Memorandum by the Confederation of British
Industries (CBI) (PGS 43)
INTRODUCTION
1. The CBI represents companies of all sizes
and from all sectors of the economy. With a direct membership
accounting for 4 million employees and a trade association membership
accounting for 40% of the private sector workforce.
2. The CBI believes that both an increase
in the supply of housing and improvements in infrastructure are
vital to the health of the UK economy and welcomes this opportunity
to respond to the Government's consultation on Planning-gain Supplement
(PGS).
3. The CBI's Minerals Group has submitted
a separate response to the consultation highlighting the specific
issues and concerns that relate to that industry. CBI Scotland
has also responded to both the Treasury and Scottish Executive
to complement the CBI's overall response.
OVERVIEW
4. The CBI supports the Government's aim
to increase the supply of affordable housing and increase investment
in infrastructure, both of which are key issues for businesses
in the UK. However, the CBI believes that the Government's proposals
to implement PGS are likely to lead to a number of unintended
and negative consequences that would outweigh any potential benefits
of PGS and we would strongly urge the Government to reconsider
its proposals. There are three major areas which need to be recognised:
(a) The potential threat to the competitiveness
of UK business and the long-term health of the UK economy:
— placing an additional tax burden on business
in the context of increasing costs and global competition could
further threaten wider business investment;
— the widening of the original proposals
from Barker, without a correspondingly broader package of offsetting
benefits, risks impacting on development and business growth;
— making development more costly and complex
risks undermining the important role that property plays more
widely for business;
— the proposals cut across the better regulation
agenda and would entail a significantly increased administrative
burden on business; and
— the Government does not seem to have
fully explored the potentially complex and negative consequences
on the property market, specific types of development or the wider
business community.
(b) PGS is likely to make it more difficult
in many respects to achieve key Government objectives, for example
increasing the supply of housing:
— PGS could undermine the willingness of
landowners to bring forward land for development;
— the additional tax and complexities of
PGS would increase the costs and risks of development and could
threaten the viability of regeneration and wider development;
— the relationship between development
and the delivery of supporting infrastructure would inevitably
be weakened with potential impacts on the acceptability and workability
of development;
— the proposals would be likely to undermine
the broader agenda to streamline the planning process, with potential
delays of two years for complex schemes; and
— the proposed scaling back of Section
106 would be very difficult to achieve, with knock-on implications
for the business-local authority relationship and the viability
of schemes.
(c) The proposals for PGS are likely to be
unworkable and do not sufficiently address past problems with
development taxes:
— the self assessment process would still
impose a significant burden on business (particularly those companies
for whom development is not their core business);
— the valuation process would be highly
complex and would cause major uncertainty thereby adding both
to the costs and timescales of development;
— the proposals would involve taxing expected
gain rather than actual gain creating scope for unfairness and
increasing the risks associated with investment in potential development;
— the requirement to pay on commencement
of development threatens to create cashflow problems for businesses;
— PGS would impose significant resourcing
pressures on local authorities, the Valuation Office Agency and
other organisations; and
— PGS is already affecting the market and
would continue to raise serious problems during a transitional
period.
5. Given these concerns we do not believe
that PGS should be taken forward. However, we recognise the need
to secure funding for infrastructure and will work with the Government
to explore alternatives which may be more workable.
A. THE COMPETITIVENESS
OF UK BUSINESS
Concerns about the Increasing Business Tax and
Cost Burden
6. The CBI strongly believes that this is
the wrong time to introduce a new tax on UK business. We are extremely
concerned about the impact of new taxation in an increasingly
competitive global market when business in the UK is already having
to cut costs, avoid new costs and is increasingly risk averse.
7. The overall tax burden on UK business
is already high. Overall, Budget decisions since 1997 will have
added an extra £8 billion to the tax bills of business and
its investors in the fiscal year about to end—bringing the
cumulative additional bill since 1997 to £50 billion. Business
and its investors have borne a disproportionate share of the tax
rise due to post-1997 policy action, even if the impact of above-inflation
council tax increases is taken into account.
8. The major impositions have been the surprise
£4 billion per annum rise in employers' national insurance,
and the £5 billion per annum erosion of dividend tax credits,
which have been only partly offset by reduced corporation tax
rates. In addition, many businesses have been affected by the
rising burden of stamp duty land tax, while some sectors (such
as utilities in the past, and North Sea companies today) have
been singled out for special higher-tax treatment. We also note
several other ongoing initiatives (the prospect of compulsory
employer pension fund contributions, the Pension Protection Fund,
and HM Revenue and Customs' target to close an alleged but unproven
£3 billion "tax gap"), all of which threaten to
add still further to business' tax bills.
9. The impact of this on the available funds
to invest (and the incentives to do so) and on international competitiveness
is critical. By adding both to costs and uncertainty, these policies
are already holding back business investment, which has recently
been at its lowest ever level as a share of GDP.
10. The problem is that these fiscal policy
impacts have come on top of other pressures making it more difficult
for businesses to grow profits, compared with a decade ago. At
present, this includes the impact of the economic slowdown. But
while the economic cycle will turn upwards in due course, other—"structural"—pressures
have also emerged:
— intense international competition
due to globalisation and the rise of China as a major world trading
power. This has helped to push prices down in product markets,
but up in commodity markets, thereby squeezing margins. Imported
goods prices (excluding oil) are 17% lower than a decade ago,
and export prices are down by 14% on the same basis. By contrast,
manufacturers' raw material and fuel costs have risen by 26% in
just three years;
— the increase in employer-funded pension
scheme deficits, which are having to be reduced through additional
business contributions. Employer contributions to funded occupational
and personal schemes amounted to £36 billion in 2004, having
more than doubled from £17 billion in 1998. Increased
longevity, low long-term interest rates and—until recently—poor
global stock market returns have all contributed to this situation,
alongside the tax changes; and
— Government policies outside of the
fiscal policy field, in particular labour market and other regulations
which have added to business costs.
11. In turn, corporate profits recently
peaked as a share of GDP, at a clearly lower level than the peaks
achieved in the mid-1980s and mid-1990s, and even a little lower
than the peak achieved in the late 1970s. Related to this, business
investment has been depressed, reaching an all-time low as a share
of GDP early last year.
