Living expenses

The Planning Gain Supplement Tax is out and a tariff-based approach to planning charges is in. However, the details are still to be finalised, says Tim Pugh

In the Queen’s Speech on 6 November there was no reference to a Planning Gain Supplement Tax Bill. For the British Property Federation (BPF) and the many others who had campaigned against the tax, this news was welcomed enthusiastically.


The Government has for many years been pursuing a new homes agenda. The July 2007 Housing Green Paper, for example, speaks of three million new homes by 2020. For many years investment in new infrastructure has lagged behind growth. The areas most targeted for new communities and regeneration need investment in transport, schools, local services and health facilities.

Traditionally, investment in local services has come from central government, funded by direct taxation and from local rates, topped up by ‘planning gain’ contributions from the development industry.

The crux is that existing resources are not delivering enough to fund the necessary new and improved infrastructure. Increasing taxation on local and general populations is politically unacceptable. Research in 2004 showed that ‘planning gain’ via Section 106 agreements was negotiated in only 1.5 per cent of all developments, 17.6 per cent of major developments and 25.8 per cent of major residential developments.

In a gravity-defying property market, developers and landowners apparently earning large profits enjoy limited press, and even less public, sympathy. The Government has therefore warmed to the twin challenge of how to extract greater contributions from developers and how to capture contributions from the large majority of small developments that would otherwise slip through the net.

New tax plans

Proposals for a new centrally collected Planning Gain Supplement Tax (PGST) were launched for consultation in December 2005.

PGST was conceived as a measure “to capture a portion of the gains accruing to landowners as a result of the granting of planning permission so that increases in land values can benefit the community more widely”.

Under the proposals, planning obligations (Section 106 Agreements) were to be scaled back and a direct tax to capture a percentage of uplift in land values deriving from the granting of planning permission was to be levied.

PGST would be paid direct to HM Revenue & Customs (HMRC). Revenues captured were to be partially hypothecated with a ‘significant majority’ recycled to the local level, with a ‘significant proportion’ to be ringfenced for strategic infrastructure.

The campaign against PGST

The property and development industries did not see the proposals as either fair or efficient. From December 2005 to October 2007, the BPF led a campaign for the proposals to be scrapped in favour of a tariff-based approach.

A chink of light appeared when the July 2007 Housing Green Paper invited comment on four approaches to development-related contributions to infrastructure funding, only one of which was PGST.

Over summer 2007, there was frenetic activity by the property industry culminating in a combined BPF, Home Builders Federation, London First and Major Developers Group submission advocating an alternative approach.

An alternative to PGST

The submission, backed by research demonstrating the degree to which local authorities were already using a tariff-based approach to large developments, proposed:

– using Section 106 obligations as the foundation for the wider introduction of tariffs;

– setting a tariff-charging system in development plans, as opposed to an informal policy;

– applying the system to all developments from smaller developments to local or sub-regional infrastructure;

– introducing a development plan requirement for all developments to contribute through a tariff towards general infrastructure;#retaining existing Section 106 arrangements for when specific infrastructure needs to be secured for a particular development.

New planning charge

The representations were successful. The October 2007 Pre-Budget Report announced: “Legislation implementing PGST will… not be introduced in the next parliamentary session. Following discussions with key stakeholders, the Government will legislate in the Planning Reform Bill to empower local planning authorities in England to apply new planning charges to new development, alongside negotiated contributions for site-specific matters.”

The same afternoon, Yvette Cooper, the Minister for Communities and Local Government, outlined the main features of the planning charge as follows:

– Subject to low de minimis thresholds, residential and commercial developers will be liable to pay the planning charge.

– Where appropriate, local authorities will be able to use planning charges to supplement a negotiated agreement. The agreements will still be necessary to secure affordable housing and to address costs related to the specific development site.

– Planning charges would be based on a costed assessment of the infrastructure requirements arising out of the development, taking account of land values.

– Planning charges should include contributions towards the costs of infrastructure of sub-regional and regional importance identified in development plans.

– Planning charge policies will be tested through the development plan process, in consultation with developers, stakeholders and the community to ensure they support the new development and levels of new housing required.

A battle won

The development industry has won a battle in a longer war. PGST has been shelved. But in its enthusiasm for standard tariffs the industry has conceded the principle that developer contributions to infrastructure should be based on need generated by individual developments.

Also, the true detail of the new planning charge has yet to emerge. The October announcements are opaque on how the charge will be calculated, but it is clear it will take account of land values. They are similarly opaque as to who will receive the monies raised and who will collect them.

Section 106 planning obligations will continue for the foreseeable future and will certainly be relevant to larger developments.

For smaller developments there will be a planning charge alone. For larger developments, combinations of infrastructure-related Grampian Conditions (a planning condition saying development cannot proceed beyond a certain point before another event has occurred), planning charges and Section 106 planning obligations may still be the norm. The conundrum of how developers can ensure that infrastructure to which they contribute will be delivered to release Grampian Conditions still remains. The spectre of developers having to make payments as well as having themselves to deliver infrastructure to overcome Grampian Conditions still remains.

If the charges are dependent on both emerging legislation and adopted development plan provisions before they come into play, they will be at least two years off in most areas.

PGST has not been permanently ruled out. The development of statutory planning charges is to be kept under close review to make sure that the Government achieves its aim of increasing investment in infrastructure alongside supporting new development.

The Treasury and HMRC are rumoured to have spent £40m on a computer system for collecting PGST. If this is so, they will be reluctant to see it disappear altogether.

Tim Pugh is joint head of planning and environment at Berwin Leighton Paisner