However, as the recent breakfast briefing held by Martineau Johnson and Bruton Knowles demonstrated, there is no consensus on whether the tax will help produce the "step change" in housing supply that the Government wants or indeed will speed up the planning process.

Speakers: Clive Read, Partner, Martineau Johnson (left); Lynne Franklin, Senior Associate, Martineau Johnson (centre); Charles Chivers, Partner, Bruton Knowles (right)

The breakfast briefing, attended by over 20 guests ranging from landowners to developers and funders, provided an opportunity to discuss the likely impact of the proposed tax on land values, land supply and development phasing and considered whether the tax would help finance additional infrastructure to support the Government’s growth agenda.

In reviewing the consultation paper, Martineau Johnson and Bruton Knowles highlighted some of the issues which need to be addressed:

• Whereas Section 106 Agreements can allow for an element of flexibility when specifying when development has commenced, typically excluding exploratory site investigative works, PGS may not be so flexible. This is important because payment of the PGS is said to be upon commencement of development and appears not to allow any variation of the statutory definition of what constitutes the start of development.
  
  
• In calculating the amount of PGS the Government says that the expected costs of development, including remediation costs, are likely to be taken into account but this raises important timing and financial issues : the full extent of remediation costs are unlikely to be known or costed until after development has commenced but payment of the PGS must be made upon commencement of development. Developers are unlikely, in our view, to be able to recoup those additional costs by means of a rebate of PGS.
  
  
• Developers, funders and subsequent buyers will want to know that there is certainty of the HMRC accepting the PGS calculation which is prepared by the developer’s surveyor. Any delay or time frame within which HMRC can challenge the calculation could severely impact on the timing for the successful delivery of any development and the consequent impact that might have for the financial profile of the development.
  
  
• Phased developments of major schemes are accommodated under the current Section 106 Agreements because developers can negotiate the timing for payment of obligations, linked to the occupation of a certain number of units, thereby improving cashflow. It is unclear how the Government will address the timing for payment of PGS where larger schemes will be built out over a significant period of time but, where a scheme is not phased in planning terms but is otherwise very large, PGS for the whole scheme would have to be paid up front.
  
  
• Significant valuation issues also arise for phased developments because it is unclear how infrastructure costs should be factored in : proportional related to the overall area or tied to a particular phase? Is the installation of infrastructure early on in a major development likely to have a ransom value? These issues need to be considered and addressed.
  
  
• The fact that PGS is meant to bite against all but the smallest commercial developments and household improvements may have the effect of discouraging the replacement of ageing buildings which are unfit for their purposes (in other words urban improvement). This is surely a counter productive result of PGS which flies in the face of the Government’s stated aim to improve the fabric of our towns and cities.
  
  
• PGS may cause a temporary increase in available land in the short term (as landowners race to sell before the tax bites) but a longer term drag on supply which may ultimately feed through to increased house prices, thereby not meeting one of the Government’s stated objectives.

It’s clear from the issues raised at the briefing that the Government will need to think carefully about the detail of the tax to ensure that it is workable. Responses to the consultation document are required by 27 February 2006 and your views could make a difference. This is what you said:

• Although it is likely to be the developer who will be identified as the "chargeable person" and liable to pay the tax as he will serve the Development Start Notice, it was felt that in the short term the house buyer could ultimately suffer as the additional burden of the PGS (which may not have been off set by a reduction in the price paid for the land) would be reflected in a rise in house prices.
  
  
• To illustrate the controversy, it was thought conversely that it will be the landowners who will bear the brunt of PGS as it will deflate land prices. Despite the Government’s purported attempt to avoid the mistakes of previous taxes on development, there was a strongly held view that the PGS could prove to be a colossal waste of time and would suffer the fate of its predecessors. Repeal of the tax by 2012 was thought to be a distinct possibility. There will undoubtedly be much consideration of how developers buy land (whether outright, on conditional contracts or by options) and the price that is expected to be paid : the conventional wisdom of paying for land at a price which represents an element of "hope" value may not hold true in the future because that hope value cannot be factored in to the PGS calculation.
  
  
• There is considerable concern that the introduction of PGS will in fact add to the delays which are currently experienced by developers : there is the completion of the PGS return and the need to serve a Development Start Notice which in turn will need to be registered as a local land charge. That increased bureaucratic burden for developers will probably not be assisted by the fact that local authorities and HMRC who between them are meant to administer the PGS are unlikely to be given any additional resources to do so.
  
  
• Although the Government asserts that scaling-back planning obligations so that Section 106 Agreements only cover the costs of the immediate impacts will speed up the process, it is anticipated that negotiations will continue to be protracted as developers and planning authorities argue about where the line should be drawn. In any event, Section 106 Agreements will still need to cover affordable housing and in many cases it is the principle and detail of such provisions which create the greatest negotiating difficulties.
  
  
• The Government claims that PGS will be channelled back to local authorities to finance infrastructure projects for the benefit of the local community. However, there is no detail as yet about how the tax revenue will be redistributed, how much will actually be returned to the local level and whether any constraints will be imposed on spending. This will be of concern to local authorities but also to developers who will have no certainty that the revenue will be applied to infrastructure essential to the delivery of their schemes. For all its faults the existing negotiated system does allow developers to secure some commitments on the part of the local authority.
  
  
• Developers should ensure that Section 106 Agreements currently under discussion address the implications of PGS so that they are not required to pay twice for social and physical infrastructure and there is some flexibility to recoup payments already made under the Section 106 but not yet expended by the planning authority.

Martineau Johnson and Bruton Knowles will be submitting responses to the consultation paper before the 27 February deadline. All parties with an interest in a progressive and workable planning system are encouraged to do the same.

Martineau Johnson and Bruton Knowles will keep you updated as the debates continue. For more information on how PGS may affect you or on the services we offer please do not hesitate to contact us.