Property and Development Important to Wider Business
12. Property is often perceived narrowly
in terms of the "property industry". But this belies
its wider importance. The property industry is indeed important
in its own right but property is also a crucial ingredient of
business success and is important to the overall performance of
the economy and the attractiveness of the UK as a place to do
business.
13. Business needs a constant supply of
high quality development, offering a range of options to suit
different and changing business needs. We need to ensure that
companies can respond to varying economic and social drivers.
Business investment in new property, redevelopment or a move from
one property to another can transform the production process leading
to substantial increases in output and/or greater efficiency.
Increasingly property is also an important diversifier of investment
risk—with a growing role in pension fund activity.
14. PGS must therefore be seen as a tax
that has ramifications for the wider business community and the
context of doing business in the UK—whether as a housebuilder,
commercial developer, owner-occupier, tenant or inward investor.
PGS has significant implications for property/development
15. PGS, when initially conceived, was intended
to apply to greenfield residential development where there was
significant uplift in value from the planning permission. The
current proposals cover a much wider range of developments (such
as major mixed use or urban regeneration projects) which tend
to involve more complexities and risks. As a consequence, development
decisions and wider business decisions are likely to be impacted
more significantly than appears evident from the consultation
document.
16. In the UK, the level of taxes related
specifically to property (eg business rates, SDLT) is already
high relative to other countries, as our report (Is the tax system
a help or a hindrance—UK As A Place to Do Business) and
the latest OECD figures highlighted. In addition, business already
pays in the region of £2 billion direct to local authorities
through Section 106. The proposals for PGS represent a new
and additional tax on property development. While the Government
intends to scale back Section 106, it is clear that the intention
is for the combination of scaled back 106 plus PGS to raise significant
additional revenue (although there is no clarity about how much
extra).
17. The introduction of such a new tax burden
would be expected to impact in a number of ways: to reduce both
the viability of new development and the attractiveness of redevelopment
and to add to the costs of doing business—depending on where
the incidence of PGS falls. The complexity of the proposals, within
an already complex tax system, would reinforce this. This is likely
to have significant impacts for development specifically, but
also for the wider business community for whom property is an
important operational and commercial element, at a time when UK
businesses already face a challenging environment.
18. The Government assumes that where possible
PGS costs would be factored in to the price paid for land. This
would have potential implications for the supply of land (see
Section B) and consequent wider economic impacts. In many cases,
however, the incidence of PGS (at least in part) would be on the
development, for example where a land transaction is not involved
(eg an owner occupier business developing their site) or where
the full cost of PGS cannot be factored in. In these cases, PGS
could impact in a number of ways:
— a reduction in the rate of return
that the development can make;
— the need to reduce other costs—either
within the development or more widely;
— a reduction in other agreements entered
into eg with local authorities;
— less willingness to proceed with
development; and
— an increase in the price of the development
to the end user.
19. In turn, there could be significant
implications for a variety of sectors of the business community:
— developers: a lower rate of return
will impact on profitability with a knock on impact on wider investment.
Or if there is less willingness to proceed with development this
will impact on regeneration and business growth;
— owner-occupiers: if businesses face
additional costs and complexities this may result in lower quality
development, reduced profitability, changes to wider investment
decisions or simply a decision not to proceed. This will have
consequences for the wider UK economy and competitiveness agenda;
— occupiers (tenants): may face higher
costs in terms of rents or a reduced supply of suitable high quality
developments which will impact on their ability to compete; and
— investors: if profitability decreases
this could impact on pension funds and inhibit diversification
of risk.
20. Property development is accompanied
by a number of intrinsic risks, which are considered when deciding
whether or not to enter into development. The introduction of
PGS would add risk to this process despite the "sensitivity"
of the proposed system (for example it is payable regardless of
whether the developer is a profitable concern at the time) and
could tip the balance of risk against proceeding on a number of
development schemes, especially those that are currently marginal.
Even for specific developments where the total of PGS and Section
106 may be lower than previously, the complexities, risks and
impracticalities of PGS could reduce the willingness to proceed.
21. PGS could be a barrier for businesses
considering renovation, expansion or change of use. This could
inhibit business growth and adaptation and undermine small business
development. It could also undermine wider objectives for which
development is essential, for example the aim to diversify the
use of farm buildings and boost rural economies. It is important
to note that in cases of business expansion, companies would be
paying additional business rates in line with the relative increase
in value.
22. The "do nothing" option (ie
not proceeding with development) is likely to be higher than presumed
for those businesses which have a choice of international locations
to consider. Where the additional complexity and cost involved
are perceived to be too high, new business investment/expansion
simply may not take place or may take place elsewhere. In the
context of seeking to attract (and retain) international firms,
high value added and R&D investment to the UK, this is a key
concern.
23. Ultimately property and the development
industry is of fundamental importance to wider business. With
property as a factor of production, an increasingly important
element in pension provision, and an underpinning to labour market
flexibility, the Government should not underestimate the potential
wider impacts of PGS and the risks of slowing down development.
This is particularly important given the background of increasing
pressures on business and the far tougher economic context that
we have outlined.
PGS does not fit with better regulation agenda
24. The CBI is concerned about the implications
of implementing PGS for the better regulation agenda. We have
long argued that an appropriate regulatory environment is a key
factor for the efficient operation of markets and that a commitment
to more effective regulatory enforcement practices has to be central
to the UK competitiveness agenda. We believe that implementation
of the Hampton recommendations represents a real opportunity to
ensure that regulation and regulatory enforcement in the UK adhere
to the principles of better regulation set out by the Better Regulation
Task Force prescribing proportionality, accountability, consistency,
transparency and targeting.
25. The CBI believes that the Government's
proposals do not adhere to these principles because they would
result in two parallel systems of revenue collection both of which,
directly or indirectly, capture some of the gain in value from
planning permission to fund local infrastructure. It would be
extremely inefficient for central and local government and business
to administer a two-tier system and it would contribute to the
already significant bureaucratic burden placed on business and
local authorities by the planning system. The proposed scaling
back of section 106 is unlikely in practice to significantly reduce
the administration of that system.
