2012 Budget: construction industry implications

Practical Law UK Legal Update 7-518-5410 (Approx. 11 pages)

2012 Budget: construction industry implications

by PLC Construction

Background to the 2012 Budget

On 21 March 2012, the Chancellor of the Exchequer, George Osborne, set out the government's spending and taxation plans in its 2012 Budget. It also published its Infrastructure delivery update (March 2012) and the Plan for Growth: Implementation Update (March 2012).

The 2012 Budget was preceded by the:

2011 Autumn Statement, which acknowledged that the UK economy is recovering from the biggest financial crisis in generations. (See Legal update, 2011 Autumn Statement: construction implications.)
2011 Budget, which was fiscally neutral and confirmed the government was continuing with its plans to reform the economy. It was described as a "budget for growth". (See Legal update, 2011 Budget: construction industry implications.)
October 2010 Comprehensive Spending Review (SR 2010), which set out the government's plan to reduce the budget deficit. (See Legal update, Spending Review 2010: construction industry implications.)
June Budget 2010, which announced the government's plans to focus on health, education and infrastructure, its aim to cut waste and reform the welfare system, and intention to invest in transport, green energy infrastructure and sciences. (See Legal update, June 2010 Budget: construction implications.)

This note looks at areas in the 2012 Budget of primary interest to construction and engineering lawyers. For all our Budget coverage, including practice area summaries, see PLC 2012 Budget (this page will populate with links to our coverage from Thursday morning).

Programme for funding infrastructure

On 19 March 2012, prior to the 2012 Budget, the government announced its plans to carry out a feasibility study looking at "new ownership and financing models" for funding infrastructure programmes, including securing greater private investment in roads.

In making the announcement, the Prime Minister, David Cameron, said:

"I want to set out a vision for this country’s infrastructure in the 21st century; what we need, how we can pay for it and some specific steps that we are going to take."

He went on to add:

"...we now need to be more ambitious. Why is it that other infrastructure - for example, water - is funded by private sector capital through privately owned, independently regulated, utilities... but roads in Britain call on the public finances for funding?"

One option being considered is to introduce road tolls for new (not existing) capacity, as well as attracting investment from pension funds and other investors. The Treasury and the Department of Transport will carry out a feasibility study, which is due to report by the 2012 Autumn Statement.

Source: Number 10: PM speech on infrastructure (19 March 2012).

Industry reaction

Mark Odell, transport correspondent, Financial Times:

"The question is: can they make it work? Perhaps the Chancellor should read page 101 of his National Infrastructure Plan, which identified that the regulated asset model used in the water industry wouldn’t work because this government has ruled out tolling on existing roads."

NIP 2011

The government's latest announcement follows on from its National Infrastructure Plans, published in October 2010 and October 2011 (NIP 2010 and NIP 2011 respectively). In particular, NIP 2011 announced a number of finance measures for infrastructure projects, including:

The fact that the government had signed a Memorandum of Understanding with two groups of UK pension funds. The Prime Minister's speech confirmed that the first wave of £2 billion of this investment will be made by 2013.
Plans to increase public investment in infrastructure.

For more information, see Practice note, National Infrastructure Plans: construction, environment and property implications: Financing the NIP 2011.

Green Deal and Green Investment Bank

The government is committed, through the Green Deal, to improving the energy efficiency of buildings to benefit both energy bill payers and the environment. In the 2011 Autumn Statement, the government announced that it would allocate £200 million to encourage early uptake of the Green Deal in its initial phase over 2012-13 and 2013-14. The 2012 Budget did not contain any further details of this.

The government will invest through UK Green Investments (UKGI) in green infrastructure projects from April 2012, ahead of obtaining state aid approval for the Green Investment Bank (GIB). Non-domestic energy efficiency will be one of the priority sectors for UKGI, which will make available up to £100 million in the next financial year for commercial and industrial energy efficiency projects. The 2012 Budget made no further announcements.

For more information, see Practice note, The Green Deal.

