PRE-BUDGET REPORT

Although Gordon Brown in his Pre-Budget Report speech made scant reference to any of the matters of importance to the commercial property industry, the report itself and the associated publications are of considerable significance.

Gordon did mention that the Government will be taking forward the ideas put forward by Kate Barker in her review of land use planning in a white paper next spring, particularly the suggestion for the creation of an independent planning commission to handle major strategic developments, as recommended by both Barker and Eddington.

Here’s a summary of the PBR's key contents, of interest to the industry:

Planning gain supplement

The Government will pursue PGS, "if after further consultation, it continues to be deemed workable and effective." It believes that an effective PGS with a scaled-back planning obligations system (section 106 agreements) is "a fairer and more effective means of releasing land value to help finance infrastructure."

PGS would not be introduced earlier than 2009 and would be levied at a modest rate across the UK. At least 70% of PGS revenue would be hypothecated for local infrastructure priorities and would be returned to the local authorities in which it was generated. The remaining revenue would be returned to the regions to help finance strategic infrastructure projects. PGS revenue in Scotland and Wales would be returned there and spent at the discretion of the respective administrations.

The Government has launched three further consultations about the design of PGS and the new approach to planning obligations.

Our response

We still have major concerns over how a PGS would affect the supply of land for development and the balance of the property industry and the economy. It could remove vital links held locally between developers and local authorities due to the scaling back of section 106 agreements, which currently see benefits such as schools and roads built alongside major commercial developments. These benefits would be replaced by a centrally levied tax, of which just 70 per cent will go back to that local authority.

We are pleased that the Government has clearly recognised that a PGS is more complex than first thought, but we are concerned that there is no mention of the intended rate of the levy nor of any hard evidence of its benefits. We welcome the opportunity to work with ministers on finding a workable solution.

REITs

The Government will make it easier for newly established companies to join the REIT regime. New companies will have a one year grace period during which they do not have to satisfy the special REIT 75% income and asset test. The measure will also mean that new REITs can be established without paying the 2% conversion charge until the end of the initial 12 month period.

The PBR includes other proposed changes to the REITs regulations, addressing interpretation problems identified with the detailed REIT legislation during the consultation period. The Government also announced it proposes to extend the regime to more complex group joint ventures.

Our response

This announcement on newly formed companies is a small improvement in the REIT regime, but it does not address other difficulties they could face, such as the potential double tax hit (stamp duty and REIT conversion charge) on accumulation of a property portfolio, lack of tax incentives to encourage property owners to transfer property into a REIT and the cost implications of obtaining a full listing during this incubation period.

Stamp Duty Land Tax

The Government has introduced a number of anti-avoidance measures designed to apply to sub-sale relief, transfers in and out of partnerships and leases. The regulations came into force from 2.00pm today, but there are some transitional provisions to deal with transactions entered into before 2.00pm today.

VAT

The Government is proceeding with its reform of the partial exemption regime for VAT. Two changes are to be brought into effect from 1 April 2007. First, a business will be required to declare “to the best of its knowledge and belief” that its proposed special method is fair and reasonable. Second, a right will be introduced for businesses to apply for a combined method that will cater for the recovery of overseas supplies conferring the right of input tax deduction. Examples provided by HMRC include supplies of finance and insurance made to customers outside the EU.

BARKER RECOMMENDATIONS WELCOMED

The BPF welcomes Kate Barker’s recommendations on the future of land use planning, which mark the beginning of a process that will lead to a white paper next spring on planning reform.

Responding to the recommendations, BPF Chief Executive Liz Peace said: “Kate has come up with an interesting cocktail of recommendations, almost all of which we would welcome, with many being ones we had previously suggested. I don’t believe these measures would lead to uncontrolled development or the neglect of community interests. What Kate is trying to do is make the planning system work efficiently – she is not proposing that we demolish it.”