Building Safety Levy (Scotland) Bill: business and regulatory impact assessment

Section 3: Costs, impacts and benefits

4. Costs, Impacts and Benefits

4.1 Introduction

This section of the BRIA will outline, to the extent possible, the expected direct costs to businesses as well as other potential impacts.

As the SBSL will be a wholly new national devolved tax in Scotland there is no direct example to draw from when modelling impacts.

The Scottish Government have taken an extensive approach to engagement with the housebuilding sector and relevant stakeholders to ensure the widest and most informed views and evidence has been gathered in relation to the way in which the SBSL will interact with stakeholder functions.

To address the above evidence gap, this document will consider existing data relating to the current state of the Scottish housing market, as well as data relating to previous and current examples of the impacts of policies or costs that may be analogous to, or at least provide context for, the introduction of the SBSL.

In addition to this, as outlined in section 2 of this document, the Scottish Government has undertaken engagement through various means, such as the Expert Advisory Group, public consultation, stakeholder roundtables, and an industry impact questionnaire. The aim of this engagement strategy was to allow for the broadest possible range of views and evidence to be gathered in relation to the ways in which the industry would interact or be impacted by the SBSL. This has provided the Scottish Government with an industry informed view and evidence of the potential impacts that the introduction of the SBSL may have.

The impacts questionnaire was circulated with the intention of gaining clear evidence of the costs of introducing a SBSL to businesses.

Businesses were given a fact sheet for the levy that summarised the policy design outlined in the public consultation in order to enable them to better understand and estimate the additional administrative costs and revenue impacts of the levy.

Respondents were unable to provide a clear picture of the costs related to the administrative burden they currently undertake nor the potential additional cost of undertaking payment of the SBSL in the future, other than to note that it would definitively be an additional cost. This was largely justified by a lack of detail provided in relation to the administrative systems and process, calculation method, and rates.

There is, therefore, limited evidence upon which the Scottish Government can provide a reliable indication of the cost of the SBSL to the housebuilding sector at this time. Impacts of the SBSL will be continually monitored, with the Bill containing a provision for Scottish Ministers to report on the operation of the SBSL within the Act. As noted earlier in this BRIA the report may occur at such intervals as Ministers consider appropriate. This will be an opportunity to gain clear evidence of the costs, impacts, and benefits of the policy once established.

Evidence and potential impacts of the SBSL are outlined below. These are aligned with the key areas that came from engagement with detail provided by industry stakeholders and experts.

5. Impacts

As part of the evidence gathering process to inform this BRIA the public consultation posed questions related to potential impacts of a SBSL. The questions aimed to assist in gathering information from the industry on the sort of impacts a levy could have on the housebuilding industry, alongside consideration of other potential impacts such as island communities, equalities and data protection.

Based on engagement with stakeholders, the following impacts to businesses were identified in relation to the introduction of a SBSL (Option 3):

• 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 SBSL 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 SBSL.
• Financial impact – Businesses liable for a SBSL 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.

5.1 Scottish Housing Market

The Financial Memorandum to the Bill estimated that, excluding social and affordable new build as well as new build on islands, around 13,600 units per year could potentially be subject to the SBSL. The average new build sales price in 2024-25 in Scotland was around £340,000,^[16] which gives an indicative annual market value in the region of £4.6bn. As the proposed revenue target is £30m per year, the levy would be equivalent to around 0.6% of the market value. This could vary depending on the final form of any exemptions (discussed further below) as well as trends in house prices.

Annual growth in new build prices has averaged 4.3% over the 22-year period from 2023-24 to 2024-25, with the lower quartile for price growth at 1.4% and the upper quartile at 7.1%.^[17] Developers are accustomed to working in an environment of significant fluctuations, and the impact from the levy is not likely to be large in relation to normal fluctuations in house prices and other input prices.

The economic effect of the levy can be thought of as reducing the net price that the developer will receive, which implies that one way of estimating the potential impact of the SBSL on the wider Scottish housing market is to draw on the literature relating to the elasticity^[18] of supply/new build with respect to the price of housing.^[19] Various studies suggest that the price elasticity of new build is relatively low in the UK, with most estimates being below 1.^[20] A supply price elasticity below one would mean that the impact on new build volumes would be smaller than 0.6%.

