Briefing Note: The Infrastructure Levy
Pillar 3 of the ‘Planning for the Future’ White Paper outlines radical proposals to scrap the existing Community Infrastructure Levy (CIL) and Section 106 Planning Obligations and replace it with an all-encompassing Infrastructure Levy. The Government is clear that the new Levy is intended ‘to raise more revenue than under the current system of developer contributions, and deliver at least as much – if not more – on-site affordable housing as at present’. But how will the proposed Infrastructure Levy work and will it address the problems with the current CIL and S106 regime?
The current system
The CIL was first introduced via the Planning Act 2008 and subsequent Community Infrastructure Levy Regulations 2010 with the most recent amendments occurring in 2019. CIL is currently discretionary in principle and enables a Local Planning Authority (LPA) to levy a fixed charge per sqm of new floorspace which can vary across location, size and type of development and is intended to fund local infrastructure and support development. Conversely, S106 (previously S52) agreements have been around for many years and take the form of a negotiation between the LPA and applicant, designed to render schemes acceptable through site specific mitigation.
So, what was wrong with the s106 system and why was CIL introduced? Well, as S106 agreements focus on site specific mitigation, each agreement needs to be negotiated individually with the LPA which, as many developers will know, is often a time consuming and somewhat unpredictable process. The CIL was introduced to allow LPA’s to charge a fixed rate depending on the size and type of development with the aim of creating a faster and more transparent system. However, the CIL itself has been criticised for being inflexible in the face of changing market conditions and, despite several reiterations to the CIL regulations since its conception, there continues to be an inconsistent uptake characterised by regional disparities, with around half of LPAs still not having a CIL charging schedule. The other big issue is that affordable housing cannot be delivered using CIL. S106 agreements therefore remain a necessity for many developments. In fact, contributions worth a total of £7bn were secured in 2018/19, of which £4.7bn was in the form of affordable housing contributions.
As a result, we are currently left with two routes for LPAs to secure developer contributions, both of which have their own set of issues and limitations.
The proposed Infrastructure Levy
Ergo, amongst the wider reforms set out in the ‘Planning for the Future’ White Paper, Pillar 3 proposes to replace both CIL and S106 obligations with a mandatory nationally-set value-based flat rate charge, termed the Infrastructure Levy. This consolidated levy features several key distinctions. Firstly, the new Infrastructure Levy is to be charged as a fixed proportion of the development value above a threshold. This minimum threshold, below which the levy will not be actioned, is designed to protect low viability developments. Crucially, the Infrastructure Levy would be levied at the point of occupation, to be charged on the final value of a development. This amendment is intended to aid the development industry by smoothing over any potential cash-flow issues associated with having to pay CIL at the point of commencement. Further, LPAs would be allowed to borrow against Infrastructure Levy revenues in the interim to facilitate forward funding infrastructure, hence ensuring off-site infrastructure is delivered in a timely way. Another interesting suggestion is that any affordable housing provided on site could be off-set, meaning it would be deducted from the value of future Infrastructure Levy liability.
The Infrastructure Levy is to be more comprehensive in scope with current exemptions potentially under review. Government is discussing capturing changes of use through permitted development rights. To this end, additional homes delivered through this route would bring with them support for new infrastructure. Of note, the levy would apply to changes of use and not just the creation of new floorspace. The London Mayoral CIL and similar strategic CIL in combined authorities could be retained to support the funding of strategic infrastructure.
Designed principally to reduce time spent on negotiating S106 agreements and inefficiencies in capturing land value uplift, MHCLG intend the new levy to be transparent, consistent and buoyant, whereby the system is flexible to macroeconomics thereby supporting competition in the housebuilding industry. There is a palpable drive to both increase more revenue than the system at present and to deliver more on-site affordable housing. It is suggested that the LPA will be attributed with greater discernment concerning how developer contributions are to be utilised. The Infrastructure Levy would be available for wider purposes than CIL with Local authorities having the flexibility to use this funding to support both existing and new communities. Indeed, the White Paper highlights the aspiration of the Infrastructure Levy being responsive to local needs with revenues continued to be collected and spent locally. Conversely, experts have questioned whether LPAs may lose flexibility in terms of being able to set differential rates for different types of floorspaces.
Potential implications
From a developer perspective the reforms would bring certainty of cost, given that it would be easier to see upfront what their commitments would be, with levy rates fixed at the grant of planning permission. However, owing to the absence of a site-specific viability process at the application stage, the rate of the Infrastructure Levy in policy would be very important; the rate cannot be set too low or too high as there would be no viability process to act as a safety valve. It is also difficult to see how a nationally- set flat rate can reflect local circumstances.
Unlike the current CIL, the Infrastructure Levy seeks to encompass affordable housing which is often the biggest financial contribution sought by an LPA and frequently takes longest to negotiate. This is, however, likely to be easier said than done and the finer details on how affordable housing will be secured on site via the new levy will to be critical. Questions also arise such as whether the new levy would be payable in instalments and, significantly, whether the removal of viability assessments will actually help facilitate easier development that is more likely to be delivered (or make it more difficult to deliver schemes which fall just above the proposed minimum threshold). Ultimately, the central issue is how to effectively balance flexibility for local authorities against delivering certainty for developers and communities alike.
The reforms are certainly ambitious and are an opportunity to capture more of the share in the uplift in land value linked with development. Nevertheless, will the all-encompassing Infrastructure Levy work in practice? Or will the alternative option whereby the Infrastructure Levy will remain optional to be set by individual LPAs prove more enticing in reality?
We await the results of the consultation for these proposals which runs until 29th October 2020.
Planning for the Future White Paper can be accessed at: https://www.gov.uk/government/consultations/planning-for-the-future