Archived decisions

Contact: Karin Taylor, ext 7362 email: [email protected]

1. Introduction

1.1 In December 2005 HM Treasury, HM Revenue and Customs and the Office of the Deputy Prime Minister jointly published a consultation document relating to the introduction of a Planning-gain Supplement (PGS). The purpose of this would be to capture a portion of the land value uplift arising from the planning process in order to fund the infrastructure that makes growth possible and acceptable. A PGS would partially (but not exclusively) replace the current system whereby local planning authorities negotiate planning obligations with developers for financial contributions or payment in kind towards infrastructure provision associated with new development sites. These obligations are then embodied in Section 106 Agreements.

1.2 The Government has requested the views of all stakeholders on any of the issues raised in the consultation document but has also highlighted a number of specific issues to which responses are sought. The closing date for the consultation is Monday 27 February 2006, the same day as this Cabinet meeting.

1.3 General consideration of the principle of a PGS is included in the main report, whilst detailed points and a proposed response to Government are set out in the attached appendix.

2. The Government's Proposals

2.1 The consultation document has been published as part of the Government's response to the Barker Review of housing supply. To help finance vital infrastructure and support growing communities, Kate Barker recommended that the Government should capture a portion of the land value uplift arising from the planning process. The Government has accepted her conclusion that a PGS was likely to be more effective than other means of capturing land value uplift (such as VAT on new housing on greenfield sites or the current planning obligations regime) in providing resources to support the expansion of housing supply, provided it could be successfully designed and implemented.

2.2 The basis for calculating PGS would be a percentage of the "planning gain", ie the difference between the land value with full planning permission and the value of the land in its current use (the "uplift"). These values would be self-assessed by the developer and collected by HM Revenue and Customs. It is expected that in most cases the developer would in effect pass the cost of PGS back to the landowner. Payment of the PGS would be required on the commencement of development and a "Development Start Notice" procedure will be created to make this a statutory chargeable event. In cases of non-compliance, PGS would be enforced by a combination of interest charges, penalties and other compliance measures including a new dedicated "Development Stop Notice".

2.3 The Government intends to apply a single percentage rate of PGS to all types of development, although it is seeking views as to whether a lower rate should be applied to brownfield land. Home improvements would be excluded from the levy and consideration is also being given to a further threshold, possibly to exclude smaller development projects. The Government has stated that PGS would be set at a "modest" rate to discourage avoidance, although it has not indicated what the actual percentage would be.

2.4 The introduction of a PGS would be accompanied by a scaled down planning obligations system, limiting planning obligations to those matters that need to be addressed in order for the environment of the development site itself to be sustainable, safe, of high quality and accessible. Affordable housing would also remain within the scope of planning obligations. In practice planning obligation requirements would be discounted from the sum upon which PGS would be levied, therefore it is not clear why affordable housing should remain within Section 106 funding, and therefore effectively be a "first call" on developer funding, and other major infrastructure such as transport, or education provision, would depend on PGS levied on residual uplift funding. The consultation document includes specific examples of the relative scopes of planning obligations and PGS applying this "development-site environment approach".

2.5 Government commits to the following key principles for allocating revenues if PGS is implemented:

(i) a significant majority of PGS revenues will be recycled directly to the local level for local priorities. The consultation proposals state that this will help local communities to share more equitably the benefits of growth and manage its impacts, and will ensure that local government overall will receive more funding through PGS than is currently raised through Section 106 Agreements;

(ii) PGS revenues will be dedicated to financing additional investment in the local and strategic infrastructure necessary to support growth. The Government anticipates that an overwhelming majority of PGS funds will be recycled within the region from which they derived; and

(iii) PGS revenues will ensure growth is supported by infrastructure in a timely and predictable way. Local and regional stakeholders will play an important part in determining infrastructure priorities, to help unlock development land.

2.6 Whilst the majority of PGS revenues would be recycled directly to the local level, a significant proportion would be used to deliver strategic regional, as well as local, infrastructure. Government proposes that this would be done through an expanded and revised Community Infrastructure Fund. There is also the possibility that PGS income would be redistributed around the country, ie from areas of high land values/development pressure to areas of low land values/low development pressure.

3. Discussion of the General Principles of the Proposed PGS

3.1 The idea of a levy on increases in land value arising by means of the planning process is not new. Previous attempts, most recently the Community Land Tax, have been abolished by subsequent Governments after they obstructed the development process by discouraging owners from bringing forward land for development. The Government considers that if a PGS is set at a "modest" level (this is not specified in the consultation document, but indications have been given that the percentage would not exceed 20%) it will not inhibit landowners and developers in releasing land. The development industry, however, is not confident that this will be the case and it is therefore a possibility that the introduction of a PGS may decrease the amount of new development (in particular housing supply) rather than increasing it by removing infrastructure constraints.