Industry reaction

Paul King, chief executive, UK Green Building Council, on the Green Deal:

"I’d much rather it was delayed than they went out and blundered it. Because if we blundered it there would be headlines saying this is a disaster, and it would take two years at least to get it back into consciousness - it would kill the thing."

Michael Ankers, chief executive, Construction Products Association:

"It was particularly disappointing that the government once again failed to do anything to encourage investment in improving the energy investment in buildings, and the Budget seems to have been developed in a vacuum as far as their claims to be the 'greenest government ever' are concerned."

Health and safety

The 2012 Budget announced that the government intends to repeal or improve 84% of the UK's health and safety regulations, including:

Introducing legislation in 2012 to ensure employers are no longer in breach of strict liability duties if they have done everything reasonably practicable and foreseeable to protect their employees.
Giving the Health and Safety Executive (HSE) authority to direct local authority health and safety inspection and enforcement activity. A code will be introduced in April 2013.
Introducing additional changes to the Reporting of Injuries, Diseases and Dangerous Occurrences Regulations 1995 (SI 1995/3163) (RIDDOR 1995) by October 2013 (in April 2012 the period an employee needs to have taken off work before an injury or accident is reported will be extended from three to seven days).
Aiming to start all health and safety prosecutions within three years of the incident.

The government has previously committed to these in its response to Professor Löfstedt's review of health and safety regulation (see Practice note, Reforming the UK's health and safety laws: Government response to Professor Löfstedt's review).

Housing, including SDLT and Get Britain Building Fund

The 2012 Budget announced that stamp duty land tax (SDLT) will:

On 24 March 2012, be reintroduced for first-time buyers at a rate of 1% on properties costing between £125,000 and £250,000. This SDLT "holiday" was introduced in March 2010 (see Legal update, March 2010 Budget: the construction industry reacts: Stamp Duty Land Tax), but was considered to be "ineffective" in getting more people onto the property ladder.
From 22 March 2012, increase to 7% on the sale of properties over £2 million.
From 21 March 2012, be levied at 15% on residential properties valued at over £2 million purchased by "non-natural persons, such as companies".

The 2012 Budget also announced that:

The government will consult on introducing an annual charge on properties valued at over £2 million held by non-natural persons, with a view to the change being introduced in April 2013.
Capital gains tax will be payable from April 2013 on disposals of residential property held by non-resident, non-natural persons, such as companies.

The 2012 Budget announced that the Get Britain Building Fund (which, in December 2011, was provided with £420 million to fund construction firms to build 12,000 new homes), will receive a further £150 million, which will help to deliver a further 3,000 homes.

The government had already announced (on 12 March 2012) its NewBuy scheme, which is intended to boost housing supply and provide access to mortgages for those who can afford mortgage repayments but do not have large savings. Strict criteria apply, including that the property must be a new build with a sale price not exceeding £500,000. Other properties are excluded, including second homes, buy-to-let properties and those that are shared ownership or shared equity purchases. For more information, see Legal update, NewBuy scheme launched.

Industry reaction

Sue Foxley, head of research, Cluttons:

"There is a massive shortage of family homes in London's villages and given price growth expectation, growing demand will push average three and four bedroom family homes in many areas such as Islington into the top stamp duty tier within a year or two, making it even harder for families to commit to staying in the city.

There will certainly be a rise in the number of people looking for a renovation project priced beneath £2 million, preferring to spend their money on improving their home and potentially getting it back when they sell, rather than handing an additional 2% over to the Treasury."

Brian Berry, chief executive, Federation of Master Builders:

"The Chancellor made some welcome announcements in today's Budget designed to help businesses hire people, such as the additional cut in corporation tax. However, construction SMEs need measures to reverse the contraction in the housing sector output before they can increase employment opportunities.

Homeowners and landlords need to know, just as much as the industry, what the total benefits will be of signing up for a Green Deal loan attached to their property.

Sadly, the Chancellor did not listen to those arguing for an extension to the Stamp Duty holiday for first time buyers. The reinstatement of Stamp Duty on properties worth over £125,000 for first time buyers will increase the numbers struggling to get on the property ladder."

