Scottish Building Safety Levy: partial business and regulatory impact assessment

Section 3: Costs, impacts and benefits

Quantified costs to businesses

Based on initial analysis and engaged with stakeholders, the following direct costs to businesses have been identified from the introduction of a Scottish BSL (Option 2):

• Reporting obligations – developers will be required to submit self-assessed tax returns within a required timeframe.
• Compliance requirements – As part of the compliance and enforcement aspects of the tax, businesses will be required to retain information and records relating to the tax liability.
• Operational changes - The Scottish Government does not believe that businesses affected by a Scottish BSL will be required to alter their processes or workflows. We do recognise that businesses may undertake changes in order to minimise the financial and administrative impact of a Scottish BSL.
• Financial impact – Businesses liable for a Scottish BSL will be required to calculate, pay and remit the levy to Revenue Scotland. This means that, in addition to the cost of the levy, liable businesses will also require resourcing to calculate the tax and submit returns within the required timeframe.
• Training and education – to support employees in calculating the tax and submitting returns, businesses may need to provide additional training for these procedures.

As noted above, the Scottish Government intends to raise around £30 million per annum from a Scottish BSL, proportionate to the amount the UK Government is seeking to raise from the BSL in England. This is relatively small in relation to other cost obligations in the sector. For example, research commissioned by the Scottish Government found that almost £500 million £0.5bn was agreed through planning obligations in Scotland in 2019/20^[7].

Initial engagement with industry stakeholders has highlighted the need to carefully consider and assess the cumulative regulatory impact (both currently and proposed) for the housebuilding industry. This includes changes to residential building standards (including Passivhaus), costs for construction-related applications, Non-Domestic Rates, and the development of an infrastructure levy. Consideration will also be needed in relation to reserved regulatory areas such as corporation tax and RDPT.

A number of exemptions and reliefs are being considered, in order to mitigate impacts and support delivery of the Scottish Government's aims. These include an exemption or relief for affordable and social housing, and a reduced rate for units built on brownfield land. Developers who build on brownfield or contribute to the Scottish Government's affordable housing supply programme may have a lower tax liability compared to those that do not build in these circumstances.

Other impacts

When a tax is introduced there will be an associated behavioural change (transactions may be initiated, postponed or cancelled) and measuring the extent of these things relies on accurately predicting the tax elasticities (the responsiveness) associated with that change.

In the case of introducing a Scottish BSL, the impact of the tax will depend on how developers respond. For example, developers could absorb the costs associated with the tax, pass the costs on at some point during the development process (e.g. through decreased land prices or increased house prices), or decide against proceeding with certain developments where viability was already marginal.

Recent evidence from the Competitions and Markets Authority suggests that, where land is yet to be acquired, developers are likely to seek to pass on the costs of a new tax through the price they pay for the land^[8]. This relationship between land value and property development is explained in the following excerpt from a Scottish Land Commission discussion paper on the housing land market:

"Because land acquisition is usually the largest single cost, and often the first one to be incurred, the price that the developer pays for the land determines much of what happens later in the process. In a competitive market, the developer that makes the most bullish expectations of sales prices, and/or projects the lowest costs, will typically be able to offer the landowner the most and secure the site. A residual valuation methodology is typically employed to arrive at an offer price, which involves estimating the final sales value that the developer expects to get from the new homes, and then subtracting all of the costs expected to be incurred in building them, to leave a residual amount. The price offered by the developer for the land must come from this residual value."^[9]

An initial assessment in relation to a Scottish BSL suggests that the likelihood of the costs of the tax being passed on to through increased house prices is low. As new build housing made up just 11% of all Scottish residential sales in 2023-24^[10], residential housing developers are unlikely to have sufficient market power to be price setters (due to the secondary market).

Therefore, with limited scope for developers to pass through the cost of the levy onto house buyers, the more likely scenario is that developers will seek to pass on the costs of a Scottish BSL on through paying a lower price for the land to be developed. If the landowner is unwilling to accept a lower price for the land then the likely implication is that development may not go ahead. This same implication may also arise where the developer already owns the land they intend to develop. However, where the developer has purchased land for development prior to the introduction of a Scottish BSL, it would not be possible to pass on the costs of the BSL through lower land prices.