The lack of detail and impact assessment adds
to business concerns
26. Given the wide implications of PGS for
property and business, the absence of any real detail in the proposals
is a major concern. There seems to be little assessment of the
possible impacts of PGS on development or the wider issues highlighted
above. The absence of such information further undermines CBI
members' confidence that the proposals are consistent with efforts
which help business to compete in an increasingly challenging
global environment. And the lack of detail on the likely rates
of PGS or the proportions to be re-distributed has heightened
business sensitivities.
27. Given the risks involved, it is inappropriate
for the Government to proceed with proposals for PGS without providing
such analysis. This is particularly important since the Government
has significantly expanded the scope of PGS from the original
Barker recommendations. The burden of proof should not be placed
on respondents.
28. We are willing to work with the Government
to explore the issues further but we strongly believe that there
are too many uncertainties and potentially negative consequences
across business to consider progressing the proposals. As well
as the detailed questions of workability (in section C), some
of the issues that need to be addressed include:
— the level of revenue sought by PGS;
— the assumptions made in relation
to how much of the additional money through PGS would be via extended
scope (ie more developments being subject to PGS than Section
106) versus projects that already pay section 106, paying more
in total through section 106 and PGS;
— the PGS rate at which the supply
of land and development will not be adversely impacted;
— the proportion of schemes for which
the Government assumes that PGS will be able to be "knocked
off" the cost of land;
— where this is not possible (and particularly
where the total of PGS and 106 is higher than previously), the
assessment of likely impacts for different types of development;
— the offsetting measures to ensure
that wider developments were not deterred (beyond the Barker proposals
for housing);
— the baseline for Section 106 and
by how much it would be scaled back;
— the budgeting processes for PGS and
redistribution work in practice and mechanisms that would be put
in place to provide certainty of delivery of infrastructure;
— the assumed set-up and running costs
for PGS; and
— interaction of PGS with other Taxes
eg SDLT, CGT.
B. GOVERNMENT
OBJECTIVES AND
WIDER IMPLICATIONS
29. The CBI believes that PGS would not
achieve the Government's core objective, namely to increase the
supply of affordable housing, would threaten some of the Government's
wider objectives and would have a number of unintended negative
consequences for business, local communities and government (both
centrally and locally). These include:
— PGS revenue is likely to be lower
than Government expects because development would be likely to
decrease (a reason for failure of past attempts at taxing the
uplift from development);
— Government revenue such as Capital
Gains Tax (CGT) would decrease because of the slowdown in development;
— many brownfield developments in particular
may not be viable which would be detrimental for the Government's
regeneration agenda;
— activity in the minerals industry—vital
for the provision of materials for house-building and infrastructure
would decrease;
— local authorities could lose out
from fewer section 106 agreements or other initiatives because
of the slowdown of development; and
— ultimately local communities would
lose out both from the lack of development in their area and from
the related lack of investment in local infrastructure.
PGS threatens the release of land
30. The CBI notes that the Government's
objectives have the aim of increasing the supply of affordable
housing which dates back to the original set of Barker recommendations.
The CBI fully supports these aims and the Government's intention
to increase investment in infrastructure—the lack of affordable
housing and infrastructure are both key constraints on business
productivity.
31. However, we fail to see how a new tax
on development in the form of PGS would achieve these aims. Instead,
a consequence of PGS is likely to be a decrease in the amount
of sites that are brought forward for development—with landowners
and developers exercising their "do-nothing" option.
Although the Government proposes a "modest" PGS rate
there is no clear evidence to support the assumption that the
supply of land would be unaffected.
32. The CBI is concerned that PGS would
have a disruptive effect on the release of land in the short to
medium term. Two scenarios are possible; both would distort the
market and neither are desirable:
— there would either be an immediate
incentive to increase development and the release of land before
2008 would increase to avoid PGS, followed by a decline in development
post-2008; or
— land-owners would refrain from releasing
their land thereby decreasing opportunities for development, in
anticipation of a change of Government (which has happened with
three previous attempts in the past).
33. The scope of the proposals has been
extended significantly from the Barker Report in terms of moving
from housing to wider development. It is inappropriate simply
to extrapolate from assumed impacts in relation to housing and
the supply of land for housing. There is little to suggest that
the Government has examined in detail the likely impacts on commercial
development or has understood the implications for the wider market
or specific types of development.
34. The Government has argued that PGS should
be seen in the context of a package of measures that they believe
would offset potential impacts. But there is little clarity in
relation to the positive measures that would offset potential
impacts on commercial development and little certainty that those
related to housing would be sufficient.
PGS likely to hinder supply of housing
35. The Government's claim that increasing
investment in infrastructure would allow house-builders to obtain
planning permission and build more houses presupposes that the
lack of infrastructure is the biggest constraint on housing development
in the UK. Infrastructure is undoubtedly a factor but it is unlikely
that the additional cost, associated risk and level of administration
that PGS would introduce into the planning system would be directly
outweighed by the benefits of increasing infrastructure provision.
36. The Government's proposals also fail
to address the timing issue—PGS from development is intended
to fund infrastructure to draw in development, but in practice
development usually follows the provision of infrastructure or
is provided alongside development through planning obligations.
Even without this complication there would inevitably be a lag
of several years between the introduction of PGS and the actual
delivery of any infrastructure.
37. As highlighted, we support the Government's
aims of trying to increase affordable housing and secure funding
for investment in infrastructure necessary to underpin sustainable
development and support economic growth. Therefore we are willing
to work with Government to explore potential options which may
be more workable than current proposals. This may include building
further on section 106 (also looking at the feasibility of the
tariff-based approach), CGT or mechanisms such as Tax Incremental
Financing.
38. But it is too early at this stage to
be more definitive: issues would need to be addressed in any such
options. For example, we recognise the Government's concerns about
the relatively blunt nature of tariffs and the potential impact
on viability of development (or alternatively the level of complexity
that might be necessary in some areas to ensure sensitivity).
But using existing mechanisms is a far less risky—and more
cost efficient—approach than introducing a major new tax.