Simon Rubinsohn, chief economist, RICS:

"RICS is pleased to see the Chancellor move to get small businesses building and growing again. The National Loan Guarantee Scheme, more money for the Get Britain Building Fund and streamlining the planning system are all welcome measures that should combat the growing scepticism in the construction sector and the view that SMEs are being squeezed.

Whilst credit-easing and the Get Britain Building Fund will take effect immediately, other initiatives like the planning reforms and infrastructure development will take longer to feed through. RICS would have liked to have seen a reduction in VAT to 5% on all home, maintenance and repair work, and a reinstatement of empty property rate relief up to £18,000 as immediate measures to generate jobs and growth now."

Brian Murphy, head of lending, Mortgage Advice Bureau:

"The new top rate of 7% stamp duty on properties worth more than £2m falls short of the 'mansion tax' which had been discussed before the budget. However, the impact will not be inconsiderable as the market in the southeast and particularly parts of London has been booming. The leap from 5% on properties worth more than £1m is significant and this – in combination with the pledge to crack down on tax avoidance – could raise hundreds of millions in tax revenues."

Infrastructure

The government has already published its vision for the ongoing delivery of infrastructure improvements in the UK in the National Infrastructure Plans of 2010 and 2011 (NIP 2010 and NIP 2011) (see Practice note, National Infrastructure Plans: construction, environment and property implications). In addition, David Cameron delivered a speech on 19 March 2012 on the country's infrastructure in the twenty-first century (see box, Programme for funding infrastructure).

The 2012 Budget announced that the government will continue to take an active role in ensuring that NIP 2011 is delivered efficiently and on time.

In its Infrastructure delivery update (March 2012), it identified the 40 priority infrastructure projects and programmes, setting out progress against each one. It also confirmed that:

A shortlist of options has been identified to increase capacity and improve performance of the A14. This may include part-funding through tolls.
High Speed Two will proceed.
Network Rail will be supported to invest £130 million in the Northern Hub rail scheme, which will improve train services between Manchester and a number of towns and cities, including Sheffield.
A number of cities will become "super-connected" as part of a £100 million investment in delivering ultrafast broadband to 1.7 million households and 200,000 businesses.

The Infrastructure delivery update also identified a number of other infrastructure initiatives:

On roads, to carry out a feasibility study into new ownership and financing models (see box, Programme for funding infrastructure).
Tackling congestion, connectivity and improving cycling in London. This will include looking at new river crossings, ways to improve rail journeys and lengthening commuter trains (in conjunction with the Mayor of London and Network Rail).

In addition, the 2012 Budget announced other investments across the UK, including:

London will get a new £70m development fund to look at new investment opportunities.
An enterprise zone will be established for the Royal Docks in London.
A further £50 million will be made available for Belfast, Birmingham, Bradford, Bristol, Cardiff, Edinburgh, Leeds, London, Manchester and Newcastle to become "super-connected" cities, using ultra-fast broadband.
Mobile coverage will be extended to 60,000 rural homes, using £100 million announced in the 2011 Autumn Statement.

Industry reaction

David Higgins, chief executive, Network Rail:

"Today's announcement of further funding for the initial stages of the Northern Hub is a welcome show of confidence in rail bringing benefits to passengers as well as driving economic growth. To realise the project's total value of £4bn to the Northern economy and create between 20,000 and 30,000 new jobs, the final stages of funding will need to be supported in the rail budgets to be announced later this year."

Nick Prior, head of Infrastructure and capital programmes, Deloitte:

"While little in the way of additional infrastructure spending was announced, the Budget showed the importance government is attaching to the UK’s infrastructure."

Landfill tax and aggregates levy

The 2012 Budget announced:

The standard rate of landfill tax will increase by £8 per tonne (to £72 per tonne) on 1 April 2013, but the lower rate will continue to be frozen at £2.50 per tonne in 2013-14. This was announced in the June 2010 Budget. (For more information, see Practice note, Landfill tax.)
The rate of aggregates levy will not increase from £2 per tonne to £2.10 per tonne, as scheduled, but will be delayed to April 2013. (For more information, see Practice note, Aggregates levy.)

