Section 106 Agreements: The Tax Treatment of Planning Obligations for Developers

A Section 106 agreement is the price of a planning permission that a standard charging schedule cannot capture — site-specific, individually negotiated, and just as capable of reshaping a scheme's viability as the Community Infrastructure Levy it usually sits alongside. Developers who model CIL carefully and treat Section 106 as an afterthought regularly find the negotiated obligation is the bigger number, and the one with the least room to challenge once the agreement is signed.

What a Section 106 agreement actually is

Named for the section of the Town and Country Planning Act 1990 that creates the power, a Section 106 agreement is a legally binding obligation a local planning authority attaches to a grant of permission, agreed — in principle — between the authority and the developer before permission is issued. Unlike CIL, which is set by a published charging schedule and calculated by formula per square metre of net additional floorspace, a Section 106 obligation is negotiated for the specific site, and it can take several different forms in the same agreement: a financial contribution towards local infrastructure, a requirement to build and hand over a proportion of the scheme as affordable housing, land transfers, or physical works such as highway junction improvements the authority considers necessary because of the development itself. Because it is negotiated rather than calculated, the final figure depends heavily on viability evidence, negotiating position, and how effectively the obligation is scoped during the planning application — not on a formula either side can simply look up.

How Section 106 costs are treated for tax

For a developer trading as such, Section 106 costs — whether cash contributions, the cost of building affordable units for transfer, or works required as a condition of the permission — are treated as part of the cost of carrying out the development, because they are incurred wholly and exclusively to secure the planning permission the scheme depends on. In practice this generally means the cost is capitalised into work in progress alongside build costs and land, and relieved against trading profit as units are sold, rather than deducted as a lump sum when the agreement is signed. Timing matters: under UK GAAP a provision for a Section 106 liability is only recognised once there is a present legal obligation as a result of a past event — typically when permission is granted and the obligation crystallises — not simply because a scheme is expected to attract one at some future planning stage. Getting this wrong in either direction, either expensing too early or failing to provide for a known obligation at all, distorts reported profit in exactly the periods HMRC and auditors look at most closely.

The VAT position on affordable housing transfers

Entering into a Section 106 obligation, or simply complying with it, is not in itself a supply for VAT purposes — a planning obligation is generally treated as a fetter on how land may be used, not consideration for something being supplied. The VAT question that actually matters is how the affordable element is delivered. Where a developer constructs qualifying dwellings and then sells or grants a long lease of them to a registered social landlord or similar registered provider as required by the agreement, that transfer can itself qualify for VAT zero-rating on the same basis as a private sale of a new dwelling, provided the usual conditions for zero-rating new residential construction are met on that specific transaction. The risk sits in the detail of how the transfer is structured and documented: get the mechanics wrong — for example structuring it in a way that is not a qualifying grant of a major interest — and a developer can end up facing standard-rated VAT on units it built at cost to satisfy a planning condition, with no equivalent income to absorb it.

How Section 106 interacts with CIL

CIL was introduced partly to reduce reliance on Section 106 for the kind of area-wide infrastructure that used to be funded through pooled contributions across many sites, and a regulatory restriction that limited pooling of Section 106 money from more than a handful of agreements towards the same item of infrastructure was removed in 2019. In practice the two systems now run side by side rather than one replacing the other: CIL funds general infrastructure through its standard charging schedule, while Section 106 is reserved for mitigation that relates specifically and necessarily to the development in front of the planning committee — on-site affordable housing being the clearest example, since CIL has no mechanism to require affordable units directly. A scheme can, and routinely does, face a CIL liability calculated under our separate note on CIL and a negotiated Section 106 obligation at the same time, assessed and paid through entirely separate routes, and a viability appraisal that only models one of them will understate the real cost of the permission.

Where the numbers get missed at feasibility stage

• Modelling Section 106 as a fixed percentage before negotiation. Unlike CIL, there is no schedule to look up — the affordable housing percentage, tenure mix and any commuted sum are all subject to negotiation and viability evidence, and early feasibility work that assumes a round number can be badly wrong once the actual agreement is drafted.
• Treating the cost of affordable units as fully relieved by the sale proceeds received from a registered provider. Those proceeds are typically well below open market value by design, and the shortfall is a real cost of the scheme that needs to be in the appraisal from day one, not discovered when the affordable units are handed over.
• Structuring the transfer of affordable units without checking the VAT position first. A transfer that fails the conditions for zero-rating can turn an already subsidised handover into one carrying an unrecoverable VAT cost as well.
• Recognising a Section 106 provision too early or too late relative to when the legal obligation actually crystallises, distorting reported profit in the wrong accounting period.
• Assuming CIL and Section 106 are alternative routes to the same liability, rather than two separate charges that can both apply in full to the same scheme.

Why this needs pricing in before you bid on land

A Section 106 obligation negotiated after a site has been acquired at a price that assumed a lighter affordable housing requirement is one of the more common ways a scheme's viability collapses mid-planning. Because the final terms depend on negotiation and viability evidence rather than a published rate, the only reliable way to protect a land purchase is to build a realistic Section 106 assumption — informed by what comparable local sites have actually agreed, not a generic percentage — into the appraisal before exchanging on the land, and to revisit it as the planning application progresses and the authority's actual position becomes clear.

Common mistakes

• Bidding for land against a Section 106 assumption that has not been checked against recent comparable agreements in the same authority
• Overlooking the VAT conditions on affordable housing transfers to registered providers until the units are ready to hand over
• Failing to capitalise Section 106 costs correctly into work in progress, distorting reported profit against sales
• Treating CIL and Section 106 as if paying one reduces exposure to the other
• Leaving viability review mechanisms in the agreement unmonitored, so a later increase in obligation is missed until it is triggered

Common questions

What is a Section 106 agreement?

A Section 106 agreement is a legally binding planning obligation, agreed under section 106 of the Town and Country Planning Act 1990, that a local authority attaches to a planning permission. Unlike the Community Infrastructure Levy, which is calculated by a fixed formula per square metre, a Section 106 obligation is negotiated individually for each site and can require a financial contribution, the delivery of affordable housing units, land transfers, or specific works such as highway improvements.

How are Section 106 contributions treated for tax purposes?

For a trading developer, Section 106 costs are treated as part of the cost of the development, deductible in computing trading profit because they are incurred wholly and exclusively to obtain the planning permission the scheme depends on. They are generally capitalised into work in progress and matched against sale proceeds as units complete, rather than expensed as soon as the agreement is signed, and a provision is only recognised once there is a present legal obligation rather than merely an anticipated future one.

Do Section 106 affordable housing obligations affect VAT?

Potentially, yes. Entering into or complying with a planning obligation is not usually itself a taxable supply, but the way affordable units required by a Section 106 agreement are actually delivered matters. A qualifying sale or long lease of new affordable dwellings to a registered provider can attract zero-rating in the same way as a private sale of a new dwelling, provided the normal conditions for zero-rating new residential construction are met, but getting the structure of the transfer wrong can leave a developer facing standard-rated VAT on units it never expected to charge for.

How does Section 106 differ from the Community Infrastructure Levy?

CIL is a standardised, non-negotiable charge calculated per square metre of net additional floorspace and set by the local authority's published charging schedule. Section 106 is negotiated on a site-by-site basis and is generally reserved for mitigation that relates directly to the specific development, such as on-site affordable housing or access works, rather than the wider area-wide infrastructure CIL is meant to fund. Many schemes face both at once, and the two are assessed and paid under entirely separate mechanisms.

This article is general information, not personal tax advice, and tax rules change. Your own position depends on facts we cannot see from here — please take advice before acting on anything above.

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