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That takes me to the second key issue: the point at which the tax will bite. The PGS is predicated on the assumption that the main enhancement in value comes when planning permission is given. That is true in some cases, but in others the picture is much more complex. I leave aside all sorts of issues of hope value and other such factors and focus on two circumstances. There is sometimes a need for substantial land remediation costs before a site can be developed, or for infrastructure investment to give access to the site before the true value can be derived. Without the Jubilee line extension, the Greenwich peninsula in my constituency would not have been developable because, essentially, it was not accessible. Putting in the infrastructure of the Jubilee line was far more important to uplifting the value of the land than any grant of planning permission, irrespective of the infrastructure investment. That is where there is
enormous scope for developers, with their advisers, to examine, explore and exploit opportunities to argue that it is not the granting of planning permission that explains the uplift in value, but the process of development, the enhancement of access, the remediation of the land, the opportunities to develop and the process.
In many developments, a period of relatively discounted low-value rents is necessary to attract people to the site. The true values are achieved only several years down the line, when the site is seen to be working. However, PGS is predicated on the assumption that it bites when the planning consent is granted, not on the ultimate development value of the site. There are serious questions about whether this measure is the most effective way to capture development value and real risks that canny developers will find easy opportunities to evade liability.
That brings me to the nub of the problem: past development taxes have generally failed because developers have seen no advantage in making the required contribution. On the contrary, they have sought to evade liability—and look set to do just the same with PGS. By contrast, section 106 contributions, despite the problems associated with them, to which I shall return in a moment, are often paid willingly by developers when they see the money being used to create a better environment for their development. That has very much been my experience in Greenwich, where my local authority raised substantial sums under section 106 from developer contributions to major local schemes such as the Greenwich peninsula or the Woolwich arsenal. The developers have been willing to agree such contributions because they can see direct benefits: better transport arrangements to serve the site, new schools, parks or health facilities that will make the development more attractive to potential investors. In short, the section 106 framework has worked for us because it has offered a win-win outcome as a result of which both parties have seen clear advantages, so there has been no incentive to try to evade the contribution.
I recognise that that does not apply in all cases. The experience of section 106 is patchy: the mechanism has worked in some areas but not in others. Developers have been critical of many local authorities for making unrealistic demands or allowing the process to drag on, so delaying much needed development. Equally, some critics have demonstrated that local authority enthusiasm and indeed capacity for negotiating section 106 agreements has been variable and that some authorities have failed to secure appropriate contributions
The conclusion that I draw, as was implied by my question to my hon. Friend the Minister, is that the section 106 process can and should be improved. The sharing of good practice and the development of appropriate support and advisory services to help local authorities negotiate section 106 agreements is obviously one way in which to improve outputs. Irrespective of the Government’s decision on PGS, that will be necessary, because—as my hon. Friend conceded—a continuing, albeit reduced, remit for section 106 is envisaged under the Government’s proposals.
If such improvements can be achieved—and in my view there is no reason why the poorer-performing local authorities cannot be helped to up their game to reach the level of the best—an obvious question is raised about why the Government are proposing to introduce a complex, unproven and potentially risky new task that may well end up raising contributions that are less than those that could be achieved under a properly functioning section 106 arrangement. A study undertaken by Knight Frank that was reported in Regeneration and Renewal last September suggested exactly that scenario—a lower yield for PGS than for a properly working section 106 system.
The traditional section 106 route is, of course, not the only option for securing developer contributions to infrastructure or social and environmental investment. There have been some very interesting developments involving tariff systems, sometimes described as “roof tax”. Perhaps the best-known example is the Milton Keynes system. Under those arrangements, developers are required to pay a fixed sum per home or per square metre of commercial space to finance additional community needs such as transport, health, education, environmental improvement and social housing.
The evidence to date suggests that developers are generally willing to enter into such agreements when they are certain of the benefits that will flow from the use of the funds that are necessary to complement and ensure the success of their development. I am aware that such an arrangement may not work everywhere. The special circumstances in Milton Keynes, which is in a defined growth area with a clear pipeline of future expansion and where land prices are generally pretty comparable throughout, make it especially suitable for such an approach. However, there is growing interest in different means of securing appropriate developer contributions within the existing legal framework. Evidence suggests that the sums being raised are growing. It seems curious that, just when there appear to be good prospects of securing the objectives that lie behind the Government’s proposal by existing means, attention may be diverted by the introduction of a radical and controversial new tax.
