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Tolley's Practical Tax by Louise Pinfold CTA (Fellow)

Louise Pinfold explores the Planning Gain Supplement.The Barker review of housing supply, published in March 2004, indicated the need for additional housing to support a growing population, and identified an inadequate supply of development land as being the main constraint on the delivery of such additional housing.

One of the detailed recommendations made was that tax measures could be used:
‘to share in windfall development gains accruing to landowners so that increases in land values can benefit the community more widely’, with the suggestion that this should be done by considering the granting of planning permission as a suitable point to levy a charge to capture part of that windfall development gain, allowing the cost to fall largely on the landowner.

Other options were considered, such as adaptations of the planning obligations regime or the VAT system, or the introduction of a broader Land Value Tax, but these were rejected as being either inflexible or inconsistent with the planning system.

The Government has adopted many of the recommendations of the report and has indicated its ambition to increase new housing supply in England and Wales over the next decade by 200,000 units per annum. It has recognised that if it is to achieve this, and ensure that growing communities are sustainable, additional investment will be needed to help finance infrastructure. In the 2005 pre-Budget report it announced that it was putting out for consultation its proposals for a new property tax, the Planning Gain Supplement (PGS), to be charged on the increase in value in land following the granting of planning permission.

This article looks at the details of the proposed scheme, as known so far.

Scope

The aim of the PGS is to capture a portion of the uplift in land value arising from the planning process, which is then ringfenced and used largely to fund the cost of local infrastructure, such as schools, roads, public transport and hospitals. The balance will be allocated to regional infrastructure projects.

The objectives of the scheme, as stated in the consultative document are:

• ‘to finance additional investment in local and strategic infrastructure whilst preserving incentives to develop;

• to help local communities to share better the benefits of growth and manage its impacts;

• to provide a fairer, more efficient and more transparent means of capturing a modest portion of land value uplift; and

• to create a flexible value capture system that responds to market conditions and does not inappropriately distort decisions between different types of development.’

It is proposed that the scheme will not be introduced before 2008 and that there will be transitional arrangements. Once introduced, it will apply to both commercial and residential development land throughout the UK.

The Barker review recommended that transitional arrangements should apply to developers already engaged in land sale contracts drawn up before the charge was introduced, and to those who held large amounts of land already purchased, but where planning permission had yet to be secured. The consultative document merely says that it is envisaged that planning permission granted before the appointed date will not be subject to PGS.

PGS will be introduced in conjunction with changes to simplify and speed up the planning process. In particular, current planning obligations under the Town and Country Planning Act 1990 s 106 will be scaled back to matters relating to the environment and the provision of social housing only, significantly reducing the scope of matters currently covered by planning obligations.

Details

It is proposed that PGS will apply to all forms of development, with the exception of home improvements. Consideration is to be given to the treatment of small-scale improvements on non-residential property and a lower rate of PGS may be applied to brownfield sites, although it seems unlikely that there will be a general de minimis limit. The Barker report recommended that consideration also be given to the possibility of varying rates in other circumstances, eg for areas where there are particular housing growth strategies or where other social or environmental costs arise, but the consultative document makes no mention of this.

Indeed, it comments that the application of a single rate to all types of development would minimise the risk of distortion and mitigate the problem of apportionment of mixed use sites.

No details have been given of the tax rate to be applied, other than the comment that it will be ‘modest’ to preserve incentives to develop, but the recommendation in the Barker report was that it should provide additional resources over and above the current level of local authority gain from developer contributions.

Basis of calculation

PGS will be charged on the planning gain, ie the difference between the value of the land with full planning permission (the ‘planning value’ (PV)) and the value of the land in its current use, assuming no development potential (‘current use value’ (CUV)). The calculation will be as follows:

(PV – CUV) x PGS rate = PGS liability

Both PV and CUV will be assessed on the basis of an assumed unencumbered freehold with vacant possession for the whole of the site in question, and any contributions made under a reformed planning system will be taken into account when assessing the PV. The PV will be determined largely by the ultimate development value, in turn determined by the nature of the development and factors such as density and location. The CUV will depend on the value of any development already permitted on the land and could vary depending on the nature of the site – developed sites being subject to more variation than undeveloped ones.

The granting of full planning permission was felt to be the most suitable point at which to base the charge, as this not only captures the majority of the uplift in land value, but is a clearly identifiable point in the development process. The sale or disposal of land was considered as an alternative tax point, but was thought to be less attractive given administrative complexities and potential for avoidance.

Payment of PGS will not be required until the commencement of the development. The developer will be required to declare his intention to commence development and to proceed he will need a statutory Development Start Notice. This identifies the chargeable person for the purposes of PGS in relation to the relevant development site. That chargeable person will then be required to make a return (and payment) to HMRC within a specified time (see below). No development can legally start without a validated Development Start Notice.

