Examination of Witnesses (Questions 220-239)
MR STEWART
BASELEY, MR
JOHN STEWART
AND MR
JOHN SLAUGHTER
16 MAY 2006
Q220 Martin Horwood: In terms of
the brownfield sites that are complex and difficult to develop,
surely, by definition, there would not be much planning gain and
therefore there would not be much Planning Gain Supplement. That
is the thing that is being put to us by government.
Mr Baseley: I accept that in principle,
but where I struggle to square the circle is that we have been
told, I think fairly categorically, this has to be revenue raising.
Seventy-two per cent of development, I think it is now, is on
brownfield land and rising.
Q221 Martin Horwood: Overwhelmingly
the income for this is clearly going to come from greenfield sites,
is it not?
Mr Baseley: Is it? Is there going
to be greenfield land released?
Q222 Martin Horwood: It is hardly
going to raise anything from complex brownfield sites?
Mr Baseley: In which case, one
imagines, there will have to be quite a substantial increase in
the rate of greenfield land being released to generate more money
than is currently being generated. I struggle economically to
square that circle. John can tell you precise numbers on this—I
am sorry, I do not have them exactly right in my head—but
I think the amount of land that has actually been coming through
the planning system over the last five years or so has been going
down, despite the fact that housing numbers have been going up.
Q223 Chair: You would accept that
not all brownfield land is the same, that there is complex, extremely
expensive brownfield land and there is other brownfield land where
there would be planning permission.
Mr Baseley: As there, frankly,
are greenfield sites. It would be equally wrong to put all greenfield
sites into one bucket, because quite often the infrastructure
that is required to develop greenfield land is much more substantial
and significant than the infrastructure required to develop brownfield
land. By definition, greenfield sites are often extensions of
towns or adjacent to towns and require a heavy commitment to services
and roads, which, quite frankly, brownfield sites sometimes do
not.
Q224 Sir Paul Beresford: I would
have thought one of the advantages of the 106 is that you know
where the money is going. If you are a developer and you have
struggled, you have developed a brownfield site and you have been
taxed and it just goes on and it comes back, at least in part,
to the local authority to be used for one of your competitor's
sites, et cetera, is it going to warm the cockles of the heart?
Mr Baseley: I think it is a very
important point that we know where the money is going, and that
helps us in our negotiations with local authorities in being able
to demonstrate to the broader public in those areas the value
of the scheme that ultimately people are going to be able to see
take place, because, as you know, local councils typically make
decisions for their own planning applications that are consented
or refused. The broader point is also that some of the 106 negotiations
that I have personally been involved with over the years can get
extremely complex and often involve a very detailed agreement
between the developer and the local authority about the time of
payments in return for certain things being provided. Quite often,
30-40% of the development takes place and then certain payments
are made in return for which by that stage certain highway works
have been put in place, or whatever it may be. The funding is
transparent for everybody. The local authority can see it is getting
the money at a certain stage, it knows therefore it can commit
to spending the money on a roundabout. You know that the school
can be provided for before there are more children than there
are school spaces available, and that kind of thing. The fear
I have is, as the money goes into the Treasury and comes back
(the mechanism for that), how the local authority will know how
much it is going to get and when it is going to get it, how we
will know that we are not going to end up with a development stopped
halfway through because highways improvement funding has not come
through, the highways improvements have not happened and from
a safety point of view, for whatever reason, the development has
to stop at that point. It is a recipe for disaster.
Q225 Chair: The situation you have
got at present in some developments with section 106 is precisely
that, that the Highways Agency has put a stop to development because
no money is coming through for the highways. Would not the PGS
at least sort that out in that it also funds regional infrastructure,
not simply local infrastructure directly related to individual
developments?