Given the uncertainties and risks implicit in the route on which they are embarking, I urge caution on my right hon. and hon. Friends. Whatever gloss their officials may try to put on the outcome of the earlier consultation, the reality is that the majority of informed opinion is not in favour of PGS. Nor is it a case of vested interests. The local authorities that may have the most experience of negotiating successful section 106 agreements with developers are as wary of the PGS proposals as the development industry. The Royal Town Planning Institute, of which I am proud to be an honorary fellow, described the proposals in somewhat stark terms in a press release headed “Government ‘sleep-walking’ into unworkable new tax”.
Although this is only a paving Bill, it begins a process that is inherently complex and risky and that could end badly. I urge my right hon. and hon. Friends to take stock and give careful thought to all the issues involved, as well as the considered views of the people and organisations who best know the minefield that they are approaching. If they do so, they may well conclude that the alternatives available can generate
better outcomes and save them from repeating the mistakes of the past. When history has such good lessons to teach us, it is unwise—to say the least—to ignore them.
4.49 pm
Dr. Vincent Cable (Twickenham) (LD): It is a privilege to follow the right hon. Member for Greenwich and Woolwich (Mr. Raynsford). His expertise, as a result of both his ministerial experience and his extracurricular CV, speaks for itself. As I witnessed his well-directed Exocets pounding the target, it made the rest of our contributions seem superfluous. He approached the matter in exactly the right tone, being constructive but also sceptical, and I hope to continue in that spirit. The Minister’s style—the approachable way in which he dealt with questions, and his searching for areas of consensus—also encourages us to look at the matter constructively, and I shall try to do so. However, I agree with the right hon. Member for Greenwich and Woolwich that the planning gain supplement—certainly as conceived of by Kate Barker and in the Government consultation—is a seriously bad idea, and there is no point in disguising that.
It is a seriously bad idea for several reasons. There are a variety of technical issues, some of which we have heard about, such as the potential impact in terms of complexity and the negative disincentive effects on development. It is also a bad idea because it is potentially centralising. Effectively, the Government will be top-slicing section 106 money. It interposes Her Majesty’s Revenue and Customs in an area where many local planning authorities have already developed substantial expertise in judging the optimum level of planning gain that they can seek. It sits alongside proposals for the reform of the planning system that will suck out much of the decision-making authority that councils currently have
It is a bad idea for another reason, although I suspect that the Conservatives have a different view in this regard, and I do not know the view of the right hon. Member for Greenwich and Woolwich. It detracts from what is potentially a much bigger and more radical approach to the taxation of land. There is a growing view, certainly among liberal, or market, economists, that the right way forward is taxation of land values, as opposed to development betterment. That view is shared by thinking organisations on the centre-left: the Institute for Public Policy Research has produced a very good case. The Government had an opportunity to open up this whole argument. I accept that it is big, radical and complicated in itself, but by focusing on one very narrow aspect of land taxation—and probably the most difficult and unattractive aspect—the Government might well undermine that potentially important development.
Mr. Curry: I agree that the idea of a land value tax has frequently been discussed, but if there is an old lady in my constituency whose paddock is included in the area for development and she is then penalised for not developing it, will the hon. Gentleman volunteer to explain to her how she will pay that?
Dr. Cable: Of course, such matters depend on how such a very big system of taxation is introduced. That is why it is important that local authority-wide pilots are run and that work is done, as is happening in a couple of local authority areas. For example, there is collaboration between the right hon. Gentleman’s party and mine in the vale of Oxford. How this might work is being looked into. Clearly, a lot of exploratory work needs to be done and, if the legislation had been broadened in that regard, it would have been much more attractive to me.
