Planning for a new tax
4 Aug 08
James Aitken and Stuart Brodie examine the options for Scotland now that planning gain taxation has been recognised as a devolved issue
by James Aitken and Stuart Brodie
In his October 2007 Pre-Budget Report, Chancellor Alistair Darling said that legislation implementing planning gain supplement would not be introduced in the next parliamentary session. Instead the Government would “legislate in the UK Planning Bill to empower local planning authorities in England and Wales to apply new planning charges to new development, alongside negotiated contributions for site-specific matters”.
Westminster had proposed a national tax on the increase in land value created by the grant of planning permission. The planning gain supplement, (PGS), would have been used to finance infrastructure needed to support new housing and growth.
The switch was welcomed in Scotland, by politicians and the property industry. It allows Scotland to go its own way. Stewart Maxwell, the Communities Minister, said in April: “Now that [PGS] is off the agenda, we are free to pursue a solution that best meets the needs of sustainable economic growth. We are initiating a review and are open to all suggestions.”
It seemed obvious to most of us that PGS, something that had been tried and failed four times since the end of the Second World War, just will not work. Also, as planning and housing were devolved matters why was the funding of infrastructure for new development not devolved too?
Meanwhile, the UK Government has gone for a community infrastructure levy (CIL), introduced in the UK Planning Bill. This will be a statutory planning tariff, set by local authorities in accordance with published structure plans, and will be paid by landowners and developers. The rate will depend on such factors as location and the type of development proposed, for example, greenfield, brownfield, regeneration. If an authority chooses to implement CIL, it must first identify what infrastructure is needed and how much it will cost, and then determine what contribution each development should make to that cost.
So, what might Scotland do?
1. Do nothing. This is unlikely.
It would be good, though, to hear some explanation of why developers should be expected to fund infrastructure improvements.
2. Introduce a centrally set Scottish PGS. Again, this is unlikely given what has been said by the Scottish Government and the previous Executive.
3. Introduce a Scottish CIL. The CIL has been well received in England and Wales and local setting is important. Developers may support a Scottish CIL if it gives them more certainty.
4. Reform of the law on bilateral agreements. This option, which covers the present “section 75” system of agreements between developers and councils as part of the planning process, may involve retaining a contribution system for one-off projects such as the Edinburgh trams or the Borders railway. This would be relatively easy to do and research (see box, below) indicates that more effective use of these types of agreements is being made.
5. Combine 3 with a restricted 4, as in England and Wales. This is more complicated than 4 as there would be two systems and developers would not want to pay twice.
Just as important as the choice of system is what the funding is for. Will some go to Transport Scotland, Scottish Water, the proposed Scottish Futures Trust or even to pay for more planning officials? Will some be ring-fenced for affordable housing or flood prevention?
We have to remember that only so much can be extracted from a developer. We have to decide on priorities. If we do not, and attempt to extract too much, then as in the past the property market will be affected. No-one wins if that happens.
The much lauded Milton Keynes “roof tax” represents joint working between government agencies and developers. It is effectively a tariff-based system replacing section 106 payments (the English equivalent of section 75). Here, the council calculates the cost of the infrastructure that the development needs and then will typically ask the developer to pay a third. In Milton Keynes, this equates to £18,500 per house built and is expected to raise £300m in the coming decade. More than two dozen local authorities in England operate such schemes.
The roof tax has found favour with developers as there is less negotiation (and therefore variation between parties), and it is levied locally. This means there may be differences from authority to authority, but it also means that the infrastructure is much more likely to be built than if the tax was administered centrally.
Tariff-based systems are not universally loved – complaints are growing in Sydney and Brisbane in Australia, where inflated levies are used to fund infrastructure for the rest of the community, and are rising at rates far outstripping inflation and the rise in construction costs. New houses in Sydney incur total infrastructure charges of A$68,233 (£32,800) compared with a direct infrastructure cost of just A$1,752 (£842).
Tariff-based systems only tax new construction, so older properties that rise in value thanks to new infrastructure benefit without contributing.
To curb this, some jurisdictions prefer a “land value tax”. This is particularly favoured in Scandinavia but Harrisburg, in Pennsylvania, introduced it more than 25 years ago. The value of the land is taxed at a rate six times greater than the tax on buildings. This tax has been credited with ensuring the productive use of land.
In the Scandinavian model, when a site has permission for development but has not been built on, its land value assessment is the same as if it had a building on it. This is an incentive for the owner to sell or build, rather than pay tax on a bare site.
There is not the perceived unfairness and disincentive to construct new buildings as can be found under the tariff-based systems. On the other hand, such a scheme could disadvantage the elderly who are often land rich, but cash poor.
Is it possible to come up with the perfect system? Probably not. However there are at least options which we can consider as we try to come up with our own “least-worst” method of paying for the infrastructure we desperately need. n
STUART BRODIE is director, indirect taxes, with Grant Thornton. JAMES AITKEN is a trustee of Reform Scotland, a member of the Law Society’s tax committee and a senior associate with HBJ Gateley Wareing.