Mr Baseley: It could do potentially
if I could be satisfied, and I guess I am not at the moment, that
the money will come back in a timely fashion in adequate numbers
to make that happen. I totally accept the point that you make
that the present system is not perfect. I should add, we have
long been arguing to simplify and reform the 106 system, and Kate
Barker's report, which is where the whole concept of PGS emerged
from, was partly on the back of submissions or representations
we made to her about the frustrations we have dealing with the
lack of responsiveness, from a timing point of view, of existing
planning systems. I am not advocating the 106 systems as a perfect
system or as incapable of being significantly improved. The way
we looked at this, just to step back, we would have quite liked
to have been able to come forward and say the PGS is the perfect
panacea to all our problems because, as we have been calling for
change for a number of years, then it would be perfectly reasonable
for us to do that. We looked at this long and hard but concluded,
on balance, that it is not likely to increase the supply of land
with planning permission coming through. Therefore, we struggle
to see how it is going to help the Government attain its housing
targets.
Q226 Sir Paul Beresford: You have
also accepted there is going to be a top slice. You said 50% or
96%. Presumably you have accepted there is going to be a stealth
tax on this?
Mr Baseley: If the word majority
is used rather than totality, then by definition, I expect some
of it is not coming back. If they had said it was all going to
come back, that would be different to a majority.
Chair: Can we move on.
Q227 Mr Betts: You are saying that
you want to see change. Presumably, therefore, in principle some
form of simpler approach to taxing the operative value on land
is not one you are opposed to; it is the way that this is proposed
in detail to happen. I want to try and deal with some of the concerns
you have raised. You have raised some concerns about option agreements
and, effectively, where they have already taken place, that the
PGS will be an unfair tax on those, but if we had a transition
period and an exemption for those, would that not deal with the
problem?
Mr Baseley: Potentially a transition
period is going to be very important, without doubt, not just
for option agreements but for historically held land. I think
the option agreement point is an interesting one and one you might
want to pick up on from a valuation perspective. My concern there
is about double count really.
Mr Stewart: I will try and be
simple. I am sure you all know what an option agreement is. If
I agree to buy a portion of land from you, at some point in the
future when I get planning permission, I will pay you, let us
say, 85% of the current value at the time of the planning permission.
The discount is: can you offset that against the payment of the
PGS? The developer incurs substantial costs when progressing a
site through the planning system to be able to realise that value.
Would those costs be offset against the PGS calculation? It appears
at the moment they could not be. That was our main concern about
options. You are quite right about transition arrangements: they
would be extremely important.
Q228 Mr Betts: Could you explain
how you think transition arrangements might work? You are saying
you want them for more option agreements. Perhaps you could elaborate
on that point as well and how long do you envisage a transition
arrangement lasting for?
Mr Stewart: We have not come down
on a hard and fast figure. You would have to have a cover point,
but we had five years in mind for sites which were already in
the ownership of the developer. I am not quite sure how it would
work in practice. The concern is that you could end up double
taxing sites, obviously, and a site which, let us say, got planning
permission on section 106 and was signed a day before the new
tax came in, clearly to impose the PGS on top of that would be
onerous. Local authorities are not going to wind down their section
106 demands as we get up to the point at which the PGS comes in;
they will carry on requiring them until the last day; so there
would have to be a period and that period would have to cover
the period to build-out the site, and that could be many years
or it might be one year; it depends on the size of the site. There
would have to be a period of many years to allow that to happen.