Furthermore, particularly in the medium to long run (for reasons set out elsewhere in this BRIA), it is likely that developers will be able to pass through the impact of the levy in terms of lower land prices, meaning that the net price that they receive will be unchanged. It might be that in some marginal cases, where the price of the land in other uses is close to its residual value if used for housing, that it might not be possible to fully pass on the cost as a lower land price. The flexibility allowed for in the regulations in terms of how the levy can be varied due to factors such as brownfield, etc, will allow the design of the tax to mitigate the impact of such situations.

Based the considerations set out above, we therefore do not anticipate that there will be a significant impact from the SBSL on the level of new build housing in Scotland.

5.2 Financial and Administrative

Further to stakeholder engagement and the public consultation an impacts questionnaire was circulated to relevant businesses and stakeholders to gain additional insight into three key areas: Financial and Administrative Impacts; Cumulative Regulatory Impacts; and Wider Impacts on Land and Housing Stock. Both the public consultation and the impacts questionnaire aimed to gather views on potential impacts, rather than factual information on established impacts of the SBSL. Below is an overview of these views related to the above areas of potential impact.

The following potential financial and administrative impacts to businesses were expressed by stakeholders in relation to the introduction of a SBSL:

• Cost and Viability
  • Without a clear outline of the value of the Levy and its administrative costs they would be unable to fully comprehend and demonstrate the SBSL’s impacts on their business.
  • Increased cost of building homes and threat to the viability of developments.
  • Increase in cost of delivery across the board.
  • Businesses to absorb the cost then pass it on through either house price rises/reduced numbers of units built or unable to absorb the cost and therefore fewer homes will be built, and/or businesses will no longer be viable.
  • Cost to likely be passed on to the number of affordable units built rather than allowing the impact affect private builds.
• Housebuilding Sector
  • Wider economic benefits provided by the housebuilding sector reduced by increasing financial burden.
  • The knock on impact to the jobs and wider economic benefits that are created by the housebuilding industry.
  • Other industries and infrastructure reliant on the strength and contributions of the housebuilding sector.
  • The levy would be included in the land price for future land deals. The impacts of this are unknown but it has been suggested by stakeholders that it could materialise in lower land prices.
  • Burden of the administrative costs to developers when undertaking payment and return of the levy.
  • Cashflow issues linked to the tax point of the SBSL. Having payment at completion certificate a barrier due to payment prior to the receipt of funds from sales.
  • In cases of onward sale, the potential to lose funds paid if the sale does not complete.

Compliance Cost

5.3 Cumulative Regulatory Impact

Initial engagement with industry stakeholders highlighted the need to carefully consider and assess the cumulative regulatory impact (both current 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 Residential Developer Property Tax.

The following cumulative and regulatory impacts to businesses were expressed by stakeholders in relation to the introduction of a SBSL:

• Cost and Viability
  • Further adding to the cumulative burdens on the housebuilding industry from existing or proposed Scottish Government policies and regulation.
  • Current regulatory burden exacerbating an already challenging context which Scottish home builders are operating within.
  • Rising material and labour costs as well as the added pressures of the National Planning Framework 4 (NPF4) planning delays mean that the costs of the SBSL could not likely be passed on in full.
  • Any additional cost would have to be built into the cost of the site and this would lead to a reduced residual price available for land. The impact of this was noted to be that less land would then be sold for residential development leading to a slowdown in the housing market.
• Current Regulations
  • Additional cost of prospective regulation to introduce an equivalent to Passivhaus Standard in Scotland and the cost of implementing gigabit and EV connections.
  • Developers in England do not face the same planning issues and constraints and that the UK Government have prioritised new build housing, and their energy efficiency requirements are less stringent making it cheaper to construct the same or similar properties in England.

5.4 Wider Impacts on Land and Housing Stock

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 SBSL, 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.

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^[21]. 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.”^[22]

An initial assessment in relation to the SBSL suggests that the likelihood of the costs of the tax being passed on through increased house prices is low. As new build house sales made up just 9% of all Scottish residential sales in 2024-25^[23], residential housing developers are unlikely to have significant price setting power (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 the SBSL 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 there is a risk that a development may not go ahead. This same implication may also arise where the developer already owns the land they intend to develop. Measures within the Bill, such as the power to set different rates based on local authority house prices and for brownfield sites, and transitional provisions to deal with the treatment of development spanning the commencement of the Levy are intended to minimise these impacts.