What is being proposed is also a bad idea because it does not give us sufficient detail to talk about the planning gain supplement properly. I understand the Minister’s difficulty in setting the rate, but the rate issue is fundamental to how we debate the matter. Its history has been partially rehearsed. It is one of Governments experimenting with very different levels of development taxation. The first experiment was the proposals of Lloyd George and Winston Churchill almost exactly 100 years ago: there was a development tax of 20 per cent. but the proposals were not introduced because of difficulties with another place on a wider subject. The Attlee Government had the confiscatory 100 per cent. There was then Wilson mark 1 and Wilson mark 2, which had rates of 40 per cent. and 80 per cent. respectively, and the Thatcher Government initially experimented with 60 per cent.
There has, therefore, been a very wide range, and where we position ourselves on that range is crucial to the feasibility and attractiveness of the scheme. If we position ourselves at the top end, there will be many major disincentive effects on development; if we position ourselves at the bottom end, the issue arises as to whether it is worth introducing this measure, particularly as I believe that the Government are proposing to allow tax offsets against other taxes such as capital gains tax.
I want to develop the argument in three stages. First, as the Financial Secretary encouraged us to do, I want to look at the basic principle, his approach to which I support. Secondly, I want to look at the relative merits of adapting section 106 agreements, as opposed to introducing the new tax. Finally, I want to offer some alternatives, which the hon. Member for Rayleigh (Mr. Francois) was coy about doing.
On the basic principle, most of us will agree that the Financial Secretary is right in saying that there is a very powerful philosophical case for taxing betterment and the windfall that accrues through no greater effort than achieving a change in planning status. The right hon. Member for Suffolk, Coastal (Mr. Gummer) wrote an article some time ago in which he mounted a spirited case against that principle, based on his experiences as Secretary of State for the Environment, but as he is not here it is probably unfair to drag him into the debate. I think that there is a general acceptance among those present that the principle of taxing betterment development value is right, but the problem is that there are already other ways of doing that.
Section 106 and adaptations of it have been discussed at length, but what has not been mentioned is that capital gains tax does the same thing—it taxes windfall capital gains. The objection to relying on CGT is made in the Government’s consultation paper, which says that its effect is severely undermined by the various
allowances and reliefs. The logical response to that is to tighten up on the allowances and reliefs, which I would suggest doing for wider tax reasons. At present, there are not just one but two ways of taxing betterment: section 106 and CGT.
That brings us to what is essentially a practical argument: whether section 106, as adapted—the right hon. Member for Greenwich and Woolwich suggested how that might be done—compares with the planning gain supplement concept. The arguments against section 106 have been well made and the Financial Secretary repeated some of them. In its worst expressions, it is arbitrary and inconsistent and can be long-winded. Examples from across the country—particularly from the early 1990s, when section 106 was first experimented with—show that all those arguments are true, but it has two enormous attractions: it is purely local and it is reformable.
This situation strikes me as odd, particularly as the Minister for Housing and Planning is sitting alongside the Financial Secretary today. The former Office of the Deputy Prime Minister, and now the Department for Communities and Local Government, expended a lot of effort on trying to persuade local authorities that good practice could be built on. Circular 1/97 was an example, and another circular, in December 2003, also explained how good practice could be built on. It is not at all clear that the Treasury and the DCLG are entirely at one on this issue. The former ODPM was very clear that the system was capable of being improved considerably, and some of us are disappointed that that effort has not been carried through.
I could understand why the Government want to argue that that system should be superseded if there were a simple, clear and easy way of extracting development value for the taxpayer that does not happen at the moment, but it is clear that the planning gain supplement does not do that. I do not want to speak at length on this issue, as some of the points have already been made, but there are several specific ways in which it fails. First, it fails in terms of valuation issues, as the hon. Member for Watford has already pointed out several times. In part, the problem is how it is possible in practice to crystallise a transaction in such a way that the planning gain supplement can apply in a simple way. A big development will have lots of different and related planning applications. As we know from the work of our local authorities, in practice, big and complex projects often involve a necessarily long planning process, during which there is discussion of planning conditions. It is not at all clear how a single point and a single owner can be identified for tax purposes.
