Tuesday, 23 August 2011

Taxing development

There have been several attempts in the past 60+ years to impose a tax on development; but on each occasion it had a severely depressing effect on the development market, and (except for the most recent version) was repealed by the next incoming government. The nationalisation of the ‘development value’ in land was a major feature of the Town & Country Planning Act 1947. We then had ‘betterment levy’ in the mid-sixties, followed by Community Land Tax in the ’70s (coupled with the horrendously complex machinery of the Community Land Act) and a proposal by the last Labour government for a Development Land Tax. This was dropped in favour of a Community Infrastructure Levy (‘CIL’), which is simply a development tax under a different name. This was put into effect in the 2008 Act and, after initial hesitation, has been adopted by the coalition government.

The justification for CIL (which may be open to debate, but I will refrain from comment on that issue) is that it was devised in order to pay for infrastructure (such as roads, schools, etc.) the need for which is created by new development. The principle on which it was based is that the developer (which ultimately means the occupiers of the new development), rather than the community as a whole, should pay for infrastructure which would not have to be provided in the absence of that new development. The fact remains, however, that this is a tax on development.

It seems that the government is now departing from the original justification for this tax, by proposing that CIL should not be reserved exclusively to pay for the infrastructure required to service new development, but should be available to be spent by local authorities for other purposes. It is thus a misnomer still to call it an ‘infrastructure levy’; it is set to become what it was originally called – a Development Land Tax.

It is strange that a Tory-led government should be promoting a development tax when successive Tory governments in the past repealed similar development tax regimes, partly on doctrinaire grounds but also because of the damaging effect which they had had on the market and thus, in more general terms, on the economy. Bearing in mind the government’s anxiety to promote development as a means to boost an economy which is clearly faltering in face of international pressures (and which has not been helped by the economic and fiscal policies which this government has pursued since it gained office), a development tax such as CIL appears to run counter to this aim.

This is not the only proposal emanating from the present government which will in effect be a tax on development. There is also the daft Lib-Dem idea (now adopted as government policy) of holding ‘land auctions’ which, as other commentators have already pointed out, means in effect auctioning planning permissions to developers. The openly stated intention is to ‘cream off’ for the public purse a significant part of the development value of land which is (allegedly) attributable to the grant of planning permission. For a variety of reasons, the notion that a grant of planning permission automatically increases the value of land is mistaken, but if implemented this would be a further element of taxation on development.

All this comes on top of a substantial element of taxation which already applies to housing developments. This is the requirement that a significant proportion of houses on any housing development must be provided as affordable housing, thus reducing the financial return on that development – to such an extent in some cases as to destroy the viability of the development altogether. Some developers have succeeded in negotiating a reduction in the proportion of affordable housing provided on particular sites, but others have just walked away from the development, so that neither the open market housing nor the much-needed affordable housing is built. There is a huge need for affordable housing in this country, but it is a grotesque distortion of the planning system to seek to provide it by this means, and it has certainly not delivered the levels of affordable housing that are needed.

The point of this piece is not to argue the rights and wrongs of taxing development as a principle of fiscal policy, but to question whether such taxes and impositions are consistent with the government’s declared aim of boosting the economy by encouraging development. If the government is serious about facilitating development as a means of promoting economic growth, they ought to give serious consideration to scrapping both CIL and the land auctions proposal in order to remove these impediments to development. A further boost to housing development should be given by scrapping the requirement to include an element of affordable housing in residential developments, and to fund the provision of much-needed affordable housing instead by a more effective means which does not act as a tax or brake on development.



  1. I wrote this piece completely ‘off-the-cuff’, and it seems that I muddled up the nomenclature of previous development taxes. Under the 1947 Act it was called a ‘development charge’; then in 1967 we had a ‘betterment levy’. ‘Development land tax’ was introduced in 1976, and the proposed tax which was replaced by CIL was to be called ‘planning gain supplement’.

    I have come across an article by a senior Tory, written some years ago when they were in opposition, fulminating against the proposed ‘planning gain supplement’ for precisely the same reasons as I have suggested here – taxation of development merely ensures it doesn’t happen. It seems that now they are back in government, the Tories have been persuaded that ‘planning gain supplement’ (or ‘CIL’) is a good idea after all. On the other hand, they suddenly decided this year that we must have more development to save the economy. So maybe they should think again about the desirability of taxing development.

  2. "taxation of development merely ensures it doesn’t happen"

    I hope they read this and take note.