The Scottish Government will also continue to work with partners, including industry, to consider how the introduction of a SBSL could impact both land and house prices. In particular, where a SBSL 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).

The following wider impacts on land and housing stock impacts to businesses were expressed by stakeholders in relation to the introduction of a SBSL:

• Cost and Viability
  • A negative impact on the development, viability, and delivery of housing. However the scale of this impact on delivery was noted to be indeterminable without further details regarding the rate of the Levy and importantly the scale of cladding in need of remediation in Scotland.
  • SBSL not recoverable from sales revenue and so would be treated as a development cost.
  • Cost would be reflected in land valuation and this will lead to reduced land values.
  • Not all land values capable of further compression leading to reduced number of units due to marginal sites not being taken forward.
• Housebuilding Sector
• Potential increased burden on Local Authorities to the capacity within the construction industry and wider technical experts related to the industry to deliver the remediation programme.
• House Prices and Rent
  • Negative effect on housing delivery, and subsequently young people and families.
  • Constraints on housing delivery would make it more difficult for young people to buy their first home and would further the issue of young people and families in temporary accommodation.
  • Increased costs disproportionately impacting, first time buyers, families seeking to buy bigger homes, and on issues related to child poverty
  • Increased rents in the Build to Rent sector, which may have a disproportionate impact on younger people.^[24]

6. Exemptions and Reliefs

A number of exemptions and reliefs have been considered, in order to mitigate impacts and support delivery of the Scottish Government’s aims. These are outlined below:

The following residential institutions, hotels and similar establishments are to be outwith scope:

• Hotels, inns and similar establishments
• Residential institutions which provide accommodation alongside personal care for reasons relating to old age, disability, alcohol or drug use or mental health
• Hospitals and hospices (both private and NHS)
• Military barracks and other residential accommodation for use by members of the armed forces (including single and family accommodation provided by or on behalf of the Secretary of State for Defence)
• Prisons and similar establishments
• Residential accommodation for school pupils
• Places of worship which provide accommodation within it
• Accommodation for asylum-seekers and dependants

6.1 Social and Affordable Housing

The Bill proposes that housing intended to be used as social housing and affordable housing designated as such at completion will be exempt from the SBSL.

An exemption for affordable housing would mitigate concerns on local authorities acting as taxpayers for the SBSL and ensures that public funding provided for social and affordable housing is not then subsequently used to pay costs associated with the Levy. In addition, this exemption would mirror the UK Government proposals for exempting affordable housing in England, ensuring there is equal treatment of these developments north and south of the border.

6.2 Brownfield

The Scottish Government recognises there may benefits to including a reduced rate on previously developed land to support the reuse of buildings and are therefore considering setting a reduced rate for brownfield through the regulation-making powers provided in Part 3 of the Bill.

This may result in developers that predominantly build on brownfield having a lower tax liability compared to those that do not build in these circumstances.

6.3 Island Developments

In recognition of the particular challenges faced by housebuilders on islands, the Scottish Government concluded that applying the SBSL to developments on islands risked exacerbating existing issues. In light of this, the Bill provides an exemption for all residential development constructed on islands. The Scottish Government therefore considers that the application of the levy will not result in any additional impacts on islands housebuilding, when compared to those elsewhere in Scotland, nor any differential impact between housebuilding on different islands.

6.4 Self-build

All new self-build homes to be exempt from the SBSL. As the policy intention of the SBSL is to generate funding from residential property developers, we do not consider owner-occupier self-builds as property developers, as there is typically no intention of development for the generation of profit. Exempting all owner-occupier self-builds also aligns the SBSL with the UK Government proposals of exempting self-builds from the English Levy.

7. Scottish firms’ international competitiveness

The Scottish Government does not believe the introduction of a SBSL will affect the ability of Scottish businesses to compete internationally, particularly given the domestic nature of those operating in the housebuilding sector and the existence of an equivalent Levy in England.

8. Benefits to business

As the SBSL will provide funding for the Cladding Remediation Programme, which in turn will commit significant public expenditure into the residential property construction sector, there may be benefits to businesses that are involved in the process of cladding remediation.

