HM Treasury, HM Revenue and Customs together with the Office of the Deputy Prime Minister have finally shown their hand. On 5th December they published the long-awaited consultation paper relating to planning gain supplement (PGS).
This document is in response to the Barker Review in relation to housing supply. One of the Barker Report’s recommendations was that the Government should seek to capture a portion of the uplift in value of land arising from the planning process.
The basic rationale of the new tax is to capture part of the increase in the value of land which is generated by the grant of planning permission. The tax revenue would be shared by the Government with local and other authorities to provide infrastructure and community facilities. The Government suggests this will stimulate further growth and ensure that local communities receive a better share of the benefits that come with the development of land.
In the consultation paper the Government acknowledges that the 4 previous attempts at “development gains tax” that have operated in the UK in the past 60 years have not been successful (largely, Government believes, because the complicated nature of the various regimes and the high rates of tax led to wholesale avoidance). However, it also believes that sufficient lessons have been learnt from those previous attempts and that PGS will be successful. The consultation document stresses that the Government is only looking for a scheme which is designed both to minimise tax avoidance opportunities and to capture a “modest portion” of the uplift in value so as not to disincentivise developers from continuing to develop sites.
The main features of PGS are:
- PGS will not be implemented before 2008.
- The tax will relate to all residential, commercial and mixed use development.
- PGS is based on the increase in value arising from a “full” planning permission – the consultation paper makes no mention of reserved matters’ approvals but it is assumed that these will also be a trigger for calculation of PGS
- There will be transitional arrangements to allow the real estate market to adjust. It is accepted that planning permissions granted before an “appointed date” will not be subject to PGS but the precise date has yet to be specified.
- The person liable to pay PGS will be the person who implements the relevant planning permission. There will be a procedure requiring service of a statutory notice (“Development Start Notice”) before work is started.
- PGS will be payable in one lump sum upon commencement of the development (which will, probably, have the normal Planning Acts meaning). This will be some years (typically up to three years) after the grant of the full planning permission but based on the increase in value as at the time of the grant of the planning permission.
- The percentage of the tax has yet to be fixed and there may well be a lower tariff for brown field sites.
- Payment will be by way of a self assessment regime with the person who is liable to pay the tax actually determining the increase in value. When looking at the value it is assumed that the property is valued as a freehold with vacant possession.
- There will be penalties and interest regime for defaulters. As a final sanction parties who have implemented a planning permission without paying the tax could be forced to stop work.
- Section 106 obligations will be scaled back and in future these obligations would only relate to the “environment of the development site” itself and affordable housing. Contributions towards all off site facilities (such as schools, hospitals, highways, etc) would all be dealt with by way of the PGS. In theory this means that the tax payable by way of PGS should be off set by the reduction in potential liabilities under section 106 obligations.
- It is suggested that there should be some exclusions from PGS but only in relation to small scale house improvements (eg small extensions) The Government is reluctant to accept a threshold for small development projects.
- PGS will largely be recycled back to local communities. There are two different alternatives suggested in the paper for this. The preferred solution of the Government is that the PGS revenue will be distributed as grants in direct proportion to the revenues raised for that area.
- Not all of the revenue would be distributed back at a local level. A significant proportion will be used to deliver strategic regional infrastructure via an expanded and revised Community Infrastructure Fund
A few of the more obvious issues for the industry to comment on/consider include:
- Because the tax is payable by one lump sum there will be adverse cash flow consequences for developers where similar payments under the section 106 agreement would normally have been payable in phases (for example on physical completion or occupation of a specific number of units). The Barker Report did recommend that consideration should be given to allowing phased payments so as not to adversely affect developers’ cash flow but this has not been incorporated into the consultation paper
- There is no proposed arrangements for reimbursement of PGS in the event of the monies not actually being used to provide the community facilities – section 106 agreements would normally provide for repayment.
- Of critical importance will be the transitional arrangements. Issues include:
– Where an outline planning permission has been granted
before the “appointed date” but a reserved matters approval granted subsequently, PGS could be payable when the reserved matters approval is implemented although the developer may well not have factored that in to its development appraisal.
– Developers will need to consider carefully what strategies they want to adopt in the run up to PGS being implemented – particularly in relation to implementing full planning permissions or reserved matters approvals before the appointed date so as to avoid paying PGS.
– Similarly, developers may want to accelerate programmes and apply for and try and obtain reserved matters approvals before the “appointed date” for PGS coming into effect.
- Developers will need to start considering the potential impact of PGS in relation to schemes they are negotiating to acquire now (particularly large phased developments where reserved matters approvals may be granted after 2008). Issues include:
– Making sure that PGS is reflected in any overage arrangements/thresholds agreed on options/conditional contracts being negotiated.
– Because section 106 Agreements may be entered into now with outline planning consents but the reserved matters approval may trigger PGS section 106 Agreements need to contain provisions that there should be deducted from any monies payable under a section 106 agreement any tax paid by way of PGS. Developers are not going to want to pay twice!
- Is the proposed freehold valuation approach correct? For example, what about a typical shopping centre or redevelopment where the freehold is retained by the local authority and a head lease granted to the developer/investor.
- On large phased developments which may be undertaken by a consortium will PGS be assessed in relation to each phase separately or could the implementation of, say, the reserved matters approval for the infrastructure alone trigger payment for the whole site?
Clearly there is a lot for the property industry to consider. The period for consultation expires on 27th February 2006 so there is plenty of time for the industry to put in a measured and considered response to these proposals:
Ultimately if and when PGS is implemented and the market becomes used to the procedures the likely effect will simply be to reduce the prices which developers are prepared to pay for land so as to offset any additional tax burden. In terms of the practicalities of PGS the crucial issues will be the rate of tax and the terms of the transitional regime because these will determine the appetite of developers to take action to avoid the tax.
This article first appeared in our Construction and development legal update Spring 2006. To view this publication, please click here to open it as a pdf in a new window.