The Scottish Government will work with partners, including industry, to consider how the introduction of a Scottish BSL could impact both land and house prices. In particular, where a Scottish BSL could result in reduced land prices, we will consider how this affects the viability of individual sites in Scotland (i.e. where a drop in land prices renders some sites unviable for development). We will also consider the impact of a Scottish BSL in those cases where developers have purchased land prior to the introduction of a Scottish BSL.

The calculation of a Scottish BSL may also have an indirect impact on the shape of the housebuilding industry. For example, a flat rate applied across all units may have distortive impacts on the profitability of certain housing types. The Scottish Government's preference, as set out in the consultation, is to introduce a BSL rate that is based on the value of the property. The consultation is seeking views on the appropriateness of this method and the merits of using an alternative method.

Scottish firms' international competitiveness

The Scottish Government does not believe the introduction of a Scottish BSL will affect Scottish business's ability to compete internationally. The Scottish Government will consider whether a Scottish BSL will affect Scotland's attractiveness as a destination for global capital investment.

Benefits to business

As the Scottish BSL will provide funding for the Cladding Remediation Programme, there may be indirect benefits to businesses that are involved in the process of cladding remediation.

Small business impacts

We are aware that due to their size, SME housebuilders are more likely have disproportionate costs associated with the introduction of a levy on new residential housebuilding.

The Scottish Government is proposing to put in place measures to exclude smaller housing developers from a Scottish BSL. The public consultation accompanying this Partial BRIA seeks to gather views on how best to implement such an exclusion.

Investment

As the policy on a Scottish BSL developer, we will, informed by our consultation and engagement, consider the potential impact of a Scottish BSL on investors and investment sentiment. In doing so, we will consider the policy against the recommendations of the First Minister's Investor Panel to make Scotland a globally competitive investment destination.

Workforce and Fair Work

The Scottish Government does not anticipate the proposals for a Scottish BSL will affect the workforce or Fair Work First principles.

Climate change/ Circular Economy

The introduction of a new tax on residential property development provides an opportunity to support positive behavioural changes though the use of exemptions or reliefs. One example could be a relief or discounted levy rate for developers using brownfield sites. This is explored in the public consultation accompanying this Partial BRIA.

Competition Assessment

The Scottish Government has undertaken an initial assessment of competition in relation to the introduction of a Scottish BSL. The results of which are as follows:

• The introduction of a Scottish BSL will not directly limit the number or range of suppliers of housebuilding. However, there may be indirect impacts stemming from the introduction of a new financial and administrative burden on housebuilders.
• The introduction of a Scottish BSL will not directly limit the ability of housebuilders to compete. However, there may be indirect impacts where certain types of housebuilding (such as affordable homes) or certain types of housebuilders (such as SME builders) are removed from charge.
• The introduction of a Scottish BSL will not limit housebuilders' incentives to compete, but as above, there may be impacts where certain types of housebuilding or housebuilders are removed from charge.
• The introduction of a Scottish BSL is not expected to affect consumers' ability to engage with the housebuilding market and make choices that align with their preferences.
• The introduction of a Scottish BSL is not expected to affect housebuilders' ability and/or incentive to introduce new technologies, products or business models.

Given these findings, and the fact that the policy remains in development and subject to change, the Scottish Government will undertake an in-depth competition assessment, which will be included as part of the final BRIA.

Consumer Duty

The Scottish Government intends to undertake a full assessment of a Scottish BSL in relation to the Consumer Duty. Our initial view is that the introduction of a Scottish BSL is unlikely to affect consumers of goods or services in Scotland that are supplied by a public authority or other public body. The two areas we have identified where such goods or services may be affected are:

• Provision of social housing – the proposals for a Scottish BSL currently include an exemption or relief for homes delivered through the Affordable Housing Supply Programme.. This includes social rent, mid-market rent, and low cost home ownership housing. This exception will be considered in relation to the Consumer Duty as policy development on the BSL continues
• Provision of services through the building standards system, such as building warrants and completion certificates – the proposals for a BSL in Scotland currently do not include any conditional link with the building standards system, therefore we do not currently envisage any impact from a BSL on these services. This will be considered in relation to the Consumer Duty as policy development continues.