Planning gains

In December 2005, the government published its consultation paper on Planning Gain Supplement (PGS). PGS is a proposed tax on the increase in land value attributable to the grant of planning permission. The revenue raised would help fund new infrastructure, to support, in particular, housing development.

Explanation of the key proposals

Cost

It is proposed that PGS will be calculated against the 'planning gain'. Planning gain is the difference between the land value with full planning permission (planning value or PV) and the value of the land in its current permitted planning use (current use value or CUV). The charge would be calculated by applying the PGS rate to the difference between the two values.

Calculation of the supplement will be self-assessed and based on valuations to establish the PV and CUV. As these valuations will be made retrospectively, a developer who must pay a PGS will require sufficient information about the condition of the land at the date full planning permission is granted. This could prove difficult for developers where ownership of the land has changed since the grant of planning permission.

Payment '“ who will pay and when?

It is proposed that payment of any PGS will not be required until development commences.

The obligation to pay PGS will lie with the person implementing a permission and will be triggered by serving a statutory 'Development Start Notice' on the local planning authority or HM Revenue and Customs. The Start Notice will declare an intention to start work on the relevant site. A PGS return and payment must then be made to HM Revenue & Customs within a specified period of time.

In cases of non-compliance, PGS would be enforced by a combination of interest charges, penalties and other compliance measures.

Transitional arrangements

Transitional arrangements will be needed to enable the market to adjust to the levy. It is envisaged that planning permissions granted before an appropriate appointed date will not be subject to the levy.

Relationships with s 106 obligations

The consultation paper proposes scaling back s 106 obligations to the 'development-site environment and affordable housing provision'. This approach would reduce the range of matters that can be negotiated under s 106. The scope of planning obligations would be defined as those matters that need to be addressed in order for the environment of the development site itself to be sustainable, safe, of high quality and accessible as well as the provision of affordable housing.

The government will also examine options for bringing highways agreements made under s 278 of the Highways Act 1980 into line with any changes to the system of planning obligations. The government has indicated that any alternative will need to ensure the timely provision of the road infrastructure necessary to support sustainable growth.

Allocating PGS Revenue

The consultation paper anticipates that a 'significant majority' of PGS revenue will be recycled directly to the local level for local priorities. In addition, it is anticipated that an 'overwhelming majority' of PGS funds will be recycled within the region from which they derived.

Two alternative options for recycling PGS revenue to the local level are identified:

• The first option is to distribute PGS revenue as local grants in direct proportion to the revenues raised.
• The alternative approach would be to recycle revenue as grants on the basis of a formula not specifically correlated to PGS revenue but which acted as a suitable proxy for infrastructure need - for example, the amount of development land brought forward.

A significant proportion of PGS revenue would be used to deliver strategic regional, as well as local, infrastructure, administered through an expanded and revised Community Infrastructure Fund.

Concerns for the developer

Delivery of infrastructure

If PGS is introduced, how can developers ensure that infrastructure required to underpin development and allow a development to be occupied will be delivered? It seems unlikely that the payment of PGS will of itself unlock land for development without guarantees that the required infrastructure is not only being funded but will also be delivered.

Provision of on-site facilities/infrastructure

The consultation paper does not address situations where, instead of being provided under PGS, infrastructure is provided on-site as part of sustainable mixed use developments. Mechanisms would be needed to ensure that developers do not pay twice, ie, through both on-site provision and through PGS.

Assessing PGS for phased/multi-permission developments

The consultation paper adopts a purist approach to the timing of the grant of full planning permission. It does not grapple with the complexities of the planning system and the variety of means through which large phased developments are both consented and delivered. For example, how does the government propose to address developments delivered on a phased basis through a series of reserved matters approvals which may sometimes be combined with separate stand alone detailed permissions under the umbrella of an overall outline permission? How will variations to planning permissions be addressed?

The range of planning permissions which would trigger PGS

The government should address a wider range of exclusions from PGS. While there may be justification in some circumstances for permissions for other forms of development to trigger liability to PGS, there will equally be a range of circumstances where liability to PGS is not appropriate.

Market distortion and the rush for consents

The government should be encouraged to make an early announcement regarding the 'appropriate appointed date'. This will at least give landowners and developers some certainty in the short term in relation to development projects currently being promoted. An early announcement date will also assist parties who need to make appropriate provisions in long term contracts and options.

The government also needs to be aware of the possibility of short term market distortion and a rush for planning permission to minimise PGS liability, which has resource implications for local planning authorities.

Relationship with s 106 obligations

Although limitations upon the range of matters to be addressed under s 106 will assist in speeding up s 106 negotiations, it is inevitable that such negotiations will be a significant and time consuming part of the planning process. It will be essential to have clarity and certainty regarding the range of matters which local planning authorities are entitled to include within a scaled back s 106 system if such delays are to be avoided. However, history suggests that whatever guidance is put in place on this issue, s 106 agreements will continue to be protracted in some cases.

Disputes over valuation

It will be essential that clarity is provided regarding the valuation approach for PGS. Consideration needs to be given as to the forum for addressing disputed levies. Given that disputes are likely to focus on valuation issues, the Lands Tribunal may be an appropriate forum. One way of minimising disputes would be to allow developers to negotiate with the Valuation Office Agency to agree valuations before commencing development. This would provide greater certainty to developers.

Consideration needs to be given to the fairness of excluding Local Plan allocations/ hope value from the assessment of Current Use Value for the purposes of PGS.

Are there alternatives to PGS?

Significant concern is being expressed regarding PGS in that it proposes a 'one size fits all' approach. If a single rate PGS is adopted, there will be no recognition of development complexities which arise within different local authorities and within different regions.

A number of alternatives to PGS are being mooted. One alternative is the introduction of a tariff based system, along the lines of the roof tax approach recently introduced in Milton Keynes where the developer pays a tariff on each house based on the average cost.

A further alternative would be to overhaul the current system of s 106 obligations in order to improve their efficiency and transparency. A modified s 106 system would also address concerns over the means of delivering infrastructure. Further, it would allow for variations in approach and infrastructure requirements as between different local authorities and different regions.

Reaction to the consultation paper

The reaction to the PGS consultation paper has been largely negative. Many development industry groups have responded that PGS is likely to deter development and slow the release of development land.

The closing date for the consultation on PGS was Monday 27 February 2006 and the government's reaction and next steps are eagerly awaited. If the proposal is dropped, and many have suggested it should be, it will be the latest in a long line of failed attempts to tax the increase in land value arsing from development.

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