3.2 In theory, the principle of taking a modest amount of land value uplift in order to finance infrastructure is one which would benefit the County Council, by rationalising and replacing the current practice of negotiating developers' contributions through Section 106 Agreements (planning obligations), a process which takes place on a relatively ad hoc and variable basis, and which relies heavily on the district councils as the local planning authority. However, a major problem with the consultation document is the lack of any detail, so raising more questions than it answers. This makes it difficult to assess whether the proposal would be advantageous or detrimental from the County Council's viewpoint as a major provider of strategic infrastructure in Hampshire. Furthermore, the Government is proposing to retain the planning obligations procedure in relation to the environment of the development site itself, and to "twin-track" this with the new PGS procedure, so almost certainly increasing the bureaucracy and costs associated with the planning system.

3.3 Although the consultation document states that it is the Government's intention that a significant proportion of planning gain monies would be redistributed to the local level, it is unclear what proportion this would be. Without a firm commitment to a high proportion it is unlikely therefore that PGS would be more advantageous to delivery of key infrastructure funding in Hampshire than the existing planning obligations system or alternatives such as a tariff system. Since infrastructure costs are unlikely to be fully met, complexity is unlikely to be reduced or transparency increased and possibly the position will worsen. From the County Council's point of view, the most appropriate level for decisions on infrastructure investment and for the allocation of funds to infrastructure projects should be the county or other sub-regional level, where an appropriate, and democratically accountable, delivery body exists.

4. PGS and the County Council's Own Land

4.1 An initial key question is whether a public authority's own land should be subject to PGS, either when it is released as surplus land for disposal and subsequent development, or when it is developed for operational purposes. The consultation document is silent on this issue.

4.2 The County Council uses its capital receipts for the purpose of improving public services and public infrastructure and therefore any land value uplift that results from its land disposal should be exempt from PGS, as is the case with Capital Gains Tax and VAT. The application of PGS to the County Council would also frustrate reinvestment proposals that can only proceed when a sale reaches a certain threshold, and to some extent this would defeat the Government's own Section 77 School Standard and Framework Act objectives.

4.3 Any uplift in value in land and property in relation to that used for the development of social infrastructure and public services themselves should also be excluded from PGS, otherwise it would have the effect of "taxing" the very development that the purpose of the PGS is aimed at.

5. Detailed Points

5.1 The consultation document asks stakeholders for responses to 13 specific questions, many of which are technical in nature. The principles set out in this report have provided the framework within which these detailed responses have been prepared. A proposed response to each question is in the appendix.

6. Impact Assessments

6.1 The recommended policy stance will not have different impacts by virtue of race, gender or disability.

Recommendations

1. That the Cabinet approves the following principles as the basis for the County Council's response to the Government Consultation on Planning-gain Supplement: The County Council:

(i) regrets the lack of detail in the consultation document which prevents a full understanding of the Government's proposals and thus precludes the County Council from making a comprehensive response;

(ii) calls on the Government to publish more detailed proposals to enable more focused comments through a further consultation;

(iii) believes that infrastructure requirements at the county and sub-regional level would be delivered more effectively through a locally collected and administered tariff system;

(iv) considers that, if a Planning-gain supplement is introduced, the funding should be fully reallocated locally to provide local infrastructure, with only surplus funds subject to transfer to the regional level;

(v) considers that, if a Planning-gain Supplement is introduced, local authorities should be exempt from paying it where they are developing land for operational purposes;

(vi) considers that the Government should explain why affordable housing would continue to be provided through Section 106 Agreements; and what impact this would have on funding for other major infrastructure, such as transport, which would come from Planning-gain Supplement; and

(vii) believes that the Government should commit to publishing an annual statement setting out the value of Planning-gain Supplement collected and Planning-gain Supplement funded investment by region and by county/unitary area.

2. That the Cabinet approves the detailed responses in the attached appendix, to the specific questions posed in the consultation document.

761Rpt/KT

APPENDIX

The Government has requested the views of all stakeholders on any of the issues raised in the consultation document but, in particular, welcomes responses on 13 specific questions. These are set out below in bold type, along with discussion of the issues and a recommended response in italics.

Q 2.1 What further clarifications to the definitions of planning value and current use value (as described in Box 2.2) would be helpful to provide further certainty to developers?