PGS likely to have adverse impacts on planning
reforms and timescales
39. The CBI is anxious that the Government
is considering such a radical change to the planning system, whilst
in the middle of implementing other major reforms that emerged
from the Planning and Compulsory Purchase Act 2004. While the
CBI has consistently sought improvement to the system of planning
obligations, this is not a reason to introduce PGS. Not withstanding
some variation across the country in the application of section
106, it is generally recognised as a tried and tested mechanism
to deliver positive physical and social infrastructure benefits
directly to local communities. The current system should continue
to be developed—building on the recent positive work (circular
2005/05, the best practice guidance on planning obligations, and
developing practice within some local authorities). We are concerned
that the proposal to introduce PGS could undermine this.
40. The Government claims that business
would benefit from the proposed scaling back of planning obligations,
but has not yet provided an established baseline for current payments
through planning obligations or how much the proposed scaling
back could save business. In fact the nature of section 106 arrangements
is such that it would be almost impossible to gauge how much is
currently received through planning obligations either in cash
or non-money contributions, which in turn would make it very difficult
to retain transparency and ensure additionality of funding through
PGS.
41. The CBI also reminds Government that
planning is a devolved policy area and therefore while the Government
could, within its powers, implement a tax across the whole of
the UK it could not direct the devolved administrations to scale
back their own planning obligations. There is therefore a particular
issue for businesses in Scotland, Wales and Northern Ireland which
could face higher costs through PGS with no promise of reduced
planning obligations.
42. In addition there is much concern in
Scotland about the implementation of such a major change to the
planning system when the Planning etc (Scotland) Bill, which could
itself introduce major reforms to the planning system in Scotland,
has only just gone before the Scottish Parliament.
43. The planning system has been subject
to considerable change and upheaval in recent years, and as our
recent report showed, business is still not significantly benefiting
in terms of an improved system, in fact in some instances the
system has worsened. This would simply add further disruption
and resource pressures and could threaten to deter development
simply by adding to the overall complexity and uncertainty of
the planning system.
44. Given that PGS calculations would need
to be made after the conclusion of Section 106 negotiations and
on grant of planning permission, this would add another delay
to the planning process. The strong likelihood is that valuation
would be a complex and protracted process, with potential for
significant debate. This would further extend timescales for development—with
developers unwilling to start development until certainty about
PGS liability had been provided. Looking back at Land Tribunals,
this could take anything up to two years for complex and disputed
cases. The certainty and timing of the assessment is critical.
45. Resource pressures could further exacerbate
such delays, with significant expertise required to manage the
system. Reducing the tax level would not remove the uncertainty
and scope for delay. It would merely reduce the revenue and further
undermine the economics of the tax.
46. The original proposal in the Barker
review was for PGS to apply when permission was granted in order
to encourage implementation. The current proposal is for PGS to
be payable on start of development. While this recognises the
problems inherent in seeking to extract earlier payment, it could
cause delays to development—contrary to the Government's
objectives.
47. The issue of Development Stop Notices
is also of concern. There is little clarity about how notices
might be used but it is difficult to see how they would not introduce
lengthy delays on certain developments. There is also deep concern
that it could make a development unlawful which could interfere
particularly with commercial developments involving complex arrangements
between a number of parties.
Proposals for streamlining section 106 are flawed
48. We have never questioned the principle
of planning obligations, in terms of development contributing
to supporting infrastructure and mitigating impacts, but have
been a critic of the way the system has been implemented. However,
these concerns are not an argument for replacement by PGS. Instead
recent efforts to improve the operation of section 106 must be
continued. We have worked with the Government and others to strengthen
the guidance and improve the system and recent changes, for example
to allow pooling of contributions, offer opportunities to address
the issues more effectively.
49. The Government argues that scaling back
section 106 will partly offset the impact of PGS but we are far
from convinced that this will be effective in practice. There
are a number of significant issues:
— even a "streamlined" system
would need to cover a wide range of issues and still involve (potentially
lengthy) negotiation over detail, delivery and timescales;
— affordable housing, which is often
the biggest element of a section 106 agreement in terms of cost
and negotiation time, remains within the scope of section 106;
— the situation with regard to the
interaction of PGS with section 278 and 6 of the Highways Act
is unclear—but is a key issue given the importance of delivery
of such infrastructure;
— there would be difficulties in terms
of how tightly the definitions of some of the elements could be
drawn eg environmental improvements can stretch far beyond the
actual scope of the site;
— as yet there is no explicit baseline
for section 106 against which to assess the proposed scaling back.
In the absence of such information—which is very difficult
to calculate with any certainty—the commitment is unconvincing;
— it would be very difficult to police
the system and could create an antagonistic relationship between
business, local government and central government;
— with a less certain and direct source
of funding for local authorities there would still be pressure
for them to seek to maximise commitments under section 106, despite
Government intentions to exclude certain elements. Given all the
difficulties highlighted, it is likely that the scaling back will
not happen as intended with potential impacts on development costs
and viability; and
— this could also reduce expected PGS
revenues since section 106 needs to be accounted for in Planning
Value.
50. In addition, there would be nothing
to stop local authorities seeking other payments or provisions
outside the scope of planning obligations, which would allow them
to maintain their direct income levels, but represent significant
additional costs for business. Conversely the cost of PGS could
mean that business was less willing or able to work with local
authorities on more innovative opportunities to deliver local
infrastructure or initiatives, leading to a worsening relationship
between business, local authorities and local communities and
a reduction in such schemes across the country.
51. We therefore have real concerns that
the proposed system would lead to:
— loss of flexibility in negotiating
planning obligations;
— potentially increased anti-development
pressures;
— greater incentive for local authorities
to seek to use other arrangements outside the scope of planning
obligations to achieve certain local benefits but with even greater
cost for business; but
— less incentive for business pro-actively
to enter into goodwill agreements with local authorities outside
the scope of planning obligations because of the additional cost
of PGS.
52. There are significant difficulties in
trying to develop a national solution when the issues to be tackled
vary between regions. A one-size fits all approach would not be
able to tackle the different problems of low value areas in need
of regeneration versus higher value areas with challenges and
pressures of growth. The answer is not PGS or the redistribution
of revenues away from higher value areas—which would risk
undermining the acceptability and sustainability of development
in these localities. Clearly funding needs to be secured for infrastructure
investment in lower value areas—but the proposals in the
document are not the solution. Making development more complex
also works against the need to encourage and facilitate regeneration
and business investment in these areas.