9. Small business impacts

Scottish Government is 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 SBSL consultation sought views on the most appropriate way in which to reduce impacts on small developers and the method by which an exemption may be implemented. Options for an exemption were considered in several formats: annual units; development size; annual profits; and development type. Details of responses to these options can be found in the SBSL Consultation Analysis Report^[25].

Having considered these views, alongside views from the SBSL’s Expert Advisory Group and other stakeholders, the Bill provides for a tax-free allowance of developed units, with the threshold to be set by Ministers in secondary legislation. The levy-free allowance is intended to assist in mitigating impacts of the SBSL for smaller developers. The Scottish Government has committed to further engagement with small developers and their representative bodies throughout the legislative process to consider an appropriate threshold level for the levy-free allowance to best give effect to its objective of protecting small businesses.

The following potential impacts to small businesses were identified by stakeholders in relation to the introduction of a SBSL:

• Cost and Viability
  • Significant risk to small developers
  • Less able to absorb costs of SBSL
  • SME developers operate with lower financial reserves making them vulnerable to additional costs.
  • SME developers largely operate with a profit margin of less than 10%
  • Respondent example:
  • § SBSL rate of £3,000^[26] per unit is equivalent to 1.2% on a property of £250,000. This would not be sustainable longer term and will reduce funding of projects where the margin is this low.
  • SME developers often focus on sites with slower build-out rates and are unable to compete with higher land values than those of larger developers. These sites have lower financial returns and are more sensitive to additional costs.
  • Further regulation will impact cashflow as SME funding arrangements differ from larger developers and have less access to revolving debt facilities.
• · Housebuilding Sector (SME)
  • SME home builders are key to number of Scottish Government’s housing objectives, and the unintended consequences of making the homes they deliver subject to the SBSL would harm those objectives.
  • SMEs deliver more than a third of new homes in rural and remote areas and any negative impact may reduce the number of units delivered in these areas.

10. Investment

As part of the policy development on a SBSL, we have considered the potential impact of a SBSL on investors and investment sentiment. In doing so, we have considered the policy against the recommendations of the First Minister’s Investor Panel to make Scotland a globally competitive investment destination.

Increasing investment in housing is a priority for the Scottish Government and Build to Rent (BTR) has been identified by the Competition and Markets Authority as one of the three forms of supply that should be supported by governments to counter the speculative nature of the housebuilding for sale market (the other two areas being affordable supply and self-build).

The at-scale rental market operates differently in terms of development, including funding flows and therefore applying the Levy may create different challenges for BTR developers paying the Levy than will be experienced by developers building houses for onward sale. In considering BTR’s different operating model, the Bill provides powers for Scottish Ministers to provide for further exemptions or reliefs, and to set a different levy-free allowance for different types of development. The Scottish Government will continue to engage with stakeholders to consider the case for any further exemptions or reliefs from the SBSL.

11. Workforce and Fair Work

The Scottish Government does not anticipate the Bill will affect the workforce or Fair Work First principles.

12. Climate change/ Circular Economy

The introduction of a new tax on residential property development has provided an opportunity to support positive behavioural changes though the use of exemptions or reliefs. One example proposed in the consultation was a discounted rate for developers using brownfield sites.

Scottish Government’s current policy position is that there would be a reduced rate for brownfield sites, in line with the UK Government’s BSL. Stakeholders have suggested that a reduced rate for brownfield sites would incentivise development and re-use if brownfield land. This was linked to the goals of the National Performance Framework 4, which encourages brownfield development. Beyond this it was highlighted that the additional challenges, complexities, and costs associated with brownfield development mean that a reduced rate or exemption would help to mitigate these costs and avoid challenging the viability of sites.

13. Competition Assessment

The standard questions within the competition assessment are as follows:

1. Does the measure directly or indirectly limit the number or range of suppliers?

2. Does the measure limit suppliers’ ability to compete?

3. Does the measure limit suppliers’ incentive to compete?

4. Does the measure affect consumers ability to engage with markets and make choices that align with their preferences?

5. Does the measure affect suppliers’ ability or incentive to introduce new technologies, products or business models?

The following sets out the Scottish Government’s view on the potential impacts of a SBSL, as relating to the standard questions within the competition assessment.

Does the measure directly or indirectly limit the number or range of suppliers?

It is not anticipated the introduction of a SBSL will directly limit the number or range of suppliers of housebuilding. If this was to occur and it was clearly linked to the introduction of the SBSL then this would be considered at the review point in line with the provisions in the Bill.

