The decision, the government says, has been taken following engagement with stakeholder organisations, the public and across government, yet leading housebuilders and industry professionals have expressed concern that the proposals are creating uncertainty in the industry and could discourage housebuilders and developers from investing in Wales.
It should be said that it is positive to see Welsh Government exploring the scope of its tax-raising powers, which it has held for some years but not yet implemented. But, while politically attractive, the imposition of a vacant land tax could prove a high-risk strategy. It must not be forgotten that land values, which tumbled in the crash, haven’t experienced the same recovery as house prices, remaining relatively flat because of the already considerable stealth taxes on development land. Against this backdrop, the Welsh Government must tread very carefully.
The concept of a vacant development land tax is not new. There have been many such efforts by various governments over the last 50 years or so, each aimed at targeting what some view as windfall profits by development companies, speculators, land ‘bankers’ and owners. However, too often these policies fail in their aim because they are so complex and burdensome to administer - the Betterment Levy and Community Land Act of the 60s and 70s being examples of this.
Typically, tax legislation on development land has resulted in unintended consequences – not least a reduction in available land and an insignificant tax take compared with administration costs. Development Land Tax in the 1970s reportedly cost more to administer than it yielded, and caused the development land market to dry up for years.
In recent years, the development land taxation regime has been both balanced and appropriate. Lower profile virtual tax measures such as Section 106 Agreements and the Community Infrastructure Levy combined with Capital Gains Tax has kept the balance right. Private land owners have maintained the motivation to release land when it is ripe for development, and a large amount of development land value has filtered back into the public purse delivering public benefits.
Implicit in the vacant tax model is an assumption that landowners and developers intentionally sit on planning permissions, which is simply not the case. If landowners have planning permission, sites are generally brought to market. Where this doesn’t take place, there is usually good reason for it. For example, in the case of large-scale strategic planning, a phased approach to development might take place so as not to flood the market, or a site may be simply not viable to develop because of high development costs compared to the returns when completed. A greater issue, especially in urban areas, is actually with public land ownership where organisations from central government to local authorities, health authorities and other agencies do have significant land holdings. Here, the commercial imperatives to release land are not generally the same. Whether such organisations will be subject to this tax remains to be seen.
If the Welsh Government is frustrated that land is not being brought forward and built on at the desired rate, a more effective way of stimulating development would be to ease the cost burden affecting development, even introduce tax breaks in more marginal areas and to ensure that all stages of the process are working as effectively and timely as possible.
A starting point might be addressing the cracks in the planning delivery system itself, which housebuilders and developers have been pointing out for years. Securing outline planning consents can take years. Even after securing permission for outline planning, there are Section 106 agreements to negotiate, Reserved Matters Approvals to secure and a whole raft of other statutory approvals to secure. It’s a multi-layered, sequential, bureaucratic process and, though everyone understands why, there’s a great deal of inertia in the system and often several years can pass between an outline consent and a start on site. The point here isn’t that the system is entirely broken, it could just be improved. Moves to improve it should be considered before altogether new taxation measures are added to an already convoluted mix.
The danger with the vacant land tax proposal is, unless it bites in anything other than a nominal way, it runs the risk of slowing the whole system down, disincentivising development and serving as another stumbling block for investors and housebuilders looking to Wales. The focus needs to be on making Wales a more inviting place to invest, not introducing moves that could have a deadening and dragging effect on the process.
It wouldn’t be the first time that regulation has been introduced in Wales with laudable aims either. Consider the domestic sprinklers regulations, the revised building regulations or the new Land Transfer Tax - all of which cumulatively added layers of cost with which housebuilders must deal if they choose to build in Wales. The effect is to impact negatively on land value and, by depressing or even wiping out land value, additional cost increasingly leads development in some areas of Wales to become marginal or even unviable.
The last thing we want is developers and investors to think ‘it’s not worth us building in Wales’. Perception is everything, and the debate at this early stage to stimulate housing delivery needs to be about how we improve existing processes. It’s critically important that policy-makers engage a thorough, wide-ranging debate on these proposals, involving all sectors of industry.
If it doesn’t, there’s a danger that unintended consequences arise and it will stall the very thing it’s trying to stimulate.