Returns, payment and tax position

Whilst the PGS charge will be based on the value at the time full planning permission is granted, payment will not be required until development commences (which may be some considerable time later).

PGS will be payable by the developer (the chargeable person) on a selfassessment basis,
administered by HMRC. The chargeable person will be required to make a PGS return within a specified time after the issue of a Development Start Notice. As part of the return he will be required to make a self-assessment of his liability using his own valuations.

HMRC and the Valuation Office Agency will carry out risk-based assessment of the return, including the valuations. The Barker review never envisaged that developers would be responsible for making a self-assessment of the valuations before and after the granting of planning permission. Rather, it suggested that developers could be required to make a contribution based on a proportion of the residential value of land in each local authority, calculated by reference to either actual transactions or Valuation Office Agency estimates as to land prices in various local authority areas. This, it said, would: ‘obviate the need to engage in a lengthy and costly administrative process to calculate accurately the exact part of the land value uplift attributable to a change of use’.

The review also recommended that the Government give consideration to allowing developers to pay PGS by instalments over ‘reasonable time periods’ to ensure that housebuilder cash flows were sufficiently accounted for, but no mention of this facility has been made in the consultative document.

In cases of non-compliance, PGS will be enforced by a combination of measures, including interest and penalties. Where non-compliance is sustained, a Development Stop Notice will be issued, and enforced by Court action if necessary. Development cannot then legally recommence without a new Development Start Notice, which will have to be submitted together with payment of PGS, accrued interest and any penalties due.

PGS will be an up-front cost to the developer and it is likely that this will be treated as an allowable business expense. However, there will be no special provisions allowing PGS to be offset against other taxes, eg VAT, SDLT.

Use of PGS revenue

The consultation document points out that PGS is intended as a largely local measure, with a ‘significant majority’ of PGS proceeds being recycled to local level for local priorities and the provision of resources to support the expansion of housing supply. Infrastructure no longer funded through planning obligations will be provided for by the use of PGS revenues. The government considers that overall, local authorities will receive more funding through PGS than is currently raised through s 106 obligations.

Although the majority of the revenues raised are to be returned to local authorities, a ‘significant’ percentage is to be used to deliver strategic regional and local infrastructures and it is proposed that this be done through an expanded and revised Community Infrastructure Fund (CIF), already established to support transport infrastructure costs.

PGS revenues will be separate from the local government funding settlement. It is proposed that the majority of funds will be returned to the region from which they derived, distributed as grants either in direct proportion to the revenues raised, or on the basis of some other formula not directly connected to PGS revenue, eg the amount of development brought forward. The consultative document invited views on these options.

Conclusion

It is envisaged that in most cases, the developer who pays the PGS will pass the cost back to the landowner through lower prices bid for land. The landowner will be taxed on a potentially smaller gain where PGS is factored into the land price.

The subject of PGS seems to have attracted little attention since it was announced in the 2005 pre-Budget report. The closing date for consultation was 27 February 2006, so it was no surprise that PGS was not developed further in Budget 2006. Buried in the depths of the Red Book however was the comment that the government were considering responses and that discussions with stakeholders would continue, with further announcements being made ‘by the end of the year’. Consultation was on a small number of specific details only (eg the question of a lower rate for brownfield development), rather than on the general principles and underlying concept, so it would seem clear that the government intends to proceed with the implementation of the scheme.

As always, the devil is in the detail, and just as with REITs, where no mention was made initially of a key factor, the conversion rate, no mention has been made of the rate which will apply to PGS; too high a rate would act as a disincentive and therefore discourage the release of more land. It remains to be seen too how the government chooses to interpret words such as ‘modest’ (the PGS rate), ‘significant’ and ‘overwhelming majority’ (funds to be recycled back to the local authority).

There are questions also on the scope of PGS, eg whether it will apply to homeowners selling surplus land for development, or to exempt bodies such as pension funds.

In the last 60 years, four previous attempts have been made to impose tax on land development. The Barker review analysed these and concluded that complex design and high rates of tax led to widespread avoidance and created incentives to hold back development. All previous attempts failed, the last of these having been abolished over 20 years ago. Will PGS be any more successful than its predecessors?

Louise Pinfold CTA (Fellow)
April 2006

This article was originally published in Tolley’s Practical Tax, LexisNexis Butterworths leading information service for small to medium sized tax and accountancy practices. It provides the day-to-day information needed to deal with all tax compliance issues and general client problems. For more information or to order this title please visit www.lexisnexis.co.uk/taxationweb