Less certainty of delivery of infrastructure
53. The proposals would effectively provide
developers with less certainty of delivery of any infrastructure
classed as off-site (which could still be integral to the success/viability
of the development) and therefore funded through PGS rather than
section 106. The benefit of section 106 arrangements is that
they are a legally binding contract between local authorities
and developers for the delivery and funding of specific projects/outputs
often with detailed timescales for delivery. In many cases, developers
have the certainty that if the infrastructure is not provided
their money will be refunded. They also have the option to deliver
infrastructure themselves providing even greater certainty. PGS
could not offer this degree of transparency or certainty for either
local authorities or businesses.
54. Unless the Government was prepared to
pump-prime PGS there would inevitably be a time lag between the
identification of infrastructure need and the local authority
receiving the PGS money to pay for it. It is therefore unclear
what agreements would be possible between the local authority
and the developer ahead of the stream of funding. In addition
future funding commitments would always be dependent on the actual
future tax take. It is unclear how this would impact on the conditionality
of a planning permission for a major complex scheme. A developer
would be unlikely to proceed in the face of significant uncertainty
about whether necessary infrastructure or associated services
(eg bus service) which are important for the development (in terms
of its workability, sustainability and marketability) but outside
the proposed scaled-back scope of section 106 would be delivered.
55. We are also deeply concerned about the
lack of safeguards to ensure the additionality of investment in
infrastructure and fear that PGS revenue would simply replace
other Government expenditure or Local Authority grants (particularly
in the longer term). While we support the Government's intention
to increase investment in infrastructure, business has too often
had empty promises in relation to hypothecation and additionality
of tax revenues.
56. The Government would need to overcome
many obstacles to make this workable and it is hard to see how
business could receive the required certainty in relation to the
delivery of infrastructure. This is crucial—the Government
would need to demonstrate clearly how the system would work and
what mechanisms would be put in place to ensure this if PGS was
pursued.
57. In addition there has been little clarity
from Government on the infrastructure deficit that they are intending
to address. This would need to be clearly detailed in terms of
which infrastructure issues were to be tackled, at what spatial
level and how far PGS would be expected to contribute.
58. PGS might also be an inefficient means
of delivering infrastructure. Some benefits may be paid for but
provided off-site at a potentially higher cost to the local authority.
Threat to business/local authority/local community
relationships
59. Collecting and redistributing PGS centrally
would undermine an important local link. While there is a commitment
that the monies received by a local authority would be at least
roughly equal to that under section 106 it is a far less direct
mechanism, and the budgetary processes are far from clear. With
the inevitable time lag and less clarity in the linkage between
developments and the provision of infrastructure there might be
increased anti-development pressures within local communities.
60. While we recognise the desire to secure
funding for regional and national priorities, redirection of revenues
from some areas to others could create significant difficulties
in terms of the local acceptability and sustainability of developments.
We are extremely concerned therefore that PGS would be redirected
via central government with a proportion siphoned off for national
purposes—particularly in the absence of any clear accounting
mechanisms or delivery structures. There may be a case for some
revenues to be directed (in a transparent way) regionally, but
the vast majority must be directed locally—back to the area
where the funds originated—to be spent according to locally-determined
priorities.
61. Given this, PGS seems an extremely inefficient
system—with significant recycling of resources entailing
additional delays and uncertainty.
62. It follows that 100% of any revenue
raised through PGS within Scotland, Wales and Northern Ireland
would have to be returned to those devolved administrations.
63. The Government argues that the revenue
would need to be collected centrally and redirected to local and
regional levels to allow for infrastructure provision across local
authority boundaries. We fully recognise the need to provide more
strategic infrastructure but believe that other options to achieve
this must be promoted. New pooling arrangements could help to
support this, as could a number of other mechanisms. The business
community is also interested in whether arrangements such as those
in Milton Keynes might be more widely applicable because they
combine the local element, an opportunity for business to help
identify infrastructure need and transparent delivery of infrastructure.
It would be much more difficult to track the revenue and see the
benefit of the tax if it was re-routed via either HMRC or HMT.
Implications for public services and infrastructure
projects
64. There are specific issues in relation
to the impact of PGS on organisations that are either wholly or
partially funded from public sources or are involved in infrastructure
delivery. The impact of PGS in terms of the additional cost and
bureaucratic burden on local authorities, providers of transport
infrastructure and higher education institutions, all of which
would currently be within the scope of PGS, could be very damaging
and threaten the Government's wider objectives. It would also
be extremely inefficient to circulate funds through various public
bodies in this way.
65. There are also significant questions
in relation to partnerships involving local authorities or community
schemes and how PGS would work.
C. THE PGS PROPOSALS
ARE NOT
WORKABLE
66. The CBI does not believe that the proposals
set out are workable. Even if the proposals were in tune with
both the Government's own objectives and the CBI's objectives
for the long-term health of the UK economy, the complexity and
administration involved would outweigh any potential benefit.
67. In theory PGS may seem to provide sensitivity
in terms of value uplift, but the complexities involved are likely
to undermine its workability:
— the proposals are unlikely to improve
sufficiently on past attempts at taxing planning gain;
— the self-assessment process would
fail to mitigate the bureaucratic burden;
— calculating the value uplift in land
is intrinsically complex and would lead to significant disputes
about valuations;
— the payment procedure would be both
impractical and unfair;
— there would be significant avoidance
attempts; and
— PGS may relate to assumed value uplift,
but is not necessarily related to actual gain.
Consultation does not learn from past attempts
68. The CBI recognises the Government's
effort to learn from past mistakes of introducing a development
land tax but remains unconvinced that this version would be any
more likely to succeed for a number of reasons:
— The Government claims that "PGS
should only capture a modest portion of the uplift, thereby preserving
incentives to develop". The Government has failed to disclose
what a "modest" rate would be, however the CBI believes
that there would have to be different rates (or exemptions) to
account for the complexity of development across different sectors
and types of scheme. All of these rates would need to be low so
as not to disincentivise development but it is likely that some
rates would need to be so low as to make the net revenue gain
for Government (once administration costs are accounted for) negligible.