Mr Baseley: It is a difficult
question to answer because options are put in place and sometimes
take 15 to 20 years to come through the planning system. The way
that they work is that the developer takes the risk of promoting
the site which may or may not ever get planning permission, but
typically options are used on land which is a long way in the
future in terms of anybody's thinking, and it is part of the speculative
risk of being a developer, which is totally understood by the
development industry. The way it pays for that risk is through
the discount it achieves on market value. In calculating market
value, surveyors and advisers to vendors will very strictly define,
within option agreements, the mechanism that is going to be used
to define market value and the deductible items that the developer
will have to take off. Section 106 costs, for example, would typically
be a deductible item; so one would calculate the land value taking
into account the fact that a million pounds, or whatever it might
be, is going to be paid by the developer towards the section 106
agreement. Effectively, the land owner is paying for that. A lot
of option agreements have tax either "get out" or deferment
clauses in them such that, if the rate of the cost to the developer
of actually bringing the land forward rises above a certain threshold
(and individual sites will vary as to what that threshold will
be) or the purchase price per acre falls below a certain number—that
is another way of doing it (it has got a minimum price point put
into the option)—then the option dies and the vendor is
not obliged to sell. Unless transitional arrangements are put
in place that circumnavigate that, the reality is that a lot of
land would come through the system over the next five to 10 years,
and, if this is intended to raise more money than the current
106 system and, therefore, the burden on that site, bearing in
mind options are most typically used on greenfield sites, is going
to be greater than was envisaged when the option was entered into,
it could well trigger either the minimum purchase price not being
met or the cost of deductibles being exceeded because of the tax
hit, which could lead to the vendor being able to withdraw from
the sale and choosing to do so. It kind of brings me to another
point which I should have made earlier, which is why we said in
our submission that political consensus on this is so crucial;
because what we see already at the moment in the market place
is owners of complex sites, which may take many years come to
fruition, simply sitting on their hands taking the view that,
if there were to be a change in government and the Government
was to change colour at that point, an incoming Tory Government
would, as they did with development land tax in the past, simply
repeal the tax. Therefore, you can understand why owners are saying,
"If that is likely to be the case, we will wait until there
is not a tax around and sell our land then."
Q229 Mr Betts: Having a transition
period when you could deal with these option agreements but, say,
after that time there would not be any specific rebate or concession
for them would not encourage, in your view, those sites to come
forward more quickly?
Mr Stewart: It could do, as long
as the transition arrangements were sufficiently long.
Q230 Mr Betts: How long?
Mr Stewart: It could be five to
20 years. The longest site I have had under option taken through
the planning system was 21 years.
Q231 Mr Betts: Moving on to the method
of valuation, which is one of the issues, I think, you raised,
you have got concerns about the calculations of CUV and PV as
one of your fundamental concerns about the system. Presumably,
therefore, you are even more opposed to using average valuations.
I think one of the proposals that was floated, but rejected, in
the consultation document was using added valuations on agricultural
greenfield sites and other systems for other developments.
Mr Stewart: Yes, we did reject
it ourselves as well. It was originally floated, I think, in Kate
Barker's report, the idea that you could have an average across
a district, but it is the point we discussed earlier that there
is a whole spectrum of sites and, therefore, land values. Some
have a substantial land value and some could have a negative land
value; so to have an average applied to that would be clearly
neither fair nor very sensible if you were trying to promote more
land coming forward.
Q232 Mr Betts: What about the residual
approach. Do you want to say anything about that: taking the 106
and then maybe a tax on the remainder?
Mr Stewart: Do you mean take out
the section 106 and just have a very modest PGS?
Q233 Mr Betts: Yes.
Mr Stewart: That is a possibility,
I suppose. We do not have a definitive answer as to what is the
alternative. What we try to do is look at the pros and cons of
all of it. The section 106 does have benefits, but over time the
practice of the section 106 has become onerous.
Q234 Mr Betts: One of the things
I am beginning to struggle with is that you do not like section
106, you want to change it, you think that the PGS is some form
of taxation which is applicable across all sites and people can
see they are being treated fairly and, similarly, might be the
right way to go, but you cannot tell us how to do it.
Mr Slaughter: That is a fair point
to raise, but perhaps it is worth explaining. One way that we
have tried to look at this is if we go back to the brownfield
issue and focus on that. I think you have to be clear about what
the objective is here. If the objective is to raise more revenue
overall in the current system, then there are certain fundamentals
that you cannot buck, one of which would be the issues we have
already discussed about brownfield. In that sense, at a very high
level, you have got certain issues you have to deal with, whether
it is a reformed version of section 106, whether it is a tariff
approach or whether it is PGS. What we are saying is that we think
there are certain generic issues, and there are certain generic
criteria that should inform any system that we adopt. We can see
the problem areas with the various options the Government put
forward in December for consideration, but we have not yet been
able to establish a whole set of positive proposals as to how
we would solve the problems we are identifying. We can see some
high level criteria that any system should apply about transparency,
predictability, a rate that does not prevent brownfield sites
coming forward, but, as we have already discussed, there is a
stack of quite difficult technical, political and distributional
issues that have to be worked through whether we go down any of
the particular routes, and that is where we are at.