Planning value and current use value are not as clear cut as is implied in the consultation document. Planning value does not arise solely at the point at which planning permission is granted, but may relate to the allocation of land in a development plan. Indeed, this may be a gradual process with land increasing in value in stages throughout the development plan, and subsequently development control, processes. Even if full planning permission has been granted, new or revised applications may be submitted for a site, or reserved matters may need to be approved, resulting in further changes in the value of the land.

Definitions of planning value and current use value should be expanded to exclude variations in land value generated by the development plans process or hope value. Where full planning permission is granted more than once on the same site, planning value should be based on the planning approval which is actually implemented.

Q 2.2 How can the self-assessment of PGS valuations and liability be made as easy to comply with as possible?

There is a danger that self-assessment will encourage overstatement of Current Use Value and understatement of Planning Value or that the costs of development are over-estimated in order to minimise PGS liability.

The self-assessment of PGS valuations and liability can be made as easy to comply with as possible by providing simple and clear proposals and processes with little room for any ambiguity about who needs to do what and by when. Lists of un-enhanced land values should be maintained which could form the basis of the assessment. An efficient arbitration process should be introduced to handle disagreements and help prevent abuse of the self-assessment process.

Q 2.3 What information on the condition of land at the granting of full planning permission should be made available to the chargeable person?

Local Planning Authorities should be required to make available relevant information where appropriate.

The information should include details of the actual use at the relevant date, details of extant planning consents, relevant planning policies and any "unusual" planning circumstances or exceptional development costs (for example where land is known to be contaminated) which would affect uplift value.

Q 3.1 Should payment of PGS occur at the commencement of development or another point in the development process?

The most practical trigger for payment of PGS would be at commencement of development. This would, however, cause difficulties where infrastructure needs to be provided up-front before the development is occupied, for example road improvements and, since commencement of development is driven by the developer, it would make it difficult for infrastructure providers to plan properly. Where large sites are concerned it may be more appropriate for PGS to be paid in tranches relating to stages of the development, although these would need to be index-linked.

PGS should be paid on the commencement of development although there should be sufficient flexibility to allow advance payments to finance infrastructure that is required up-front. Consideration should be given to allowing staged payments where appropriate, for example in relation to large development sites. In effect, a similar approach to the current system in this regard.

Q 3.2 Should the Development Start Notice be submitted to the local authority or HMRC?

If HMRC is the body responsible for collecting PGS monies, it needs to be informed of the commencement of development as soon as possible. There would, however, be merit in the local authorities undertaking this in view of their local knowledge and the importance to them of information relating to the implementation and monitoring of development proposals. Whichever body actually receives the Development Start Notice, a system should be put in place whereby the other body is either sent a copy of the Notice or is otherwise informed at an early stage that development has commenced.

Q 3.3 How should the proposed approach to compliance be made to fit with larger, phased developments?

On larger developments it would be unreasonable to expect developers to pay the whole PGS at the start of the development process; this could prevent land from coming forward and might lead to developers applying for planning permission and developing large sites in a piecemeal fashion, at the expense of sound planning.

With larger, phased developments PGS should be payable in tranches. It should be assessed at the start of development, but the system should allow for the amount of PGS to be amended in the event that revised planning applications are submitted and approved.

Q 4.1 To encourage regeneration, should a lower rate of PGS be applied to brownfield land? What might be the drawbacks?

This is difficult to answer without a clearer definition of brownfield land. Encouragement should be given to the redevelopment of previously developed land; however where the condition of the land (for example contamination) increases the costs of development, this would normally be reflected in its value, so it would be unnecessary to apply a lower rate of PGS. If brownfield land includes easily developed sites such as garden land, a lower rate should not apply as it would place such land under greater pressure for development, leading to the increased loss of important open areas and higher-density development offering less potential for wildlife habitats. The infrastructure costs associated with developing brownfield land are not necessarily less than those for greenfield sites, and indeed could be more. If a lower rate of PGS was applied, this could result in insufficient funds being available for infrastructure provision.

It is unnecessary to apply a lower rate of PGS to brownfield land as higher development costs should be reflected in land values. A lower rate of PGS could result in insufficient funds being available for essential infrastructure. If variable rates of PGS were to be introduced, a clear definition of different types of brownfield land would be required in order to prevent abuse and to discourage the over-development of infill sites and garden land.

Q 4.2 How should a PGS threshold for small-scale development be set? What factors should be considered?

There should not be a threshold for small-scale development, as all new development has implications for infrastructure and it could result in a significant lack of infrastructure investment in areas characterised by small-scale development such as many rural areas. However, there is a need for a broader class of developments which should be exempt from paying PGS, such as extensions to commercial and industrial premises to allow for business expansion. Development by public authorities for operational purposes should also be exempt from paying PGS as it is for precisely this type of development that PGS is collected in the first place.

