William Eichler 12 February 2016

Council tax creates ‘perverse incentives’ for developers

Council tax creates ‘perverse incentives’ for developers

Central government must stop local authorities from ‘hindering’ developers with unfair council tax burdens, says a leading builders trade association.

The Federation of Master Builders (FMB) has warned ahead of the March budget that the Government must address what it describes as ‘unfair council tax charges’ on house builders in order to tackle the housing crisis.

It has become, according to the FMB, common practice for local authorities to levy council tax charges on new homes before they are completed.

This practice, they argue, creates ‘perverse incentives’ which discourage developers from finishing homes before they have sold them. And this has the knock-on effect of slowing down the rate new houses come on the market.

Brian Berry, chief executive of the FMB, said: ‘Council tax is designed to fund services provided to tenants, so there is little justification for levying it on new homes months before anyone could move in.

Warning of concern among developers that council tax is being used as a ‘development tax’, Mr Berry continued: ‘We accept that there is a case for Council Tax being levied on existing empty properties in order to incentivise these being brought back into use.

‘However, for new homes, it creates perverse incentives for developers to hold back completing these properties until they’ve agreed sales and slows down the delivery of completed new homes onto the market.’

Mr Berry calls for an agreed definition of when a new home is complete for the purposes of council tax. He also emphasises that this definition should be closely tied to the question of habitability.

‘This will help ensure against current poor practice in some areas and will also serve to speed up the delivery of new homes,’ he said.

Mr Berry also urged the Government to review the automatic six-month exemption for ‘unoccupied and substantially unfurnished’ dwellings. He argues that applying this to new dwellings also slows down the delivery of new homes.

Responding to the FMB, Cllr Claire Kober, resources portfolio holder at the Local Government Association (LGA), said: ‘Where a home is structurally complete or where the work remaining can be expected to be completed within three months, councils can legally serve a completion notice to specify the date it is eligible for council tax.

‘To ensure accuracy, council officers will often visit sites and review houses being built before making a decision. A clear and transparent appeals process is in place for developers to challenge any decision.’

According to the LGA there are around 475,000 homes with planning permission still waiting to be built. Their research also shows it takes 32 months on average from sites receiving planning permission to building work being completed.

Cllr Kober defends councils’ use of council tax and argues it is a necessary tool local authorities can use to expedite the delivery of new homes on to the market.

‘Councils are desperate to tackle this growing housing backlog and need more powers, not less, to encourage developers to build homes more quickly,’ she said.

‘We are calling on government to use the Budget to hand councils the ability to charge developers full council tax for every unbuilt development from the point the original planning permission expires.’

Visit the MJ (£) to find out why local government could do well to learn from Berlin's approach to construction and rents.

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