Scottish Building Safety Levy: partial business and regulatory impact assessment

Section 1: Background, aims and options

Background to policy issue

The background to the policy issue is set out in chapter 1 of the Building Safety Levy consultation document.

The aim of introducing a Scottish BSL is to provide funding which can be used to support the Scottish Government's Cladding Remediation Programme.

Scottish Ministers have publicly confirmed that the policy position is that developers should meet the cost of remediating buildings with unsafe cladding that they developed. Where a developer cannot be identified or no parent developer exists, the Scottish Government believes it is appropriate to raise a portion of the necessary funding required to remediate buildings from the residential property development sector. Sector based levies have been used in the past to recover the cost of government intervention in a particular sector. Most recently, the UK Government's Bank Levy, introduced following the 2007-08 financial crisis.

This is also consistent with the UK Government's position on cladding remediation, as evidenced in its decision to introduce RPDT and its proposals for a BSL in England. Using this as the basis for the policy, the Scottish Government believes it is appropriate for the levy to apply to new residential developments.

There are a number of policy developments being taken forwards by both Scottish and UK governments on cladding remediation. These are set out below.

Cladding Act

The Cladding Remediation Act was Bill was passed on 14 May and the Single Building Assessment Specification was published on 21 June. This Act will give Ministers powers to set the standard for assessment through the new Single Building Assessment (SBA); arrange for assessment and remediation works in buildings within scope of the Act, where owner consent cannot be obtained; establish a Cladding Assurance Register; and make regulations to establish a Responsible Developers Scheme.

Developer Remediation Contracts

The Scottish Government continues to work with developers to agree the terms of a Developer Remediation Contract. This 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.

Nine of the largest UK and Scottish developers have committed in principle to identifying, assessing and remediating buildings that they have played a role in developing. The costs to individual developers will depend on the number of their buildings within scope of the Act and the level of remediation required for each of their buildings. The contract aims to ensure that developers contribute to the costs of remediating buildings they have developed, where possible, as part of the overall funding strategy for the programme.

Residential Property Developer Tax

The 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 £2bn from RPDT over a ten-year period. In its first year of operation (2022-23), RPDT generated £200 million in revenue.

UK Building Safety Act

The UK Parliament passed the Building Safety Act in April 2022.

Section 58 of the 2022 Act allows for the UK Government to introduce, by way of regulations, a levy on applications for building control approval of new residential buildings.

UK Government Building Safety Levy

Funding raised through the UK's Building Safety Levy 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.

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 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.

Devolution of Powers

Under the current devolution settlement, The Scottish Government's tax-raising powers are limited to existing devolved taxes (as set out in the Scotland Act 1998, as amended), and tax powers relating to local taxes to fund local authority expenditure. As the Cladding Remediation Programme is a national programme and not of the responsibility of councils, it would not be possible to utilise local tax-raising powers to directly fund this activity.

The Scottish Government set out in its Programme for Government 2023-2024 a commitment to pursue the devolution of powers to create a devolved Building Safety Levy (a Scottish BSL). The UK Government and the Scottish Government jointly held a consultation from 8 January 2024 to 19 February 2024, seeking views and evidence on the proposal to responses received, the UK and Scottish governments agreed that no evidence was surfaced to prevent the transfer of powers from proceeding and the UK Government has agreed to progress legislation to devolve powers to the Scottish Parliament.

On 19 April 2024, the Deputy First Minister and Cabinet Secretary for Finance, Shona Robison MSP, informed the Scottish Parliament of the outcome of the discussions with the UK Government, and that the Scottish Government would proceed to engage with the residential property development sector and wider stakeholders to ensure that the design and delivery of the devolved Levy is informed by the widest possible range of views. The Cabinet Secretary provided a further update to Parliament on 5 September that, following the General Election, the new UK Government administration has renewed the agreement to devolve powers.

Purpose/ aim of action and desired effect

The proposed objectives and rationale for the replacement tax are summarised here and discussed in greater detail in Chapter 1 of the associated consultation for the Levy. The objectives and rationale may be updated following consideration of consultation responses and the associated engagement.

The purpose of a Scottish BSL would be to generate revenue which can be used to support the Scottish Government's Cladding Remediation Programme.

The Programme aims to safeguard residents and owners by addressing the risk to human life that is (directly or indirectly) created or exacerbated by a building's external wall cladding system, as well as the consequential negative impacts which can currently exist in relation to the buying, selling, and re-mortgaging of relevant flatted residential properties in Scotland. The Programme scope is limited to multi-residential domestic buildings which may include a commercial premises, constructed or refurbished between 1 June 1992 and 1 June 2022, 11 metres or over in height and incorporating a form of external wall cladding system.

In addition to raising revenue to fund vital building safety work, the design of the tax could incentivise behaviours in the industry which support existing Scottish Government strategies, such as the utilisation of brownfield sites and viability of island housing developments.

As such, the intended outcome is the introduction of a Scottish BSL to provide a sustainable revenue stream to support the funding of cladding remediation in Scotland, and which places minimal impacts on the housebuilding industry.

Outcomes will be measures through the revenue collected from a Scottish BSL and the work of the Programme which will be funded.

Impacts from a Scottish BSL will be measured through existing data collection points in the housebuilding process, including (but not limited to) planning applications, building warrant applications, completion certificates and property sales. Consideration will also be given to monitoring the health of the housebuilding industry as a whole. The consultation explores the possibility of regular review points for a Scottish BSL through which these impacts could be evaluated.

