On 17th March, the Government released its technical consultation on the proposed Infrastructure Levy (IL). The consultation runs until 9th June.
WHAT IS AN INFRASTRUCTURE LEVY?
An IL would be a locally set non-negotiable tax on development, calculated as a percentage of the end value of a scheme. IL receipts would fund infrastructure and affordable housing.
IL would replace the current CIL and S106 regime (but Mayoral CIL would remain in London, CIL would remain in Wales, and S106 would remain for large, complex sites).
Unlike CIL, the adoption of IL would be mandatory for all LPAs.
In comparison to the current regime, the Executive Summary of the consultation lauds IL as being "more streamlined", "more efficient", and "more transparent". Indeed, there is the perception that the current system is complicated, a dark art, and that viability negotiations lead to planning delays.
But is this true in practice, or is viability merely one of several complex issues considered as part of a planning application? Is the proposed IL system more or less complicated than the current one?
Some suggest that viability negotiations are stacked in favour of applicants, who are better resourced than LPAs. This is simply not true: under the current system, applicants cover the LPA's viability costs.
Others believe that those LPAs that have introduced CIL - another fixed development tax - are getting more value from local development than those that operate only under S106 without CIL. Central here is the Government's noble intention that IL should deliver at least as much affordable housing and other planning benefits as the current system does. Here, we would do well to ask why circa 50% of LPAs have so far chosen not to introduce CIL since its introduction in 2010. Do these LPAs feel under-resourced for the laborious process of setting a local CIL regime? Or perhaps they feel that CIL in their local area would need to be set so low to not stymy development that it would not deliver any meaningful returns? Perhaps they believe that the mere existence of a CIL charging schedule would be enough to stymy development? These are all valid questions to ask before introducing a mandatory tax that applies up and down the country.
HOW WOULD AN INFRASTRUCTURE LEVY WORK?
LPAs would begin by drawing up an Infrastructure Delivery Strategy (IDS). This sets out all the major infrastructure and affordable housing the LPA requires over the plan period. Where currently the majority of infrastructure is funded piecemeal on a site-by-site basis; under IL, the IDS would set out a strategic vision for infrastructure requirements, and it would then be for future development to fund these requirements through the IL.
Once the IDS is in place, work would then begin to set IL at rates that would meet the costs of the IDS without rendering development unviable. The chosen IL rate would need to be low enough to ensure that the vast majority of sites in a local area would come forwards for development. We have concerns that this would mean development value that would otherwise have been captured under the current site-specific negotiation system would be 'left on the table' under IL. Current studies and examinations for CIL are complicated enough, but those for IL would also have affordable housing delivery under their remit. Given the almost endless variation in development site values and costs, there are question marks over how many development typologies would or could be analysed at this stage. The cost and resources needed for an IL study should not be underestimated.
There would be a minimum GDV threshold below which no IL would be chargeable. This aims to ensure that development recoups a base cost level before IL kicks in. There are likely to be different IL rates on different site typologies - e.g. greenfield, brownfield - and for different scheme types - e.g. conversion or newbuild. All rates would apply to GDV above the minimum threshold.
LPAs will each have a "Right to Require" affordable housing. This means they can demand that a set percentage of IL in their local areas is not paid as a financial sum; instead, it is used by the developer to directly deliver affordable housing on-site. Levels of Right to Require will be critical since they will set the balance of responsibility for affordable housing delivery between developers and LPAs. Views are polarised on who is best placed to deliver affordable housing in this country: the public or private sector. Either way, a clear advantage of the current system is that it puts the onus on the developer to deliver affordable housing, which in turn promotes the delivery of mixed and balanced communities. Whilst a financial sum may be attractive for LPAs with their own housing delivery programmes, one must caution against a move that could potentially undermine delivery. Indeed, there is no doubt that this principle puts enormous pressure on already cash-strapped local authorities. In the same vein, the IL Bill explicitly allows LPAs to use IL receipts to fund non-infrastructure items, e.g. care budgets. Therefore, whilst there is the intention to secure as least as much affordable housing as the current regime, there remain clear challenges to this.
Regarding the "streamlined" nature of IL, it is recognised that IL can't do it all and Delivery Agreements are proposed to deliver site-specific infrastructure. This, however, sounds remarkably like an S106 Agreement. Moreover, with the Right to Require, there is also presumably going to need to be some other mechanism to secure the housing in perpetuity as affordable.
WHEN WOULD AN INFRASTRUCTURE LEVY BE PAID?
An "indicative" IL liability would be calculated as part of the planning application by applying local IL rates to the estimated GDV of chargeable aspects of the proposed development. These estimates would give LPAs visibility of future IL cashflows, against which they would be permitted to borrow money to ensure the timely overall delivery of infrastructure and affordable housing across their local area.
Then, post-implementation but prior to the first occupation, the "provisional" IL liability would be calculated and paid.
Finally, post-completion or once the development has been sold, there would be a "final adjustment" payment to reflect the actual market value of the development. The adjustment payment may result in a developer making an additional payment or in the LPA returning an overpayment to the developer.
In instances where completed developments are not sold, for example, in the burgeoning BTR sector, the market value of the final development would need to be agreed between LPA and the developer by means of valuations. This valuation process would bear many similarities to current viability negotiations and begs the question of how IL would be more efficient.
We have real concerns if LPAs are to borrow against future IL receipts, which are an unknown quantity. Particularly in the context of the "final adjustment" payments set out above, if the market fell between a planning application and final delivery, LPAs would be required to pay IL monies back to developers. This is notably different to the current regime where LPAs are sheltered from market declines, having received CIL upfront at commencement and with viability review mechanisms being 'upwards only'. Final adjustment payments would be potentially lucrative for LPAs in a rising economy but could lead to all sorts of problems in a falling one.
WHAT ARE THE TIMESCALES?
The Government wisely suggests a phased "test and learn" introduction of IL per the timeline below.
2023: Bill receives Royal Ascent
2024-2025: Regulations developed and consulted on
2025-2026: Second tranche of regulations. First few "test and learn" LPA begin rate setting
2026-2027 First planning permissions granted under IL
2027-2030: Revisions made to regulations, gradual expansion of test and learn LPAs
2030-2032 National rollout and adoption
With a General Election due before January 2025, there is significant political risk around whether IL will even make it out of the consultation stage.
The introduction of IL would represent the most significant reform to developer contributions in a generation. The Government's intention that, compared to the current S106 & CIL regime, IL would streamline planning applications whilst also delivering at least as much affordable housing is admirable. However, in our experience, it is very rarely viability negotiations that are the deciding factor in a planning application's duration. Instead, viability is one of an increasing number of complex issues to be grappled with. Moreover, in seeking to set IL at a level that would not stymy development, we have concerns that significantly less affordable housing and other planning benefits would be delivered overall.
There is a question mark over who is best placed to deliver affordable housing – private or public sector? The IL puts more responsibility on the latter at a time when LPA budgets and resourcing are stretched.
We have discussed IL with wide-ranging clients and stakeholders: Registered Providers, housebuilders, Local Authorities, and funders. Most share many of the concerns above, with a view that the current system works relatively well and captures significant value. All agree that this country needs more housing, especially affordable housing, but that an overhaul of the developer contributions system is not the way to achieve this. Much better would be clarity at a national level, deeper resources for LPAs and wider engagement around the need for more affordable housing nationwide.