Posted on February 20, 2013

We all know what makes ‘good’ taxes.  They should be: fair, efficient, transparent. but, what about Development Taxes?  It is useful to understand how we have arrived at CIL and appreciate the lessons learned from previous attempts to tax development value.  As Winston Churchill said, “The farther backward you can look, the farther forward you can see.” 

The 1947 Town and Country Planning Act effectively nationalised land and development. Since that time successive governments have tried and failed to capture the development value or betterment.  The Barker Review had regard to these previous development gains taxes (Box 4.2 p78) and it is worth repeating the summary here:

The 1947 ‘Development Charge’ was the first attempt to tax windfall gains from land development. The charge was levied at 100 per cent of the excess value attributable to the granting of planning permission, relative to the existing use value on the date the development began. However, the effect of the tax was to reduce land coming forward for development, and the revenue raised was substantially lower than expected.

The 1967 Betterment Levy aimed to capture value above 110 per cent of existing use value, so as to provide an incentive to sell by allowing some development gain to be made. The charge was introduced at 40 per cent with the stated intention of raising it higher. However, among other problems, the complexity of the legislation allowed many developers and landowners to avoid paying by ‘establishing’ that work had begun prior to the charge’s introduction and again, the measure raised far less money than was initially expected.

The 1973 Development Gains Tax aimed to extend the CGT [Capital Gains Tax] regime by taxing as income gains accruing from disposals of land possessing development potential at rates of up to 82 per cent for individuals, and 52 per cent for companies. However, rapidly changing market conditions, and a change of Government to one with different development gain ideas soon after the tax’s introduction, meant that the measure had little time to exercise an influence on the land market.

The Development Land Tax was charged on each occasion of the realisation of development gain flowing from disposals of land after August 1976. The tax contained several different features to its predecessors. These include levying the charge not only on actual sales, but also on assumed disposals where development projects began on land without a preceding land sale. There were also numerous exemptions from the tax. However, the complexity of the tax led to a proliferation of avoidance regimes and resulted in the tax falling disproportionately on smaller landowners, leading to allegations of unfairness.

The Report goes on:

4.43  These are important lessons for policy makers. Any tax on the uplift in land values must have credibility, relative simplicity and be perceived as reasonable, or landowners may withhold land in the expectation of policy change, or engage in elaborate strategies to avoid paying.

The Barker Report is essential reading for anyone responsible for introducing CIL.

Justifications for Tax

The Barker Review (p70) stated that there were two justifications for proposing tax measures in relation to housing supply, as follows (our emphasis):

1 – Tax policies are part of a package of reforms and should not be looked at in isolation. Combined with policies to promote the supply of land, planning permissions and affordable housing, the result should be an increase in the amount of new housing overall, compared to a situation with no tax….and…

2 – If Government is to reform the planning system to bring forward more land for development, it will increase the potential for unearned windfall development gains that can be made by landowners (including developers) from selling land for residential use. Consequently, there is a strong case for Government to consider the use of tax measures to allow the community to share in the increase in development gains its actions will create.

We would encourage readers to look at the Barker report and the actual recommendation to introduce tax measures (Recommendation 26).   As you will see there were a number of important recommendations that were lost when Government introduced Planning Gain Supplement (PGS).  It is important that these principles should not be lost on Local Authorities setting local CIL rates.  For example:

– The PGS was proposed in the context of greenfield windfall residential development; – Barker suggested that Government may want to consider a substantially lower rate for housing development on brownfield land – and of varying rates in other circumstances, for example, housing growth areas; – That Government should consider enabling payment by instalments to ensure house-builders cashflows are sufficiently accounted for.

As you can see there were some substantial differences between the Barker recommendations and what emerged from Government in terms of PGS:

– The case for taxation was made alongside recommendations for increased supply of housing land and planning reforms – i.e. the tax was intended to be on ‘windfall gains’; – There were, and are, substantial implications for commercial development of a ‘housing-led’, but generally applied tax; – There was no thought to commercial or mixed used regeneration in PGS.  With brownfield land there is no clear definition of value and windfall profit is a myth.

So what has this got to do with CIL?

CIL was conceived by the Labour Government after the demise of PGS.  The Conservative Party stated that they would abolish CIL prior to being elected.  However, the Coalition has retained CIL, but passed much of the responsibility for implementation down to the Local Level.

The Ministerial Forward to the original CIL consultation in July 2009 gives some clues to the thinking at the time:

– Again, housing is a key theme.  CIL was first floated in the 2007 Housing Green Paper in order to pay for new homes and infrastructure; – The long term challenge was/is to deliver homes and households want excellent public services, transport and environment; – Also, CIL is heralded as being a fairer, clearer, more legitimate and more predictable way of seeking contributions from developers towards the costs of local infrastructure.

The jury is still out on these benefits.  A number of Authorities have now adopted CIL Charging Schedules and a wide variation in approach is emerging.  Some Authorities have flat rates – others have a range. Some have different rates for residential and commercial uses – others have a fixed rate.

Cities and the regions have a really exciting opportunity obtain greater financial independence from Government by capturing development gain locally. However, care does need to be taken about its implementation.  A significant difficulty, particularly in the north of England, is the “appropriate balance”.  If this levy is set too high this could make development unviable and/or encourage landowners to sit on their sites.  Conversely, if the CIL rate is set too low, development could still be constrained by the lack of funding for essential infrastructure.

This is particular relevant when considering the fundamental differences between greenfield windfall sites and brownfield regeneration (see next blog).