Options considered so far

Option 1 – Do nothing (no changes to funding streams)

This option should be taken in context with the UK Government's proposals to introduce a BSL in England. Under option 1, this would mean a new tax would be applied to residential housing developers in England but not in Scotland.

This option would see no changes to the existing funding streams to support delivery of the Cladding Remediation Programme. While Barnett consequentials from UKG spending related to revenues from the RPDT would still be available, it is anticipated that the scale of the work required in Scotland will exceed this amount and therefore additional revenue will need to be made available to the Programme.

If this tax is not introduced, Scottish Ministers would be required to fund the Programme through reprioritisation of its capital budget or through increasing or through changes to other devolved taxes. However, neither of these would meet Scottish Ministers' objective of ensuring that the costs do not fall directly onto homeowners or onto the general taxpayer. Moreover, not introducing the tax would create sustainability issues for the funding of the Programme, meaning either further pressures to the Scottish budget, or delays to work to remediation buildings fitted with unsafe cladding.

This new tax burden in one part of the UK could result in behavioural changes from residential developers, who may find the lack of a Scottish BSL an incentive to development.

Option 2 – Introduce a BSL to provide funding for the Cladding Remediation Programme

This option would see the Scottish Government introduce a Scottish BSL, to support the funding of the Cladding Remediation programme. The power that will be devolved to the Scottish Government will require the tax to be applied on the construction of new residential development. Residential developers would be liable to pay the charge at a point during the building standards process. Revenue generated through a Scottish BSL would then be used to help fund the Cladding Remediation Programme.

This approach mirrors proposals by the UK Government to introduce a BSL in England, ensuring a level of consistency for housebuilders who operate in both jurisdictions. This approach also ensures there is parity in revenue sources for remediation works between England and Scotland. We estimate that a Scottish BSL would seek to raise £30 million per annum, which is in proportion to the amount that the UKG expect to raise from the BSL in England.

Sectors/ Groups affected

The taxpayer for a Scottish BSL will be residential housing developers. A Scottish BSL will therefore have a direct impact on those developers who will be liable to pay. This impact will be a financial impact (on the additional cost of a Scottish BSL charged, plus any costs associated with administration), and an administrative impact (for example, the time and resources needed to calculate the levy, file returns, and store information required for compliance purposes).

Employment in the Residential Construction Industry

According to the Scottish Annual Business Statistics^[1], there were 2,169 businesses (though the Survey refers to these technically as enterprises) involved in the construction of domestic buildings in 2022. Together, these enterprises had 22.4 thousand employees (headcount) and had a Gross Value Added (GVA) at Basic Prices of £2,111.6 million. £2.112 billion (or £94,286 per employee)

Domestic building construction enterprises businesses are registered throughout Scotland – the local authorities with the highest number of these businesses are Highland (196), Glasgow City (163), and North Lanarkshire (162). Conversely, the local authorities with the lowest number of enterprises are Inverclyde (13), Clackmannanshire (15) and Orkney (22).

Employment in Real Estate Activities

In 2022 there were 7,181 individual business sites in the real estate division. Together, these businesses had 32.9 thousand employees (headcount) and had a GVA at Basic Prices of £2,641.1 million. Note that that 'real estate division' will also include non-domestic real estate activities, which will be out of scope of a Scottish BSL.

Location of Residential Development

Residential development occurs throughout Scotland. In 2023-24, the official statistics report that there were 14,589 private sector led house building completions and 12,904 starts^[2]. The local authorities with the largest volume of private house building completions were City of Edinburgh (2,049), Fife (1,440), West Lothian (1,258) and South Lanarkshire (899). The local authorities with the highest per capita rate of private house building completions were Midlothian, East Lothian and West Lothian.

According to the Competition and Markets Authority (CMA), the majority of new homes in Scotland are delivered through the 'speculative model' of housebuilding (over 50% in 2021-22), whereby housebuilders buy land in advance of the construction and sale of homes, for profit, and without knowing exactly the final prices at which they will sell the homes.^[3] In comparison, around 45% of homes build in 2021-22 we build on an affordable housing basis.

There is limited data available on the composition of the housebuilding industry in a Scottish context partly because several larger housebuilders operate both in Scotland and the rest of the UK. At a UK level, the CMA estimates around 40% of new homes are provided by the largest 11 housebuilders. These firms are (in alphabetical order): Barratt, Bellway, Berkeley, Bloor Homes, Cala, Crest Nicholson, Miller Homes, Persimmon, Redrow, Taylor Wimpey, and Vistry.^[4]

The Scottish Government will work with industry stakeholders and our partners in local government to develop a taxpayer profile for a Scottish BSL, ahead of the Final BRIA.

There may also be indirect impacts arising from other businesses engaged in the residential construction industry, such as contractors, surveyors and those engaged in legal services relating to the sale and purchase of land and property. These indirect impacts will be dependent on behavioural responses from an introduction of the levy, which are explored in further detail in Section 3 (other costs).

In addition, there may be 'knock-on' impacts to purchasers of residential property, whether through sale or lease. This includes businesses involved in the renting of residential property (i.e. buy-to-let), homebuyers purchasing housing for residential purposes or for operating a self-catering business from.