Q 5.1 Does the development-site environment approach proposed here represent an effective and transparent means of reducing the scope of planning obligations?

The development-site environment approach could create problems in respect of essential off-site infrastructure development and mitigation measures. Local transport infrastructure such as road and junction improvements, traffic management measures, cycleways, footpaths and bus services would fall outside the scope of planning obligations and it could be difficult to secure their provision at an early enough stage in the development process. For example, a superstore development which required off-site highway works could no longer be required to sign a legal agreement for such provision. The County Council would be dependent on the local planning authority imposing a condition prohibiting completion of the development prior to provision of the works. Off-site mitigation and other measures (eg waste management) do not seem to fall within the scope of either the proposed PGS or the retained planning obligations system despite the fact that these matters are an increasingly important element of sustainable development.

At present these works are sometimes undertaken directly by the developer rather than dealt with by payment of a contribution. The current proposals do not appear to allow for the provision of land rather than a financial contribution to enable the provision of essential facilities, such as community halls, schools and health centres. On large sites these may be provided within the development site, but on occasions they are provided off-site by means of land swap or purchase.

The development-site approach does not make adequate provision for the provision of critical off-site infrastructure or mitigation measures, which are essential in order to render the development proposal acceptable and sustainable, neither does it provide adequate scope for off-site provision of facilities in order to maximise site values (eg. off- site green space).

Q 5.2 How should infrastructure no longer funded through planning obligations be provided, including through the use of PGS revenues?

Whether a tariff based approach or PGS is pursued, it will be essential for each area to have an infrastructure delivery plan which clearly identifies what must be delivered by whom, and the funding arrangements/ expectations. Early work by Roger Tym for the South East County Leaders has given clear indications of potential levels of developer funding and the scale and relative significance (eg between transport and affordable housing) of funding required to deliver adequate infrastructure to support sustainable development and communities in the South East. This would suggest that all uplift value would be required to meet these needs rather than the modest rate suggested for PGS. Where infrastructure is funded through the use of PGS it is essential that the appropriate payment is received quickly from the collecting body in order to ensure timely provision.

Q 6.1 How should PGS revenues be recycled to the local level for local priorities?

It is essential that "local" is defined, especially in two-tier local government areas. PGS revenues should be recycled to the local level for local priorities by way of grants in direct proportion to revenues raised. Ideally, 100% of PGS raised should go to the local authority areas where the development takes place, with an appropriate proportion going to other local infrastructure providers such as health authorities. In more prosperous regions where land values are higher, so too are other costs such as building costs and salaries and therefore PGS income should not be re-distributed from areas of high land value to areas of low value. The South East, which is the area facing significant growth and development pressure already makes a significant net contribution of taxes to the Treasury, to extend this through PGS re-distribution would not be equitable or acceptable, and would run contrary to the Government's aim of making development more acceptable and sustainable by ensuring adequate funding for infrastructure.

Local Development Frameworks (LDFs) and Local Transport Plans (LTPs) should form the basis for the allocation of PGS, in that they are the vehicles by which land is allocated for development and are the most appropriate means for identifying associated infrastructure requirements.

Q 6.2 How should PGS revenues be used to fund strategic infrastructure at the regional level?

Regional Spatial Strategies (RSS) and LDFs should form the basis for identifying infrastructure needs and associated funding at the regional level. PGS income, however, should not be used directly to fund infrastructure at more than the local or sub-regional level, until it has been demonstrated that local needs have been addressed. This could help achieve delivery as it would reduce the complexity of funding streams. If a surplus did exist, a corresponding proportion of the PGS grant raised locally could be assigned to the regional level to combine with national funding sources.

Q 6.3 How can local and regional stakeholders, including business, help determine the strategic infrastructure priorities most necessary to unlock housing development?

Local and regional stakeholders, including businesses, can help determine the strategic infrastructure priorities within a locality most necessary to unlock housing development by active participation in and contribution to the developments plans process, ie RSS, LDFs and also LTPs. It is via these mechanisms that the proposals for and details of housing growth are identified and thus related funding from PGS should be directed to the appropriate local authorities based upon the outcome and development proposals of these democratic planning tools and processes, upon which planning approvals and development will ultimately be based. To add another layer of consultation and further bureaucratic processes on top of these would be unacceptable.

Local and regional stakeholders should help determine the strategic priorities most necessary to unlock housing development by means of the public consultation processes embedded in the development plans process.