— The Government also claims that "the
cost of valuations should be managed through clear definitions
of value and a self-assessment process". The CBI believes
that the valuation process would still be very costly to administer
as in previous attempts. The definitions of CUV and PV set out
in the document are too simplistic and costly/lengthy disputes
are inevitable in any valuing system. The self-assessment process
may seem an improvement on previous attempts but by no means addresses
all of the problems that are intrinsic to any value-based tax
system. At the very least it is anticipated that a system of audits
or spot checks to self-assessment would need to be put in place.
— The Government further claims that
"PGS should be designed in a way which minimises avoidance
opportunities". We believe that it is incredibly difficult
to create a tax based on land values that minimise avoidance.
It is therefore far from clear at this stage whether the Government
has managed to improve this aspect from previous attempts.
— In the absence of cross-party support
for PGS it is likely that—as happened previously—landowners
and developers would defer development in the hope of repeal.
Self-assessment adds cost and time to planning
process
69. The Government claims to have made the
valuation process simpler by introducing the self-assessment process.
However, the CBI believes that this process would still introduce
significant additional administration costs and potential delays
both before a business decides to enter into development ie when
assessing the costs and benefits of a development project and
in complying with the process once planning permission had been
granted. Valuations are already one of the most complex and disputed
elements of the tax system and PGS would require (at least) two
such valuations for each site for which planning permission was
sought, making the proposals unwieldy from the start.
70. Self-assessment would not necessarily
decrease the administrative costs for the Government because of
the need to regulate and monitor the valuations that businesses
submit (even in a risk based approach) and the need to introduce
an appeals process to handle disputes over valuations. Even in
the absence of a formal appeal, there would inevitably be lengthy
and costly negotiations between businesses and the Valuation Office
Agency.
71. The ramifications of introducing a new
stage to the planning process with an associated appeals process
would be considerable. Complex sites, of which there are many,
take time and resource to value. This resource would be an additional
cost for business but also a significant cost for Government in
ensuring there was sufficient human resource and expertise both
centrally and locally to cope with the additional volume of work.
The alternative would be to slow the rate of development even
further.
72. It is unclear how the validation and
risk based approach would work in practice, but what is clear
is that developers would not start development until they had
certainty in relation to their assessment. This would slow development
down. It should be noted that this is a problem intrinsic to PGS
that couldn't be mitigated by a low rate. There has been some
discussion of a prior agreement process, but it is far from clear
how this would work in practice.
73. There would need to be a formal validation
process—otherwise there could also be impacts on corporate
activity if an acquiring company was concerned about the Inland
Revenue challenging previous self assessments.
74. Even developments where there was a
relatively low uplift—and low PGS take—would have
to undergo the same complex process. In this sense the tax is
regressive and even small added costs could threaten development.
75. The extra costs of the self assessment
process for business should not be under-estimated and would need
to be mitigated, for example by being allowable against the tax
charged.
Complexity of valuations would threaten to stifle
the planning system
76. The CBI believes that any tax system
based on land values, including PGS, is intrinsically flawed because:
— no two property developments are
the same and therefore nearly all sites would require development
appraisals (average or comparable valuations could not be used);
— calculating the value of land both
before and after planning permission would have to take account
of a number of variables and costs which would inevitably be debated
between the developer and the Government's valuer. The degree
of variability in valuations is often plus or minus 15% (and far
more in some cases); and
— wherever the land valuations were
disputed the District Valuer and possibly the Land Tribunal would
have to be consulted, which would delay the start of development
(with impacts on both costs and timescales).
The proposed valuation system would therefore
neither be as simple (or potentially fair) as the Government claims.
77. The valuation would need to take into
account costs incurred prior to the planning permission, such
as payments for access, decontamination, rights of lights, ransom
strips and so forth, otherwise there would be significant overestimation
of values and liabilities with a consequent impact on the viability
of development. All acquisition and improvement costs must be
factored in—the CUV in many cases would not capture this
since the value would not necessarily be enhanced by such expenditure.
If such costs were not taken into account a significant number
of developments would become financially unviable and if the costs
were taken into account many developments might have a negligible
PGS liability where the low revenue would be outweighed by the
cost of administration.
78. There is a presumption that the PUV
would take account of all relevant future costs, output values,
fees and so forth—but this is likely to be extremely complex
(particularly where some costs may not be known) and could be
contested. But there would be significant implications if valuations
did not properly factor in these costs.
79. An example provided by Tesco illustrates
this point. When hypothetically calculating the Planning Value
of two mixed-use/regeneration sites (Dartford and Highham's Park),
Tesco discovered that the price they paid for these sites reflected
the "existing use property value of the individual property
of interest and the cost of relocation or extinguishment of that
interest". This is the opportunity cost to the seller and
could therefore be defined as the Current Use Value. On both cases
the Planning Value was very close to the CUV, which would have
resulted in a zero or negligible PGS liability: very little gain
in revenue for the Government but with administrative costs for
both Tesco's self-assessment and the Government's regulation of
the system. However, if the PGS calculation was as simplistic
as that proposed with the assumption that values would be assessed
on the basis of unencumbered freehold interest with vacant possession,
these sites would have been unviable for redevelopment.
80. Even on "full" planning permissions,
it is often the case that conditions will be imposed which require
further details to be submitted for approval which could (depending
on their ultimate form) affect the PV.
81. In short the points and definitions
of valuation are too vague or inappropriate to be workable especially
for commercial and industrial brownfield and mixed-use and shared-ownership
sites and phased developments. The deterrent to development could
be significant.
82. The proposed PGS system assumes that
the land is freehold which immediately introduces a bias into
the system. For example where the developer does not own the freehold
but has a development lease the PGS liability would fall entirely
on the lease-holder even though the free-holder would share in
the uplift in value. This type of lease arrangement is relatively
common in central urban areas. It is highly unlikely that the
lease could be renegotiated—and even if it could, it is
questionable whether such impacts on the market have been properly
considered in relation to PGS. If this issue was not addressed,
it could impact on the willingness to proceed with redevelopment
and the process of urban renewal.
