Feathering your nest

There has been much coverage of the conflict between nature conservationists and property developers over special protection areas, or SPAs. In particular a number of residential developments in Surrey, Berkshire and Hampshire have been put on hold after campaigns to protect the nesting areas of the Dartford warbler, the nightjar and the woodlark. Planning departments of local authorities have found themselves in an impossible situation, and planning applications have been rejected or substantially delayed. Earlier this year the Home Builders Federation estimated that up to 40,000 homes in the South-east would be put at risk by these delays. The impact of all of this is now starting to bite, with some developers beginning to prepare for cash flow difficulties as their pipeline of developments begins to dry up.

Experienced developers are familiar with situations in which economic changes have put pressure on the housing market, with the result that they have had to take a careful look at their financial situation. The present problems caused by SPAs are no different, but some developers are failing to make the best of the situation. Many developers are overlooking the opportunity to reduce their annual tax bill as a consequence of the delay or rejection of their planning application.

One question that developers should consider is whether the value of development land that they own and that is situated in SPAs needs to be reviewed. In all likelihood one would expect that land in an SPA which previously had a high development value, and may have been bought at a premium to reflect this, may be worth less as a result of the possibility of planning consent either not being granted or being watered down to accommodate a lower density of development.

If there is justification for a lower value, then developers should consider making provisions against land values in their books and reduce land values to reflect a fairer market value. As long as these provisions can be justified, with a surveyor’s report for example, then corporation tax relief will be available for the amount by which the land values are reduced.

Much will depend on the circumstances at the company’s year end and the period running up to the date that the accounts of the company are signed by the auditors and directors. For example, if at that date the directors are of the opinion that land values should be reduced because of factors such as the impact of SPAs, then the reduction in land values will result in a corresponding reduction of taxable profits and the company will benefit from a short-term reduction in its corporation tax bill.

Many developers are overlooking the opportunity to reduce their annual tax bill as a consequence of the delay

The principle can be explained as follows. ABC Ltd purchases land at a value of £1m with a view to building a number of houses. At the company’s year end, planning consent has not been granted because the land lies in an SPA. Surveyors have now valued the land at £700,000 on the assumption that planning consent will not be granted and the land has no enhanced development value. ABC Ltd reduces the value of the land in its books by £300,000 and the company’s profits are also reduced by £300,000 thus saving £90,000 of corporation tax if the company is paying tax at a rate of 30%.

If the losses are substantial enough there may even be a tax refund if the company generates tax losses that can be carried back to the previous year.

If in a later period the sites in question receive planning consent and are subsequently developed, then any provisions that have previously been made against the land values will have to be reversed. The reversal of the provisions will result in the previously reduced tax bill being increased to what would have been the right level. The overall impact is that the company is able to delay or defer its tax liability thereby helping with the company’s cash flow.

Deferring tax liabilities however should not be the only consideration when reviewing land in SPAs. Banks that may have lent on the back of high land values or third-party investors will also have an interest in the value of land held in SPAs. It is vital there is an open dialogue with bankers, so issues are understood before any writedown is contemplated. It is important that any line of funding previously agreed is not disrupted by book adjustments.

Hopefully, the issues affecting land held in SPAs will only be a short-term problem, and a solution can be found to resolve the planning bottlenecks. In the meantime, developers who fail to make the most of the present situation are missing a valuable tax saving that will certainly help with cash flow.