For supplement read tax - an update

In the January 2006 edition of the Journal we considered the UK Government’s consultation paper on a planning gain supplement (PGS). The proposed PGS is a tax on the increase in land value attributable to the granting of planning permission.

The revenue raised would help fund infrastructure improvements throughout the UK. The PGS consultation ended at the end of February 2006. In the January article we urged the Scottish Executive to take an active role with regard to any introduction of a PGS in Scotland. The Executive gave the first signals that it may be going to do so when it published a response to the consultation paper at the end of June.

The debate continues

The Chancellor in his Budget speech confirmed that the PGS would be introduced in 2008. That was in fact his only comment as far as the PGS was concerned. Notwithstanding this lack of comment, the PGS debate has continued.

What has been most encouraging has been some of the comments made by a number of UK Government Ministers when they have been questioned on how the PGS will be structured. For example it has been suggested that there may be a lower PGS rate for "green" developments, that the Treasury may forward-fund critical infrastructure improvements and that local authorities might be able to borrow against potential PGS revenues once the system is up and running.

What is the position of the Scottish Executive?

Until the Scottish Executive published its response we were not even sure whether it had formed an opinion on PGS or, if so, whether it wished to share that opinion. Prior to reading the Executive's response we had suspected that the Executive was likely to oppose the introduction of the PGS, at least in its present format, in Scotland. The fact that the PGS is as much about housing and planning, which are devolved matters, as tax, which is primarily a UK matter, was the primary reason.

That said, the response from the Executive surprised us. If you ignore the fact that the response is written in polite government-speak it can at best be said that the Executive has a number of concerns. On the other hand it is not difficult to form the view from the Executive’s response that it is in fact wholly opposed to the introduction of the PGS into Scotland.

The Executive has three main areas of concern:

• "that a misconceived final design of the PGS might constrain rather than support development and regeneration";
• "the tensions that arise from divergent planning systems and other differences in approach in devolved policies";
• "the need for transparency and equity in the distribution of the revenue".

With regard to possible constraint of development, the Executive highlights the fact that the Barker Report on housing supply, which was the origin of the current proposals, was based on the English housing market. Recent Scottish reviews have shown that Scotland’s housing and wider development markets differ significantly from England in several respects, meaning that the market is likely to react differently with regard to the introduction of a development tax. The Executive expresses concern that the effects of such a tax are likely to be particularly significant with regard to smaller scale developments which form a greater proportion of activity in Scotland than England. It also takes the view that potential disincentives to growth are most likely to apply outwith areas of high economic growth, which is more likely to adversely affect Scotland with its large remote rural areas and its areas of high regeneration needs.

The difference between the planning systems is also a concern to the Executive. It notes that the planning systems north and south of the border are "devolved, separate and increasingly divergent” and says that officials have already identified areas where technical differences in the two systems may affect the workability of the supplement. It also takes the view that the disconnection of infrastructure provision from individual planning applications implied by the PGS appears contrary to the principle of considering and mitigating the effects of planning applications through local engagement, on which the Planning etc (Scotland) Bill is based.

On the subject of recycling of revenues, the Executive requests more information and warns that the uncertainty and confusion which currently exists could be “most damaging” if allowed to continue.

Despite its concerns, the Executive does not dismiss a PGS out of hand and indeed indicates that it is keen to work with its counterparts in the UK Government to gain a greater understanding of the implications of the PGS. However, whether it will support the introduction of the tax when that level of understanding has been achieved remains to be seen.

Conclusion

Whether Scotland, or indeed the rest of the UK, has to deal with the PGS within a couple of years is dependent on a huge number of variables. These include whether the comments made by UK Government Ministers are indicative of a government willing to listen and act upon a number of the major concerns that have been raised on the PGS, how strongly the Executive would resist the introduction of the PGS into Scotland, the next Scottish Parliament election which is less than a year away and possibly even the next UK General Election. Interesting times indeed.