by Frances Plimmer and Chris Bailey
In its attempts to reform the system of local government finance by the abolition of domestic rates, central government proposed a flat-rate charge on all adults. While the detailed application of this community charge has caused uproar among the general public, its implications for the developers of houses seem to have been overlooked. The aim of this article is to outline how the community charge affects developers and the likely implications which this could have on future residential developments.
The community charge (or poll tax) was proposed by the Government’s Green Paper, Paying for Local Government, as a replacement for domestic rates, with a view to establishing local democratic accountability.
In proposing the shift away from a property-based tax (such as rating) for the provision of services, the Green Paper justified a tax based on people because of the increased emphasis of people-based local services as compared with the mainly property-based local services of the previous century.
The extension of local taxpayers to include all adults is seen not only to widen the tax base but also to ensure local democratic accountability for local authorities’ expenditure. However, the community charge is more complex than a flat-rate tax on all adults, because there remains some element of property in the tax. Although the value of property is no longer relevant, a charge-payer pays the community charge in respect of domestic property which he/she either occupies or owns.
In fact, there are three community charges:
(1) Personal community charge, which is levied on all adults (unless exempt) in respect of their sole or main residence;
(2) Collective community charge, which is levied on owners of houses where there are several occupiers, and is based on the amount of the personal community charge multiplied by the number of adult occupiers in the property; and
(3) Standard community charge, which is levied on owners of houses which are not their sole or main residence and in respect of which no one else pays a personal community charge.
It is apparent, therefore, that the link between the tax and property is not severed.
Standard community charge
The standard community charge is levied on “owners” of domestic property which is not their sole or main residence and for which they have no liability to the personal community charge. This ensures that owners of property contribute towards the provision of local services in localities where they own houses but for which they are not liable for the personal community charge(2).
For this purpose, “owners” are freeholders or leaseholders of domestic property, provided that there is no one else with an inferior interest in the property.
Sections 3 and 4 of the Local Government Finance Act 1988 set out five categories for the application of the standard community charge in respect of property which is not the individual’s sole or main residence, and which is situated in the charging authority’s area:
(1) Persons having a freehold interest in the whole of a building, and where
(a) it is domestic property;
(b) it is not designated for the collective community charge;
(c) it is not divided into self-contained parts;
(d) it is not subject (as a whole) to a single relevant leasehold interest.
(2) Persons having a relevant leasehold interest in the whole of a building, and where
(a) it is domestic property;
(b) it is not designated for the collective community charge;
(c) it is not divided into self-contained parts.
(3) Persons having a freehold interest in the whole of a self-contained part of a building, and where the following conditions are fulfilled as regards the part throughout the day
(a) it is domestic property;
(b) it is not designated for the collective community charge;
(c) it is not subject (as a whole) to a single relevant leasehold interest.
(4) Persons with a relevant leasehold interest in the whole of a self-contained part of a building and where
(a) it is domestic property;
(b) it is not designated for the collective community charge;
(c) it is not subject (as a whole) to a single relevant leasehold interest inferior to his/her interest; and
(5) The owner of a caravan, stationed on land which is a protected site.
A “relevant leasehold interest” is defined as “an interest under a lease or underlease which was granted for a term of 6 months or more and conferred the right to exclusive possession throughout the term” (1988 Act, section 4(3)).
Amount of the standard community charge
The amount of the standard community charge for any defined class of property in any area is determined by the charging authority which is empowered (section 40, 1988 Act) to apply to the personal community charge one of the following multipliers: 0, 0.5, 1, 1.5, or 2. The Secretary of State may take the power to limit an authority’s choice of multiplier in the case of any specified class of property.
Classes of property
Public notices have recently been published in the press stating the classes of property which charging authorities have defined for the purposes of the standard community charge and the appropriate multipliers which will apply to the personal community charge in any given case.
For example, Taff Ely Borough Council(3) has identified 21 classes of property (of which 11 are prescribed by the Secretary of State) which are liable to the standard community charge, with the appropriate multipliers(3). They are broadly outlined as follows:
The implications of the classes identified in italics are widespread for residential property developers, since the property is defined as being unoccupied at any time when no one lives there and the property is substantially unfurnished.
Developers’ tax
The standard community charge is thus a tax on house-owners having their sole or main residence elsewhere. By defining “owner” as being the freeholder or leaseholder where there is no inferior leasehold interest, the legislation has ensured that not only will owners of second homes be liable for the tax but also all residential property developers who temporarily own completed units available for sale. Developers in this context include those with speculative new development plus “structurally” modified refurbished property for domestic occupation. Under the former rating system both types of development were not subject to charges until occupied. However, under the new legislation both complete and incomplete projects are subject to the standard community charge with the potential for retrospective charges in the event of prolonged inability to sell.
In a buoyant accommodation market, fast-selling stock will impose a minimal liability upon developers able to satisfy the six-month period from the “relevant day”. The speedy completion of transactions by vendor and seller will ensure that the charging authority is able to levy the personal community charge on adult occupiers for the service provided by that authority — a situation closely resembling the former rating system for both the developer, occupier and local authority.
In times of financial constraint, purchasers’ reluctance to increase borrowing levels in the face of rising mortgage rates inevitably leads to a rise in stock levels on the part of developers. The ensuing slump in house sales, not dissimilar to that experienced now in parts of the UK, creates a buyers’ market with developers reducing margins, embarking on incentives to attract an ever-reducing buying population. The lead time from inception through the construction process is well recognised, often resulting in partially completed units or the suspension of projects. Yet both the completed and incomplete units are liable for punitive community charges where before no charge existed.
Taff Ely Borough Council (Western Mail, 1990) have made their intentions clear:
(1) Unoccupied completed units six months or more old are subject by a factor of 2 until such times as they are sold.
(2) The lead time from completion is reduced after six months to three months, with retrospective charges, by a factor of 2.
The liability of the developer (or owner) is absolute for these charges indefinitely.
The position becomes more complex for refurbished property entailing “structural alterations”. While in essence the liability for completed units is similar to that applicable for new-build, structural completion could arise much earlier. It is this earlier “structural completion” time which sets the community charge base rate. Substantial or insubstantial completion of the development has little bearing on the matter, for both stages have restrospective charging facilities after six months.
It would appear that local authorities may also charge, not on the basis of the single property, but on the number of occupiable units.
Research within the Polytechnic of Wales (Roach, 1990(4)) has already identified the intention of charging authorities to pursue this unexpected source of income and justify it on the grounds of a further income-generator; and/or encouraging the occupancy of otherwise empty property.
Conversely, developers aware of the implications in the legislation are alarmed to find the reintroduction of a property, rather than an individual, tax which they will have little alternative but to pass on to their purchasers. Others indicate a “wait and see” policy toward the enactment of the standard community charge by their local authorities.
References
(1) Paying for Local Government, HMSO Comnd 9714. 1986.
(2) Lewsley. “Community Charges — II”. Rating and Valuation Reporter (1988) Vol 28 pp 190-191.
(3) “Taff Ely Borough Council. Community Charge. Standard Community Charge” (Public Announcement) Western Mail, February 9 1990.
(4) Roach. “Speculative Housing Development in the UK.” Dissertation for BSc Building, The Polytechnic of Wales. 1990.