83. Given the complexities, there is significant
scope for inaccurate valuations. And there would seem to be more
likelihood of this leading to an over-estimation of PGS liabilities
with consequent implications for the viability of development.
84. More widely, the process of redevelopment
and renewal may be affected as companies seek to refurbish existing
stock in ways which avoid the need for planning consent. For example,
this would lead to more internal decoration rather than recladding
buildings which would impact on the quality of the public realm
and the ability of business to expand or up-grade their buildings.
PGS could jeopardise brownfield development
85. It is extremely difficult to see how
PGS might work efficiently in relation to large scale, mixed use
and complex developments that involve many partners, are phased
and take many years.
86. The Government suggests that we should
not be overly concerned about brownfield sites because the PGS
is proportional. But the administrative costs of PGS falls equally
whether it is in a low or high planning gain context—indeed
the burden is likely to be greater for brownfield developments
given the complexities.
87. There may be some developments where
it is assumed that high returns would mean that PGS liability
should not be a problem. However, these may be extremely high
risk with little certainty about the ultimate returns—and
PGS might deter such investment.
88. The Government implicitly seems to recognise
some of the challenges by highlighting the possibility of a lower
tax rate. There is a very strong case for this, but inevitably
it would introduce new difficulties in definition and implementation.
What is more the Government would need to assess the benefits/returns
of a lower rate against the arguably higher costs of administering
PGS for complex brownfield sites.
89. The Government also highlights the possibility
of a threshold. If PGS was to be introduced, there would certainly
need to be a threshold and most likely a number of different rates
and exemptions. It is extremely difficult to identify what these
should be and, again, this would introduce additional complexities
and could create distortions. As a starting point, PGS should
only apply where new and additional floor space was created—and
then above a minimum threshold.
90. If the Government presses on with PGS,
this needs to be addressed. Some people have suggested a value
threshold, but this would require having to go through the valuation
process which is a key problem.
91. The lack of a liquid market for brownfield
land and the diverse existing planning permissions would also
complicate the valuation process and impose a costly informational
burden on developers. Some major companies have estimated that
their valuation costs alone would increase by up to £500,000
per year.
Implications of market changes make PGS even more
difficult
92. Paying PGS on expected value gain rather
than actual gain is a significant issue and affects the perceived
"fairness" of PGS. Changes in value do not just arise
because of grant of planning permission but also as a result of
wider factors such as market conditions.
93. We are concerned about what would happen
in a number of scenarios:
— there are significant market changes
(eg downturn) from when the PV and PGS are calculated to the actual
delivery of the development which impacts on the value realised;
— the development may be phased and
some phases may not start;
— the development may start but be
substantially amended during construction; and
— the development may start with the
intention of completion, but factors prevent this and cause it
to be unfinished thus affecting its value.
Impractical Assessment and Payment Procedure
94. The CBI appreciates the Government's
effort to put back the point of payment to commencement on site.
However, the CBI still has concerns that it would be impractical
to expect payment at this stage before any of the gain from planning
permission had been realised. The commencement of development
is one of the most expensive stages of development because businesses
are outlaying significant sums in order to pay for the start of
construction. In effect many businesses would need to increase
borrowing in order to pay their PGS liability with no guarantee
that the development would pay off. This adds to the risks and
could make businesses more wary of entering into development,
particularly for longer-term investments where profit may not
be gained for a number of years.
95. This could also affect existing financial
arrangements with lenders and investors and business models with
impacts in the short term as developers sought to replace existing
arrangements. It would also be likely to increase costs as earlier
funding tends to be more expensive.
96. Many developments are phased in terms
of their delivery and realisation of value. Also commercial developments
built speculatively may remain vacant for some time after completion
and potential tenants may be offered initial rent free periods.
This means that developers may not see a return on their investment
for some time. PGS will impact more on schemes that are not prelet,
presold or divisible into phases or units. Large speculative developments
that are an essential part of the property market will be disadvantaged.
97. Wider business investment eg in new
distribution facilities, factories, offices would be based on
longer term business plans and the value would not be realised
at any specific point in time (rather it would flow through in
the form of increased productivity, increased profits, etc). For
such developments, having to pay more up front could affect their
decision to proceed or wider investment decisions. Even where
the value uplift—and thus the PGS liability—was not
high, the complexities and administrative costs involved would
be an issue.
Concern about resourcing pressures
98. We are concerned that the Government
has not set out the direct cost or level of resourcing likely
to be required to implement PGS. This would impact on both local
authorities and other organisations. At a time when local authority
resources and planning departments are stretched this is a real
concern. The role that local authorities might play in administering
and monitoring the PGS is unclear but it is likely that at least
some of the burden would fall on them.
99. Set at a low and more "acceptable"
level, the PGS would not justify the upheaval and substantial
costs of implementation and administration and it is important
to note that the inherent complexities of the tax would impact
to some extent regardless of the rate.
Transitional impacts
100. It has been noted by some of those
involved in the property industry that there are already impacts
as a result of the PGS proposals, with a reluctance to finalise
agreed figures for potential development sites.
101. In many cases, there would not be opportunities
to pass the costs of PGS onto the landowner since the transactions
would have taken place already. While for many developments this
may be corrected in the longer term, there could be significant
impacts on a large number of sites in the interim (and if the
exact quantum of PGS liability was not known when purchasing land,
pass-through would be more difficult than assumed). And, in the
longer term, there would still be developments for which this
would not be possible, for example where a business develops its
own land.
102. The debate about PGS is creating significant
uncertainty within the development industry and beyond. It is
also likely to impact on the willingness of local authorities
to develop schemes such as those in Milton Keynes and Ashford
given the necessary lead time and resource commitment.
CONCLUSIONS
103. As highlighted, the CBI supports the
aim to deliver more housing and greater investment in infrastructure
but strongly believes that PGS is not the right way to achieve
these objectives. The CBI is aware that the concept of a planning
tariff/roof tax is favoured by some organisations while others
favour improved section 106 agreements that contribute locally,
potentially combined with an area-wide charge. A number of other
options such as an enhanced planning obligations system, tax incremental
financing or changes to the CGT regime have also been mooted.
