The process under the Wales Act 2014 that enables the Welsh Government to introduce new taxes in areas of devolved responsibility subject to approval from the National Assembly for Wales and both Houses of Parliament, will be tested for the first time with the formal proposal for a vacant land tax going to the UK Government later this year. The work to gain the powers is only a first step, the development of detailed policy proposals will follow involving engagement with stakeholders and the public in accordance with the Welsh Government’s tax policy framework.
The idea behind the tax is to help solve the problem of land that has been identified as suitable for new housing and regeneration but is not being taken forward for development. A vacant land tax could help to change the balance of incentives to encourage the development to be taken forward where a site has stalled. As such the tax is intended as a mechanism for changing behaviour rather than a revenue-raiser.
The Republic of Ireland has implemented something similar in the form of a vacant site levy on vacant and underutilised sites in urban areas at a rate of three per cent of market value (increasing to 7 per cent after 12 months). In Scotland, the Scottish Land Commission has begun development work on a new compulsory sale order power, to enable local authorities to require the sale of derelict buildings or small plots of land.
The Welsh Government proposal comes at a time when the wider and often dysfunctional operation of the housing market is the focus of much debate.
The gap between the number of planning permissions granted and the slower pace of house building and the reasons for it, is part of a review headed up by Conservative MP Sir Oliver Letwin. This review will help to inform the Welsh proposal.
What are some of the practical issues of implementing a vacant land tax?
- Defining the sites that are not being developed
In Ireland, each local authority is obliged to make a register of vacant sites that will be subject to the levy. Identifying and mapping the profile of possible sites in Wales is underway. The profile of these sites will be important. The reasons for delaying development on larger sites may differ from those for failing to bring forward smaller developments. Efficiency of the market demands that a vacant site is held by a developer best placed to develop it, but an unintended consequence of vacant land tax might be to deter development of sites by larger developers, who may offer enhanced efficiency savings, but choose to dispose of the site because of the imposition of vacant land tax and develop instead outside Wales.
Will farmland in agricultural use be included or removed from scope?
In Ireland, for example, where the land is zoned for a particular purpose but is currently being farmed, there is some ambiguity but the levy may still be applied. As a result, some local authorities have included farmland on their vacant site register meaning that farmers have to object to the local authority, or ultimately make a formal appeal.
Another definitional issue is what is meant by a ‘vacant’ site – sites are commonly developed in phases, sometimes for reasons of timing of release to market but also for perhaps desirable social reasons, to allow for development of community infrastructure (schools, transport links, green spaces).
- What is a reasonable length of time to stipulate by which development should have been completed?
Land assembly for larger developments is complicated by the need to bring neighbouring landowners together to pool their land in order to provide sustainable developments with the community infrastructure that involves. A site might be zoned in the local or regional plan for development but that may be only the beginning of a long process of land assembly by a developer involving negotiation with multiple landowners with competing interests.
At what stage would the vacant land tax be levied, and on whom? On the grant of planning permission or when land is identified for housing in the local plan (and therefore on the landowner), or at a specified period after the zoning (on whoever owns the land at that point) or perhaps when the land is ‘optioned’ to the developer (that is, when the developer pays a relatively modest upfront option fee to secure the land from the landowner while planning permission is sought), and, in the latter case, who would pay the tax the land owner or developer?
- Establishing the reasons why the sites are not being brought forward for development
The reason(s) why a site is being held back will inform the conditions for triggering the tax charge. There may be multiple reasons why land, which has been identified as being suitable for development or granted planning permission, does not come forward, or is not developed as quickly as hoped; for example, where de-contamination would outweigh the value of the developed site, shortage of materials or labour and difficulties satisfying planning consents.
Framing the conditions for the charge will involve evaluating these reasons and considering the scope of any new tax, the need for exemptions or reliefs (that inevitably add complexity) and the interaction with other property-related taxes particularly council tax and business rates.
- The charging structure
The charging structure will also be important; presumably, in order to meet its objective, it will be linked in some way to the delay in commencing development. Incentivising a change of behaviour will require a sufficient ‘stick’ or ‘carrot’.
- The basis of the charge
Will it be on the price paid for the plot, its market value at the trigger point, or some other value? A robust valuation method will be essential. Any valuation process involves subjectivity, and to the extent it is imposed, will need to be subject to an appeal process. The administrative burden of business rates appeals for both authorities and the taxpayer are well known.
- Who should deal with collection and enforcement?
The planning authority might be a logical choice on the basis that they manage the planning process but the land may straddle different authorities or the Welsh/English border. A raft of further issues regarding valuation, tax collection, potential repayments etc. come to mind.
The fledgling WRA will build up, over the next year or two, substantial data and information on property transactions in Wales, and may be well placed to operate a new tax subject to resourcing demands.
An effective and efficient system of collection and compliance comes at a cost that cost recovery will presumably need to be built into the vacant land tax charging scheme
The powers devolved to the Welsh government cannot fully address the multi-faceted UK wide issues around housing supply. But there is still much the Welsh Government could do with the long-standing devolution of planning powers and the more recent devolution of fiscal powers available to it. The Mirrlees Review noted that the economic case for taxing land itself is very strong and there is a long history of arguments put forward in favour of (and against) a land value tax. In Westminster, the Housing, Communities and Local Government Committee reported recently on their inquiry into the effectiveness of current land value capture methods (such as the Community Infrastructure Levy (CIL) and section 106 of the Town and Country Planning Act 1990) and the need for new ways of capturing uplift in the value of land associated with development.
Given the importance of the property market, both economically and socially, there is much to be gained through a thorough and well-informed debate in Wales on land and property taxation more widely.
Blog by Kate Willis, Technical Officer at CIOT.More Articles by Chartered Institute of Taxation (CIOT) ...