A contentious proposed tax on profits from planning permission will be delayed by at least a year and could be scrapped entirely.

Business reacted with relief to the announcement that the government will consult further before implementing the planning gain supplement – a tax on increases in land value resulting from planning permission that is designed to help fund infrastructure.

Consultation last year on the proposed tax revealed widespread concerns about how it would be administered, given the difficulties of quantifying how much of the value of a development derives from the planning decision.

Doubts were also raised about whether the tax would prove more effective in funding local infrastructure than the existing system of ad-hoc section 106 agreements, under which councils and developers agree planning payments on each project.

The Treasury acknowledged these concerns, putting back the expected 2008 implementation date. The tax will “not be introduced earlier than 2009”, the pre-Budget report stated. It also promised an exemption from the tax for any developments already “formally in the planning process” when the levy comes into effect.

What’s more, the Treasury introduced what the CBI employers’ body characterised as a “critical if” – an element of conditionality – into its proposals. The PBR stated that the “government will move forward with the implementation of [the planning gain supplement] if, after further consultation, it continues to be deemed workable and effective”.

There was a mixed business verdict yesterday on whether those two criteria of being workable and effective can ever be met. “The jury is still out on whether the PGS will help or hinder the government in meetings its target of 200,000 new homes per year by 2016,” the Home Builders Federation said.

Experts pointed out that many elements of the proposed tax remain undecided, not least its amount – the PBR stated simply that the supplement would be “levied at a modest rate across the UK”.

Business welcomed the commitment to further consultation as a necessary breathing space. “It shows that the government recognises that there’s a bit more work to do on the PGS before it’s fit for purpose,” said Michael Roberts, director of business development at the CBI.

The British Property Federation warned that it still had “major concerns over how a PGS would affect the supply of land for development and the balance of the property industry and the economy”.

The PBR set a minimum threshold on the amount of the tax that would be ringfenced for local authorities, saying “at least” 70 per cent would be hypothecated for this purpose. However, the federation argued the supplement could still damage “vital links” between developers and local authorities that underpin the raising of more than £3bn each year through locally negotiated agreements.

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