29 March 2004
Hands up anyone who remembers development land tax (DLT)? Older readers may recall that DLT was more than just an hirsute radio DJ of long ago. Indeed, the Barker Report, ‘Delivering Stability: Securiing our Future Housing Needs’, published on Budget Day just gone, may have given them a frisson of recollection with its discussion on the possibility of taxing increases in land values as a result of “development gain”.
The purpose of this piece is not to comment on the overall proposals set out within the Barker Report. The report makes 36 recommendations, covering the full range of issues on housing stock and the supply of housing land in the UK. However, it is in Recommendation 26 that there appears to be recognition of the “retro appeal” of some form of tax on development gains.
The recommendation is clearly to tax “developers” on the increase in the value of land when planning permission has been granted.
This appears to be based on the assumption that those realising gains from the disposal of land, where the increase in land value is, in part at least, attributable to the benefit of planning permission, are contributing too little to the Exchequer. The intention is to increase the tax take, which would be used to benefit housing supply: a sort of hypothecated tax.
Even if yet another impost is just what the UK tax system needs, a cursory consideration of the implications of this recommendation throws up as many questions as a Jeremy Paxman interview. Here are a few.
For starters, the report examines the tax currently charged on land development as purely being an issue dealt with under the capital gains tax provisions on sale. Obviously, the authors of the report have not had dealings with inspectors of taxes, who in a number of cases can be particularly keen to treat land disposals as trading transactions.
In addition, the Inland Revenue is frequently attracted to the extremely broad ambit of the transactions in land legislation in the Taxes Act, which taxes gains arising from the disposal of land as income rather than as capital gains, particularly in the context of land development. It is certainly a mistake to assume that the UK tax treatment of land disposals is invariably both straightforward and uncontroversial.
Then there is the vexed question of valuation. The “planning gain supplement” (ie tax) would, after all, be levied on an increase in value in land. Would, for example, a person making a disposal of developed land have to accept values imposed on them by the district valuer?
Anyone with any experience of the taxation of land transactions can appreciate that, at times, land valuation issues can give rise to particularly vexed and prolonged debate. The proposals here would only increase the scope for valuation disputes.
A suggestion has also been made for a lower rate of tax for the development of brownfield land for residential use and varying the rates. A ’brownfield’/’greenfield’ differential is also raised in another part of the report in the context of differential rates of VAT. If the proposals are brought to fruition, it will be interesting to examine the definitions of ‘brownfield’ and ‘greenfield’ for these purposes.
While the 1970s is currently the vogue era (which mystifies many who lived in that decade), the fascination with that time should stop short of a remake of the Development Land Tax Act of 1976. The introduction of a planning gain supplement (or tax) would bring cost, complexity and uncertainty in spades to the taxation of land with, if the DLT experience is anything to go by, little material increase in the tax base.
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