10 April 2006
The Government's proposed new tax on development, the Planning Gain Supplement (PGS), has attracted criticism from many quarters since the Chancellor's announcement in his pre-Budget speech on 5 December 2005. What is the thinking behind PGS? Why the concerns? And what next?
The thinking behind PGS
In 2003, HM Treasury published Bank of England Monetary Policy Committee member Kate Barker's review of housing supply, which examined possible ways to increase the pace of new housing development. One of the constraints on development is the infrastructure (transport improvements, schools, community facilities and the like) needed in conjunction with many housing schemes. One of Barker's recommendations was that a tax should be imposed on windfall gains accruing to landowners on the granting of planning permission for residential development. She envisaged that this would partly replace the current planning obligations system, whereby agreements are negotiated under Section 106 of the Town and Country Planning Act 1990.
The Government has expanded the PGS proposal to cover all development other than the most minor householder projects - no longer is it going be restricted to residential schemes.
What is proposed?
The Government proposes that PGS would be set at a "modest" rate to capture a portion of the land value uplift created by the planning process in order to help finance infrastructure required to support housing growth. 'Modest' is not defined, but 20 per cent appears likely.
The main features of the proposed PGS are as follows:
- PGS would not be implemented before 2008.
- PGS would be payable under a self-assessment regime administered by HM Revenue and Customs (HMRC).
- A 'development start notice' would need to be served before commencement of development. The person who serves the notice becomes the chargeable person liable to pay PGS.
- Payment would be required on the commencement of development, with the valuation date being the date of full planning permission (or final reserved matters approval in the case of any outline planning permission).
- lower rate may be applied to brownfield land.
- Section 106 planning obligations would be scaled back to matters relevant to the direct environment of the development site as well as affordable housing (the 'development site environment approach'). For example, no longer would authorities be able to secure, by way of a Section 106 agreement, contributions or obligations relating to the provision of education or community facilities.
- PGS revenues would be applied towards the provision of infrastructure.
- PGS would be calculated as a proportion of "planning gain", defined as "planning value" minus "current use value". Planning value is the value of the application site the moment after planning permission has been granted, assuming a single unencumbered freehold interest in the whole of the site, with vacant possession. "Current use value" is the value of the land on the same assumption, the moment before planning permission was granted and assuming no hope value - that is, assuming that no development would be possible save under any permission granted before a date to be specified in the legislation.
The initial consultation period on the proposal closed on 27 February 2006. A wide range of representations have been made by bodies such as the Confederation of British Industry, the Law Society, the Royal Institution of Chartered Surveyors and the British Property Federation.
A number of concerns have been raised. These include:
- The artificiality of the formula to be applied for calculating PGS, which bears little relationship to true values, particularly in the exclusion of hope value from the definition of current use value.
- The uncertainties of any self-assessment regime, particularly in terms of any implications of commencing development before any risk is removed of HMRC seeking to reopen the assessment.
- The additional administrative complexities created by the proposed PGS system.
- The difficulties of applying PGS to brownfield developments and uncertainties as to the appropriate definition for brownfield developments.
- The inability of the developer in many instances to pass PGS costs to the landowner and consequent risks to the viability of schemes. Would the introduction of PGS slow down, rather than assist in, the bringing forward of a development?
- How can there be certainty that the scope of Section 106 will indeed be reduced? Will authorities not still be looking to maximise the level of Section 106 planning obligations? And will the courts not continue to be reluctant to quash permissions on the basis that planning obligations have been agreed that go beyond the Government's advice?
- The reduction in the scope of Section 106 would reduce the flexibility available to the developer as well as the authority to ensure that infrastructure is provided efficiently, when and where it is needed, in connection with development.
- While the Government has indicated that the majority of PGS revenues will be returned to land authorities for the provision of infrastructure, how can developers be certain that the revenues will be spent by authorities when and where required?
- The transitional effects of the proposal could be to cause uncertainty in the market, delay the negotiation of land deals and, in some cases, delay progress of schemes through the planning process.
- Various detailed aspects of the planning system and subtleties as to how it operates in practice are not taken into account in the consultation paper.
The Office of the Deputy Prime Minister Select Committee has resolved to carry out an inquiry into the proposed PGS. The Chancellor referred to the PGS proposal in his Budget announcements on 22 March 2006 essentially as work in progress, while stressing that the revenues would be hypothecated so that "planning gains created locally would directly benefit local communities", with "remaining PGS revenues… dedicated to strategic infrastructure of regional importance to help unlock development land".
It will be fascinating to see the Select Committee's findings and the Government's response to the consultation process. Can well-founded criticisms be dealt with in a way that preserves the concept? Or will the complexity required to address the concerns sink the proposal?
New taxes are never popular, but there are particularly deep-seated concerns with regard to PGS. For a measure that is sought to be justified on the basis that it will assist in the delivery of housing and other forms of development, the concern is that it may achieve precisely the opposite.
Development and the planning process will require a new approach; on the present proposal there are a number of strategies potentially available to mitigate or avoid liability, but the greater concern is, in fact, over how development which is reliant on infrastructure can come forward with commercial certainty on the system proposed - what guarantee will the developer have that PGS revenues will be applied precisely when and where required and as efficiently as if the works had been directly undertaken or supervised by the developer under a Section 106 agreement?
In the meantime, the implications of PGS need to be borne in mind in negotiating transactions relating to developments that could be caught by the regime. We are already operating under PGS's shadow.