Plan for Growth update

Alongside the 2011 Budget, the government published the Plan for Growth (the Plan). Alongside the 2012 Budget, the government published the Plan for Growth: Implementation Update (March 2012) (the 2012 Implementation Update).

The overall intention of the Plan stays the same:

To create the most competitive tax system in the G20.
To make the UK one of the best places in Europe to start, finance and grow a business.
To encourage investment and exports as a route to a more balanced economy.
To create a more educated workforce that is the most flexible in Europe.

In the nine areas specific to construction, the government reports that three are complete:

Its publication of the long term forward view of projects and programmes as part of the National Infrastructure Plan 2011.
The quarterly publication of a two-year rolling forward programme of publicly funded work.
Reforming the SDLT rules for bulk purchases of residential land.

The government reports that progress has been made on its remaining six targets:

Reducing infrastructure deliver costs by 20%. (The government intends to publish its first annual cost review in April 2012.)
Supporting first time buyers through the FirstBuy programme. The government will publish sales figures for the first year of its two-year programme in June 2012.
The release of public sector land for development. The 2012 Budget identifies the release of sufficient land to build 100,000 homes by April 2014.
Removing barriers to entry for Real Estate Investment Trusts (REITs). The government is committed to implementing the remaining, technical, parts of its legislative programme.
Eliminating redundancy and duplication in construction standards and codes. The government will publish a report on the transport sector in June 2012.
Confirming zero carbon homes regulatory requirements. The government is consulting on statutory changes to be implemented in 2013.

(Pages 32 and 33, section 13 of the 2012 Implementation Update.)

Planning reforms

The 2012 Budget announced that the national planning policy framework (NPPF) will be published by the end of March 2012, and will come into effect immediately. The NPPF will refocus planning policy to support growth and will include a "presumption in favour of sustainable development to underpin all local plans and decisions". For more information, see Legal update, What to expect in 2012: construction: National planning policy framework (NPPF).

In addition, the government:

Intends to introduce further measures to deregulate and simplify the planning system.
Remove duplication in the consent regime for major infrastructure development by bringing forward legislation to adjust the scope of the Special Parliamentary Procedure.
Will, on 22 March 2012, publish the results of its review of the Birds Directive (Directive 2009/147/EC on the conservation of wild birds) and the Habitats Directive (Directive 92/43/EEC on the conservation of natural habitats and of wild fauna and flora) (often referred to as the Habitats and Wild Birds Directives).
Introduce a Major Infrastructure and Environment unit.

VAT: alterations to listed buildings

The 2012 Budget announced the government's intention to remove some VAT "anomolies". In particular for the construction industry, to remove the anomaly under which approved alterations to listed buildings are zero-rated, while alterations to other buildings, and repairs and maintenance to all buildings, are standard-rated. The changes are due to come into force in October 2012, with transitional arrangements lasting up to 20 March 2013 for contracts that were in place before the 2012 Budget. For more information, see Legal update, 2012 Budget: key business tax announcements: VAT.

Industry reaction

Noble Francis, economics director, Construction Products Association (CPA):

"This is only going to cause the heritage sector more harm... But ironically, it could speed up work on heritage buildings before October because people who wish to alter listed buildings will want to do so in the next six months."

Comment

In announcing the 2012 Budget, George Osborne said his third budget "unashamedly backs business" and is "on the side of aspiration". Also, that the government is committed "to driving through the measures announced in the Plan for Growth and the 2011 Autumn Statement" and is taking steps to stimulate investment, exports, enterprise and the labour market.

Keen observers will see that George Osborne said he was backing business, before naming several industries (including aerospace, energy, pharmaceuticals, media and science) but omitted to mention the construction industry.

Graham Kean, head of public at EC Harris, summed up the industry's reaction:

"Actually, there was precious little news for most of us in our industry (the energy sector aside) – a touch disappointing when you consider the potential that construction has to delivering regeneration and growth."

Sources

Further information

For more information on the 2012 Budget, see Legal updates:

2012 Budget: construction industry implications | Practical Law