A taxing time

AJ June 2006 by Brian Waters

As HM Treasury’s move on planning gathers pace with the announcement that Kate Barker is to prepare a wide-ranging report on possible reform of the system*, so consultation on her Planning Gain Supplement (PGS) has closed with much gnashing of teeth.

PSG was Kate Barker’s (she the economist on the Bank of England Monetary Committee) invention in her review of housing supply. Given momentum by Gordon Brown in his Autumn Statement, the consultation suggests:

· a self-assessed tax on the uplift in land value consequent on the grant of a planning permission to be payable upon the commencement of development

· s106 Agreements (Planning Obligations) to be cut back and simplified to deal only with matters directly related to the proposed development – and affordable housing

· possibly a reduced rate of tax in regeneration areas, a small scale threshold to apply and householder improvements to be exempted

· the tax to be recycled to fund strategic infrastructure at the regional level and locally to meet local priorities.

Writing in April’s Planning in London** Barker refers to her interim review:

“The diagnosis of the Review was that a major problem had arisen with regard to the English planning system, such that not enough flow of implementable planning permissions was getting through the process. Straightforwardly – there was not enough land readily available to build on. This implicitly means that in my view the value the planning system places on undeveloped land is (often unwittingly) too high. In addition, the incentives faced by many players – local authorities, existing homeowners, the development industry – were such that they add up to encouraging undersupply, at the expense of the first-time buyer and others effectively outsiders to the housing market. And the whole process of planning can be extremely protracted – for a large site five years from the initial application for outline planning permission to starting construction is not exceptional, even for if it has been allocated for housing in the local plan.”

It is ironic then that her analysis seems to have brought another Development Land Tax out of the Treasury’s cupboard. As author of Development Land Tax Explained, published by Architectural Press in 1976***, I share the pessimism of the house building industry on this as a likely means of resolving the issue.

That there is an urgent need to cut back on Planning Obligation agreements is unarguable. It does seem however that Kate Barker was onto something in suggesting that PGS receipts should pay for local infrastructure and community benefits. This could go some way to incentivising planning committees and their constituencies to permit more development and to offset the democratic deficit in a system which puts no votes the way of the future occupants of proposed houses to balance the generally conservative pressure from existing residents.

It seems that the Treasury has translated this intention into a centrally managed tax with a vague (and inevitably mistrusted) suggestion that some of this would be recycled to the local and regional level.

The common complaint especially in regard to the Housing Growth Areas such as Ashford is the apparent lack of finance for infrastructure needed to support such development. The ODPM fairly points to the initial hostility of developers to a tariff or ‘roof tax’ as a means of dealing with this. With the emergence of the threat of a land tax this has changed to loud enthusiasm! But that is what consultation is about.

More irony then in the consultation response representing the growth areas, saying that PGS “would make delivery harder”. Martin Bacon, managing director of delivery vehicle Ashford’s Future, says: “Growth areas should be exempt from PGS. Its possible introduction is making it harder to agree a roof tariff deal with developers. PGS in growth areas will only increase uncertainty and reduce the developer contribution for infrastructure. It might work in average rural constituencies but would be a ‘bloody mess’ in the growth areas. We need PGS like a hole in the head”. He is supported in his concerns by both Stephen Joseph, deputy chief executive of Thames Gateway London Partnership and Milton Keynes leader Isabel McCall who “fears the tax will interfere with its recently agreed roof tariff deal as local developers are concerned they could end up paying twice.”

Local authorities also express concern that, having become hooked on milking Planning Obligation agreements, PGS would reduce their ability to negotiate local community benefits.

The consultation has flushed out many legitimate concerns and demonstrates the difficulty of using tax as an incentive. In reality it could end up operating to redistribute resources from areas with strong development pressure and in need of infrastructure to weak areas where the market is calling for subsidy. In any case the costs of managing valuation and collection would reduce resources and the new tax would reduce the current tax take where land sellers and developers make a taxable profit, so reducing the gains anticipated by the Treasury. We have been here before.

If Government is listening the circle might be squared by allowing local authorities to collect a simple, locally determined, roof tax and keep more of the Council Tax on new development while dealing with loopholes (such as offshore developers) whose profits are not properly taxed.

* call for evidence see: www.hm-treasury.gov.uk

**from www.planninginlondon.com

*** still available on www.Amazon.co.uk!

Brian Waters is principal of the Boisot Waters Cohen partnership, see www.bwcp.co.uk