However, there may be indirect impacts stemming from the introduction of a new financial and administrative burden on housebuilders. This, as is outlined in the impacts section above, would be in line with the financial viability of sites and a developers’ ability to absorb the possible additional costs a Levy would incur. There is potential that some smaller developers that hold fine margins for build viability may exit certain areas/types of build if the rates, administration and compliance costs associated with the Levy are perceived as disproportionate. That is why the Bill makes provision for a levy-free allowance to mitigate impacts on the smallest developers.

Does the measure limit suppliers’ ability to compete?

It is not anticipated the introduction of a SBSL will directly limit the ability of housebuilders to compete.

As this is a national tax that will impact developers of new residential buildings across the board, with an equivalent measure also being put in place in England, the competitiveness in and between housebuilders will not be directly impacted.

In considering effects of the SBSL Scottish Government hold the view that potential indirect impacts may be in relation to the Affordable Housing Supply Programme, Island developments, and small developers if they were subject to charge. To mitigate this the Bill sets out exemptions for new social and affordable housing as well as all residential developments on Scotland’s islands. To protect small developers the Bill also contains powers for Ministers to set a Levy free allowance, to be set in future legislation.

If costs of the SBSL are more than developers are willing to absorb, or pass on to land prices, then it could impact on broader viability including affordable housing contributions.

Does the measure limit suppliers’ incentive to compete?

Given the broad application of the SBSL to the housebuilding sector, it is not anticipated the introduction of a SBSL will limit housebuilders’ incentives to compete.

Does the measure affect consumers ability to engage with markets and make choices that align with their preferences?

It is not anticipated the introduction of a SBSL will directly affect consumers’ ability to engage with the housebuilding market and make choices that align with their preferences.

This aspect would be highly contingent on the eventual rate(s) of the SBSL. Given that this is not contained in primary legislation, the Scottish Government will undertake a further competition assessment of this and other key areas of design as part of any BRIA relating to secondary legislation.

14. Consumer Duty

The Duty ensures consumers are at the heart of all strategic decisions within the Scottish Government. Under the 2020 Act, the definition of consumers includes individuals and small businesses^[27] who buy, use or receive in Scotland goods or services (or who could potentially do so) which are provided by public bodies or supplied by a business.

For the SBSL, potential impacts on consumers include:

• Impacts on the availability and cost of residential property for purchasers and renters
• Impacts on the acquisition of land for residential property developers captured under the definition of ‘small business’ for the purposes of the Duty

If the SBSL were to result in a decrease in the provision of new housebuilding, and/or an increase in house prices or rental costs, this could potentially cause harm to consumers seeking to purchase or rent residential property by reducing their access, restricting their choice, and increasing their costs.

The exemption for affordable housing from the SBSL aims to mitigate impacts on the delivery of affordable housing and subsequently seeks to protect those identified as more likely to use this tenure of housing from any indirect impacts of the SBSL. However, given the interconnectedness of the housebuilding sector and relationship between private and affordable housing, there may be knock-on impacts to overall viability on specific affordable housing projects and the type of housing provision available to potential consumers. This may have particular impacts on those who may be considered vulnerable consumers^[28] – these considerations are captured further in the Equality Impact Assessment and Fairer Scotland Duty Assessment that have been published alongside the Bill.

Residential property developers who would be considered a small business for the purposes of the Duty may be impacted by the SBSL as consumers in their ability to acquire land for development. Developers may seek to recover costs of the SBSL through negotiating a lower price for land, but their ability to do so may be restricted if landowners are unwilling to sell at this lower price. Additionally, these developers may face increased competition for the acquisition of land from local authorities and Registered Social Landlords (RSLs) who will not be subject to the SBSL for the provision of affordable housing. To mitigate these impacts and protect small developers, the Bill contains powers for Ministers to set a Levy-free allowance, to be set in future legislation.

It is our assessment that these potential impacts on consumers are likely to be minimal. As set out in this BRIA, potential impacts are challenging to quantify at this stage given that there has never been a SBSL (or equivalent in the UK). However, as the proposed revenue target for the SBSL (£30 million per annum) is low relative to the value of the new build housing market, we anticipate that the associated costs will be similarly low and that the resulting impacts of the SBSL will be minimal.