The underlying measure that the Government propose is self-assessment, which, although it is counter-intuitive, is in fact right and a good idea. Clearly, people will not underestimate the value of their own land if at some point the Government can compulsorily acquire it at the volunteered value. What the Government have never clarified is how the system of self-assessment would be backed up by the compulsory purchase powers that would be necessary to make it effective. Valuation is possible, and self-assessment is a possible mechanism, but there is much more to it than simply saying that people should declare the value of their own development.
Mr. Francois: The hon. Gentleman makes a reasonable point. Does he agree with the sentiments of Mr. Peter Bill, the editor of Estates Gazette, who wrote, on complexity of valuation:
“The Janet and John examples (“a developer wants to build 10 houses...”) in the consultation documents will make the commercial sector gawp in disbelief at the underlying assumption that all developers do is build houses—and that development proceeds in a simple set of steps. Try a real live example of the 10-year process of assembling 30 sites for a 3-acre, retail-led, mixed-use urban site with a section 106 agreement—see how it works then.”?
Dr. Cable: That sounds a plausible example of what I was trying to say and I thank the hon. Gentleman for that intervention.
Valuation is one issue and the other is the impact on development, and the right hon. Member for Greenwich and Woolwich explained clearly the possible problems. It is straightforward if we are talking about greenfield development, but if it is brownfield development, with unpredictable and complex costs relating to contaminated sites, it becomes much more difficult.
The other area that no one has so far mentioned, in which the impact becomes unpredictable and difficult, relates to the improvement of property rather than the redevelopment of the land. A case could arise in which extensive internal improvements of a big office block or a factory could take place without incurring planning gain supplement because they are internal, but external cladding, which would require planning approval, would be subject to the planning gain supplement. Or a developer who wished to install a new, big lift development to comply with the disability discrimination provisions might also be subject to planning gain supplement. There are many complex areas in which development might be deterred or distorted by the working of the supplement.
The third problem area, which has also not yet been mentioned, is what I call the spill-over problem. Often, the main gains from development do not accrue to the developer, but to the neighbours. That is most obviously the case in big projects such as the Jubilee line or the creation of a new town. Everybody in the vicinity benefits from the rise in the value of land, but it is only the developer who is taxed. That is also a problem with section 106, but it is an underlying problem with taxing development rather than land that that anomaly continues.
Fourthly, we have the problem of double taxation. As I have already said, developers are taxed capital gains tax on appreciating capital values, as well as section 106. The Government are clearly aware of the problem and are talking about allowing the new planning gain supplement to be used as a tax offset for those other taxes, which potentially creates enormous complexity and undermines the whole pursuit of yield. The sheer difficulty of trying to administer separate systems of taxation alongside each other is formidable.
In conclusion, I shall talk about alternatives. The Financial Secretary rightly challenged the Opposition parties, asking what we would do. I would do several things. As the right hon. Member for Greenwich and Woolwich said, we know now that it is possible—based on the experiences of Milton Keynes, west Berkshire
and the City of London—to introduce tariff-based systems that are transparent and satisfy both the local authorities and the developers. It is striking that the development industry has expressed its confidence in tariff-based systems, which is a big step forward.
Secondly, I would reform capital gains tax, dealing especially with some of the reliefs. I notice that the chairman or chief executive of British Land recently announced in the property press that he had been able to achieve a gain of some £18 million as a result of taper relief and holding on to his property assets for substantial periods of time. That is the kind of relief that the Government should consider if they intend to reform taxation in that area.
Thirdly, I would look further into value added tax. My party has long argued that we need to equalise VAT between home improvements and new residences. If that were to happen, the VAT on new development would capture some of the development gain, while reducing VAT on home improvements would enhance the incentive to increase the housing stock of older property, where much of the potential for increasing supply exists.
Finally, we would want to look further into the whole principle of taxing land values. It is a difficult area and the right hon. Member for Skipton and Ripon (Mr. Curry) has already intervened to point out some of the obvious political problems, but it is worth quoting one or two of the leading authorities in the field. John Muellbauer, for example, who is widely used as a consultant by the Government, a few days ago commented:
“I think a planning gains supplement is a pretty dumb idea: it’s been tried five times and each time it failed... A land tax, levied in proportion to the total value of the land, would be much more practical, and more likely to tame Britain’s boom-bust housing market”.
In the Financial Times, Martin Wolf recently said:
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