Pernicious local taxation is thwarting efforts to revitalise housebuilding

Chris Neal
WHILE its Help to Buy equity loan scheme has won all the headlines, government efforts to remedy Britain’s severe housing shortage are far from limited to this one much-maligned measure.

There’s Get Britain Building, a £570m fund to rekindle stalled sites. There’s the aim of freeing up enough surplus public sector land to support 100,000 new homes. The New Homes Bonus is a grant to local councils for development. Developers are also offered loan guarantees, backed by government, to encourage more rented housing construction. Regulations have been relaxed to make the planning system more efficient and effective. And the NewBuy guarantee scheme is facilitating mortgages with smaller deposits.

In short, the government views supporting house building as key to generating growth. But while fiscal stimuli like Help to Buy will likely force house prices up, creating a bubble that will burst once discontinued, my main concern is miscommunication between central and local government.

Witness how local authorities are thwarting government ambitions with zealous use of the new Community Infrastructure Levy (CIL). The CIL is a tax, announced in 2007 by the Labour government, that raises funds to pay for infrastructure needed as a result of development. All well and good, but the result is extra cost for developers.

Some local authorities have also introduced an Affordable Housing Levy. I’m sorry to say this was adopted in 2011 by Sevenoaks District Council, where I have been a serving councillor since a by-election in 2012. Let me explain the impact of these taxes on the developer of a typical small project.

Three four-bed homes, with a value of £400,000 each, give a gross development value of £1.2m. Sevenoaks Council’s Affordable Housing Levy comes in at £73,440. Then add CIL (not yet adopted by Sevenoaks, but in the pipeline) at £125 per square metre, assuming 140 square metres per house, and our developer has to find another £52,500. The total tax bill paid to Sevenoaks Council for building three modest family homes would be £125,940.

Developers used to work on land cost of a third, build cost of a third, leaving a third of gross development value as a pre-tax profit. These days it is likely to be 40 per cent land, 40 per cent build and 20 per cent profit. In the first example, Sevenoaks’s £125,940 tax is 31.5 per cent of the profit. In the latter, it is 52.5 per cent.

Both taxes have to be paid as soon as work starts, and not once the properties have been sold. Then our entrepreneur has to pay HMRC a slice! Not since 1974, and Dennis Healey’s era of “tax them until the pips squeak”, have we seen such pernicious levels of tax. It stifles enterprise, aspiration and, in this case, growth and housing supply.

Common sense needs to prevail. Simply reduce the old threshold for affordable housing contributions. This would allow small scale development to flourish, and provide participants a return commensurate with the risk and hard work involved. It would also continue to provide funding for affordable housing from larger-scale projects.

Chris Neal is founder of GB Job Clubs, a member of the Cobden Centre advisory board, and Sevenoaks district councillor for Cowden, Four Elms, Hever and Mark Beech.