Cooke & Arkwright

New tax may deter development

15/03/06

On Monday 27th February 2006, the consultation period for the new Planning Gain Supplement (PGS) ended. This proposed ‘supplement’ is a tax on the increase in value of land once full planning permission has been granted. This is not a new concept: three previous attempts to implement such a tax failed in 1947, 1967 and 1976, and the current proposal is also attracting a great deal of controversy and opposition from within the property industry.

The government aims are to unlock development sites around the country to accommodate the large numbers of new houses that the Barker Report identified as being needed; to speed up the planning process on developments; and to fund local infrastructure to support sites, such as roads, schools and hospitals, as well as ‘strategic infrastructure across local authority boundaries’.

The rate of tax has not yet been determined, though the government describes it as being ‘modest’ while there is speculation that it will be around 20%. The tax will not be imposed before 2008 and will be collected through a developer self-assessment scheme. It is calculated by assessing the difference between uplift in value created upon the granting of full planning permission and the value of the land in its current use. The tax rate is levied on this difference and applies to both residential and commercial development land, with some exceptions. Currently the tax applies equally to greenfield and brownfield sites, though the treasury may make some reduction for brownfield sites.

The tax is assessed at the point when full planning permission is granted, and the developer (or active parties at commencement of development) is responsible for payment of the tax as a lump sum, at the moment development commences. The developer must apply for a ‘Development Start Order’ before work can commence.

So what are the concerns that are being raised? The property industry in general is not opposed to the principle behind some form of tax, but fears that in practice it will be unworkable and could hold land back from development. The industry already recognises the potential conflict with existing Section 106 Agreements or planning obligations, in which local authorities are able to negotiate funding for local infrastructure as part of many planning consents. It also recognises the naivety of the valuation implications and the impact for development appraisals which are extremely sensitive and vulnerable to market change.

Section 106 agreements are proposed to be curtailed. Some local authorities are concerned that such agreements are largely replaced by PGS and the fact that the treasury collects the supplement, may mean that not all the money will be passed on to a local authority. Indeed, the government proposals state that while they will pass back ‘a significant majority’ of PGS revenue to the local authority via grants, a ‘proportion’ is to be used to deliver strategic regional infrastructure. Developers are simply concerned that curtailing 106 agreements (if they are scaled back at all in practice) will result in them having to pay PGS in addition to 106 agreements.

Payment of PGS is mandatory when development commences and before any income is generated, which exposes the developer to both additional expense and risk. Furthermore, the implementation of PGS is unlikely to speed up the planning process as there are enormous difficulties in calculating the valuations in the many different and sensitive situations that arise, including when ‘hope value’ is factored in or where a site already has outline planning permission. Markets will not stand still and often bigger development schemes are ‘kept live’ in terms of value in deal structures which allow for ‘overage’ and future profit shares. This creates considerable potential for disputes between landowners, developers and the VOA over valuation appraisals.

It is not clear how the tax will operate for large, phased developments where many developers are involved and/or where planning permission is granted in stages over a number of years. Calculation of PGS would need to take into account costs borne by the developer in preparing the land and making it suitable for use, particularly in the case of brownfield sites. In practice this is difficult and there is again considerable scope for dispute.

What is for sure is that there will be a major impact on prices actually bid for development land. Landowners may not realise the full value of a sale if developers decide to take into account the PGS liability when assessing what they will be prepared to pay for the site. This may cause some vendors to hold back land in the hope that history repeats itself and the tax becomes unworkable, especially if land values were to fall. If land is held back, this could have a direct impact upon the residential housing market and one of the key aims of the government.

Theoretically, firms of chartered surveyors such as Cooke & Arkwright should be embracing a tax that could bring about an increase in valuation work and the need for professional advice. However, it is difficult to be enthusiastic about a scheme which is unlikely to have a positive effect upon the mechanisms that drive the property development world, but which will increase layers of bureaucracy through its implementation - PGS Applications, Development Start Notices, and disputes over valuations - and which may deter development and hold back potential land from the market. It is also doubtful how much of the tax raised will actually flow back into local and additional projects.

A fairer system might be to improve upon the principle existing 106 agreements, themselves capable at least of negotiation to reflect material considerations, with local authorities retaining control and ensuring that the immediate community and infrastructure directly benefit from developments. 

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