Recent studies on the current performance of section 106 agreements show an effective planning gain mechanism, which raised £1.9 billion in 2003-04 and is already set to deliver around 25,000 new affordable homes per annum over the next two to three years.  It is by no means a perfect system and needs some finessing, but this would appear relatively more straightforward when you consider the potential flaws of the governments’ proposed PGS.

One of the main pitfalls of PGS, which is not recognised or addressed in any of the three consultation documents produced by the government, is its core assumption about the nature of development land being in single ownership and acquired with freehold vacant possession.  In reality, the development process is far less straightforward with many sites held in multiple ownership, often subject to clawback or overage clauses, and with a growing number of urban regeneration sites throwing up challenges of land contamination and remediation work, compulsory purchase, and land assembly for major public/private sector projects. 

The distribution of revenue secured by a planning gain supplement is also still a major cause for concern.  Although the government has added some clarity about the potential percentage retained by the Treasury there is less certainty around how the remaining pot will be allocated.  The likelihood being that smaller local authorities will lose out, attempting to fend off the needs of the region and the agenda of their RDA against their own local and site specific needs and obligations.

There are also fundamental questions about the system’s capacity to cope with administering this tax.  The government has already ruled out a site by site appraisal approach to assessing PGS, preferring instead to set a calculation for the tax and then to check compliance with a random sample assessment.  In reality even here they underestimate the process by claiming they will be able to agree the planning gain obligation, when they randomly assess, in no more than 60 days from the issuing of a start notice.  Anyone familiar with the complexities of property development will know that this is at best optimistic and likely to unravel when put into practice.
If the government is determined not to pursue an improved section 106 process there are some other alternatives.  The well documented roof tax trialled in Milton Keynes was supposed to be favoured by the Chancellor and has appeared to work well in this trial location.  The government could instead look to other alternatives including far simpler amendments to Stamp Duty Land Tax or Capital Gains Tax for development sales. These would be far simpler to administer but unless properly constructed would run some risk of sophisticated tax avoidance schemes.

Indeed there is a strong argument to suggest that raising revenue through amendment to existing taxes will be easier to introduce and administer and more acceptable to potential taxpayers than a wholly new tax regime, particularly one so reminiscent of the failed development taxes of the past. Those considerations are in addition to the potential administrative cost, particularly considering the £52 million the treasury has recently requested just to develop the concept of PGS let alone to administer it.

Although these alternative scenarios are unlikely there are many commentators now agreeing that PGS is far less certain than it appeared. By moving the delivery date back to 2009 the Chancellor sent a clear signal that the government knows this tax is too complicated and controversial to push through at all costs.  Very reminiscent of their approach to HIPs, this delay could well signal recognition that there is a need to water down PGS without embarrassing Kate Barker who is one of the Chancellor’s favourite advisors.  Ultimately landowners, developers and local authorities alike should definitely voice their concerns and offer practical amendments to the PGS proposals during this consultation period. In the meantime there is every incentive for all parties to pursue existing development proposals before this already demanding and time consuming process becomes even further complicated by the arcane demands of PGS.