Q235 Mr Betts: One of the things
that has been pointed out to me is that for Capital Gains Tax
purposes the Valuation Office does, on a regular basis, make retrospective
assessments of value. If they can do it for that tax, can we not
do it for PGS?
Mr Baseley: Capital Gains is typically
paid by owners directly on the gain from acquisition to sale and
it is, therefore, based on the transaction value at the point
at which you sell your piece of land. It is pretty black and white
and pretty difficult for anybody to disagree what that number
is. You sold that piece of land for two million pounds, you bought
it for a million pounds, you have a gain of a million pounds,
less any relief you are entitled to when you pay your tax. Market
value is, frankly, very difficult and not a precise science. If
you ever put a piece of land on the market, and I have done many,
the range of offers that you receive for that piece of land can
be huge. How do you determine the market value?
Q236 Mr Betts: Can you not use sale
price? Is that not a possibility?
Mr Baseley: That would be one
potential way of doing it, but that is not actually, I do not
think, how it is set out at the moment.
Q237 Mr Betts: Could you actually
develop a better way of doing it based on that?
Mr Baseley: We may be able to.
We are working on that. We do not have an answer for you today
on that, because one of the things we set out in our submission
was a call for the time we have between now and 2008, which is
the earliest this tax can be introduced, as I understand it, from
what the Government has said, for us to work with valuation experts
and others on some of these points that we had concern about,
and we are doing that separately from here. We have convened what
we call a coalition of the willing to sit down and see if we can
come up with some answers to some of the questions that you have
raised and discuss those and agree those with the Treasury. We
are not valuation experts; nor are we tax experts in that sense;
so we do not necessarily have, at this hour, cast iron solutions
to some of the problems, but we can see some of the problems.
Mr Stewart: It is a fair point
that you put to us, but there are some very detailed technical
issues and there are some quite high level issues. I scribbled
down the generic areas. The whole issue of valuation is a very
technical area, and, having listened to valuers, it is quite an
extraordinarily technical area that needs a whole set of rules.
What would the rate be? We have no idea what the rate will be.
Twenty per cent is being banded around, but we do not know whether
that is what the Treasury is thinking on. There is the issue of
infrastructure delivery. A key point about the tax is that it
is a revenue raising instrument, but it says nothing about and
it is not about delivery. Without the delivery you are merely
talking about a tax on land, which will reduce the supply of land;
so half the circle has not been addressed at all. There is the
whole issue of scale-back to section 106, which in simple terms
in the consultation document looks pretty straightforward, but,
as soon as you start talking to developers, there are lots of
complexities there. There is the whole issue of affordable housing
and then there is the political consensus; so for us to come up
and say: "Here is the definitive answer", it is a very
complex area, and I can see why the Treasury are struggling with
it.
Q238 Martin Horwood: One of the other
plethora of difficulties that you see with Planning Gain Supplement
is that those responsible—this is paragraph six of your
submission—for checking and challenging self-assessed valuations
have to be adequately qualified to understand, not just valuation
but the nature of residential development, the difference between
residual valuation of housing land, very different valuation processes
involved in residential and non-residential. Is it really this
complex? Surely these kinds of valuations are done every day of
the week.
Mr Baseley: Not really, no. I
wish they were some days, but, no, they are not, because as we
started to think through those issues, the issues which we mentioned
in paragraph six of our submission to you are the ones which spring
to mind instantly which we can see causing grey areas. The concept
of this is a self-assessment tax, as I understand this particular
point. The valuation of land is carried out, obviously, in the
market place on a regular basis by experts who are trained and
have spent their life doing just that, valuing land, and they
do understand the complexities of the valuation process, which
can be quite vast. Our concern is whether the Revenue actually
has the staff in place to be able to deal with that. Frankly,
the process that could then unfold, I can see developers effectively
swapping two years of uncertainty whilst they negotiate section
106 agreements for two years of uncertainty whilst they negotiate
their tax payment.
Q239 Martin Horwood: Could they not
employ the same kind of planning consultants that your members
employ?
Mr Baseley: The Revenue or us?
|