104. However, there needs to be considerable
work done on the details and wider implications for business and
local communities before these or other schemes could be more
widely applied. The CBI is willing to explore with the Government
and others a range of options that may be more workable and acceptable
to business than the current PGS proposals.
Memorandum by David Reed BSc DipTP DMS MRTPI,
Director of Community & Environment Services, Canterbury City
Council (PGS 44)
Many observers appear to have great doubts about
the proposals for a planning gain supplement (PGS), but I am firmly
supportive of the idea having waited 25 years for a government
to tackle the betterment issue. I believe the planning profession
should be influencing the proposals in a positive way rather than
opposing them. Although some of the detail has not been thought
through yet, and there would be many practical implications, the
concept is a good one. The objective of a new tax hypothecated
for infrastructure purposes, in addition to legitimate s106 requirements,
would be very valuable.
The proposal at present does have a number of
flaws which need to be addressed, the most basic of which is where
the funds will go. There is only one acceptable answer to this,
they must go back to the local level where the development occurs
and the related infrastructure needs arise. The funds raised should
not be diverted to the growth areas (which may need other sources)
or distributed via a complicated bidding system but returned directly,
without argument. Local level should mean none other than the
local planning authority (LPA) concerned. This is vital to "incentivise"
development and to satisfy the landowner, developer and local
objectors that the tax is just and will enable the more general
infrastructure concerns arising from the development to be addressed.
Local authorities are now beginning to receive funds through the
ODPM's local authority business growth incentive scheme and PGS
receipts could be similar, automatic money as far as the authority
is concerned and even more directly related to the decisions made
locally.
The funds raised should be dedicated to address
infrastructure needs which arise more generally from development
in an area but which are difficult to require from particular
schemes. With a reasonably reliable stream of funds local authorities
could use prudential borrowing powers to bring forward much needed
infrastructure improvements which were holding back development
in the area.
To ensure transparency in the use of PGS funds
each local planning authority could produce an annual statement
setting out it's proposals for using PGS in it's area and what
has been spent so far. This statement could be the subject of
consultation with interested parties, and to ensure a fully rounded
consideration of the needs of an area, could be debated by the
local strategic partnership involving all the key local agencies.
In relation to the use of PGS funds for "regional"
needs, it is accepted that there will be some wider infrastructure
requirements that cannot be addressed by each LPA alone, so I
would accept a maximum of 30% of the funds could be used regionally
or sub-regionally. But an alternative mechanism would be to allocate
all the funds to LPAs and make them accountable for meeting wider
needs by clubbing together to commission critical improvements
from the appropriate agency.
It might be desirable for there to be some redistribution
of PGS funds from more prosperous areas to the less prosperous,
for example in relation to housing completions or employment floorspace
constructed, but only if the system would be grossly unfair without
it because the direct link between planning decision and receipt
should be maintained if at all possible.
The other big problem is the relationship of
PGS to the infrastructure provided directly by a scheme and secured
by s106 agreements or similar. These agreements cannot be scaled
back as far as is being suggested, they may need to include for
example off site highway infrastructure and community facilities
(including schools) in the case of larger schemes, anything in
fact that is directly required for a scheme to go ahead acceptably
or must be provided in a definite timescale in relation to that
development. No developer (or community) will be prepared to rely
on the PGS system to deliver time critical infrastructure in relation
to a scheme, nor should the PGS system be required to do so as
this could frustrate the speed that development could proceed.
Finally, there is a critical issue about how
the PGS should relate to the emerging roof tax systems being developed
for major growth areas. Some of the strongest objection to the
PGS idea comes from such areas, essentially on the grounds that
current s106 agreements deliver more infrastructure than PGS will
as currently proposed. There is a big danger that might turn out
to be true unless the "directly required" test is applied
more widely, giving LPAs in growth areas full scope to deliver
what their area will need through the s106 mechanism. In case
this approach might overlap with the collection and use of PGS,
why not allow LPAs the option of conceding PGS will not apply
in relation to a particular major scheme if it is satisfied that
the s106 agreement is comprehensive enough to address all the
issues raised. If it is the LPA's own money that is being conceded,
that would be reasonable.
As an alternative to PGS, the "tariff"
approach, favoured by some, has significant disadvantages which
should be recognised. A tariff approach in a typical local authority
area differs from a roof tax in a major growth area in that it
would be applied to a large number of small schemes across the
council's area. Whilst some schemes like this are in place—and
a few work well and are quite lucrative (West Berkshire is the
best example I have come across)—most LPAs have not tackled
the issue seriously yet. If the PGS idea falls every LPA will
begin to develop it's own scheme, every one is bound to be different,
leading to complexity for developers and inconsistencies between
authorities. Inevitably there will need to be a process to endorse
each tariff scheme before it will be fully accepted which could
impose another burden on the LDF process. Then the tariffs will
need to be collected by hard pressed development control officers
as part of each individual planning application. There will be
frequent claims that the tariff makes a scheme unviable, leading
to a difficult dilemma or delay as valuers are brought in to advise.
The effect of widespread tariff policies on the development control
process is potentially a big issue, the job is hard enough already
without the additional task of tax collection when dealing with
relatively modest schemes. PGS would be so much simpler with the
tax system fulfilling this task leaving development control officers
to concentrate on their main role.
There are considerable flexibility and fairness
advantages of PGS. Tariffs do not relate well to the ability to
pay since they tend to be inflexible flat rate figures based on
development types. They are not sensitive to the scheme involved,
and will require frequent updating to take account of changing
needs and market conditions. PGS on the other hand would be a
proportion of land value uplift which relates directly to the
value and difficulties of each scheme and would rise and fall
naturally as market conditions fluctuate.
In conclusion, I am confident that with the
changes outlined above the PGS can be made to work successfully.
The loss of a taxation approach to this issue for another generation
would be an historic missed opportunity, providing as it does
a much needed opportunity to raise additional resources to tackle
infrastructure shortfalls, which in turn can only speed up further
housing and other development as those shortfalls are tackled.
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