the sale price is not known), the Scottish Government is seeking views on what alternative market valuation would be available, during the building standards process, that could be utilised in place of a sale price.

6.3.2 Rate based on the size of the property

This option would see the rate of a Scottish BSL calculated using the size (per square metre) of the property. An an example, for every square metre of floor space, a value could be attached, giving a formula which would result in a value relatively proportionate for the size of the property. This would be akin to the UK Government’s approach as proposed in its consultations.

In comparison to a per-unit and a per-bedroom method, a per-square meterage calculation would be proportionately closer to market value, and therefore would help alleviate taxpayers' cashflow concerns. On the other hand, a per-square meterage method would require the floor space to be measured (and require a definition of eligible floor space), which could increase the risk of disagreement between taxpayer and the revenue authority.

6.3.3 Rate based per unit

This option would see a Scottish BSL calculated on a per residential unit basis – i.e. for every unit of eligible housing built by a developer, a flat charge is applied. This option would be easy to calculate for the taxpayer, and easy to administer for the collection authority. On the other hand, a per-unit basis makes no adjustment for the size and value of the housing built, which could leave the tax burden disproportionately borne by volume builders. Such a calculation may also encourage a behavioural response from the housebuilding market.

6.3.4 Rate based on the number of bedrooms

This option would see a Scottish BSL calculated based on the number of bedrooms an eligible housing unit has. This would result in units with a higher number of bedrooms paying a higher proportion of the levy. Consideration would need to be given on how bedrooms are defined and the appropriateness of excluding other types of rooms in a unit. Consideration would also be needed on any distortive effects from a per-bedroom charge, as house sizes, types and values can vary significantly between locations.

6.4 Brownfield development

In addition to the basis of the charge, the Scottish Government is seeking views on a different rate for developments built on brownfield land (i.e. land which has been previously developed)^[21]. For example a reduced rate may support the sustainable reuse of brownfield land including vacant and derelict land and empty buildings. The UK Government is also considering setting a differential levy rate based on brownfield developments.

Question 8

Do you agree that rate of the Scottish Building Safety Levy should be calculated as a proportion of the market value of the property?

Please give reasons for your answer

Question 9

In cases where a property is not sold on the open market, what alternative valuation could be used to calculate the Scottish Building Safety Levy to ensure proportionality with the market value of the property?

Question 10

In relation to Question 9, do you have any information on valuations undertaken during the building standards process that would be useful for the Scottish Government to consider?

Question 11

What are your views on using one of the following alternative methods of calculation for the Scottish Building Safety Levy:

• Flat rate per unit
• Rate based on the size (per square metre) of the property)
• Rate based on the number of bedrooms of the property
• Rate based on the cost of building works of the property

Question 12

Do you think there should be a different rate applied on brownfield developments?