Gathering the windfall

One of the most intractable challenges to policy makers over the past 50 years has been how best to capture some of the windfall gains from the development process to finance infrastructure and social provision. Three separate attempts were made, in the 1940s, 1960s and 1970s, to levy a tax on development gain, but all three proved abortive and were repealed. Subsequently, section 106 agreements emerged as a means of extracting a contribution towards the costs to the public purse that flow from development. Recently, alternative proposals have emerged in the form of a planning gain supplement, as suggested in the Barker report, and a roof tax, as is currently being pioneered in Milton Keynes.

So what are the merits and disadvantages of each approach, and why has it proved so difficult to devise an effective and lasting mechanism?

The three abortive attempts to tax development gain all faced formidable difficulties in defining the liability for tax, including the point in time at which the tax bites. They were also open to evasion, and with the opposition party pledging repeal, many landowners simply postponed developments to avoid the tax. As such a tax is likely to act as a disincentive to any development, irrespective of its merits, it is unlikely to resurface as a credible policy proposal.

Section 106 agreements by contrast have more limited objectives. They can, for example, help meet the costs of roads, public transport, or school places needed as a consequence of development. By definition each agreement implies some link between the proposed development and the infrastructure or social provision. This can be a source of dispute.

A contribution towards the costs of affordable housing may be important to meet sustainable development objectives, but is there a necessary link, particularly if the development is predominantly non-residential?

A tax on development gain is likely to act as a disincentive to any development

Unquestionably, section 106 has proved a useful mechanism. I have seen ambitious and successful agreements negotiated in Greenwich and Woolwich that ensure substantial additional public investment complementing private developments. However, there are two potential weaknesses. First, because each agreement has to be separately negotiated, developers do not enjoy certainty about potential costs before committing themselves to a specific proposal. Second, many local authority planners lack confidence in their ability to negotiate a complex agreement with much more experienced developers. The outcome could be an inadequate contribution, or an unrealistic demand that undermines the viability of the development.

Enhancing the skills and confidence of local authority planners to handle such negotiations is clearly essential if section 106 agreements are to continue as the main means of capturing a proportion of development gains for necessary public sector investment. This has been recognised and is part of the agenda for the ODPM-funded Academy of Sustainable Communities.

However, the problems have prompted alternative proposals for a standard tariff applicable to all developments, so giving more certainty to developers and reducing delay. Hence the Milton Keynes roof tax concept, under which a flat rate levy is imposed related to the number of homes being created. The problem with this otherwise sensible initiative is that it is unlikely to prove as easy to operate in more complex circumstances, such as mixed-use developments on brownfield sites with significant site preparation or decontamination costs. Too high a “tariff” in such circumstances would probably make development unviable. But a low tariff would allow large windfall gains on more favourable sites without adequate contributions to the public sector.

In an attempt to square the circle, Kate Barker suggested a planning gain supplement that would operate alongside section 106 agreements. We should get an indication of where the government’s thinking is heading with its response to her proposals later this year. Whatever this concludes, the debate about the respective merits or disadvantages of different mechanisms is likely to continue.