Kathryn Hampton and Claire Dutch run the rule over how the proposed infrastructure levy would work in practice.
The Housing, Communities and Local Government Select Committee’s report on the planning white paper was published earlier this month. It was rather critical of many of the government’s proposed reforms. In particular, it concluded that there was no case for the replacement of section 106 obligations with a new infrastructure levy, although it saw some merit in replacing the community infrastructure levy.
This response has been supported by many in the development industry who are concerned about the new levy. So what does the infrastructure levy seek to achieve, and why have so many pitted themselves against it? Where does this leave developer contributions in the forthcoming Planning Bill? As one of the most controversial proposals, we consider how it would work in practice, and whether there might be a better way forward.
A new tax
The infrastructure levy would be a new tariff-based system of securing developer contributions, including affordable housing. The key aims are to raise more capital than the current system; capture land value uplift; help with “levelling up”; and provide a simpler and more certain process for developers, local authorities and the public.
A national rate will apply, but payment would be collected by each local authority and used for local infrastructure needs.
The rate would apply only above a set threshold. The threshold would be based on average build costs (per square metre) plus a small, fixed allowance for land costs. Other major differences compared with CIL are that the rate will be charged on the final gross development value of a development (or an assessment of it) at the date of the planning permission, but won’t be payable until first occupation. It could also apply to changes of use, not just increases in floorspace and some permitted development rights. Further detail on how this would be enforced is awaited.
While delaying payment to pre-occupation may be attractive for developers, section 106 agreements and, to a certain extent, CIL already allow for the phasing of payments, which is often crucial for large, more complicated schemes. Certain local authorities have been slow to spend CIL on early infrastructure delivery, and this could get even worse if funds are not received until first occupation. In an attempt to deal with this, local authorities would be allowed to borrow against future levy income to forward-fund infrastructure. Presumably, though, without a section 106 agreement, developers would not be able to procure this delivery.
In the red
So will it work? A recent study published by prominent planning academics Tony Crook, John Henneberry and Christine Whitehead concluded that, while it may address some of the issues with the current system, the new infrastructure levy could present a number of new problems: “These include fixing thresholds, agreeing GDV valuations, determining the IL percentage and dealing with the TIF (tax increment financing) style borrowing costs for local authorities that will reduce what the IL can fund.”
They suggest two options going forward:
(a) add complexity to the new levy so that it achieves its objectives; or
(b) simplify the current section 106/CIL system.
We believe there’s a lot to be said for the latter.
Achieving best value
Here are a few ways that we think the existing system could be improved:
- More money for local authorities and investment in technology. This would go a long way towards reducing delays. IT programs could be used to create consistency in approach throughout the country, by asking a series of application-specific questions to a junior council lawyer or case officer, which would churn out more detailed heads of terms and/or a first draft of the planning agreement.
- A national bank of precedent clauses on each type of contribution (such as affordable housing and open space), including reasonable time triggers to ensure timely infrastructure delivery.
- Tariffs set in all local plans so that developers can calculate likely contributions.
- National precedent planning agreements for small and medium-sized enterprises/smaller, simpler sites.
- Uploading compliance evidence to the council’s online planning pages to assist with transparency, accountability and monitoring.
Paying off
The planning system is often cited as the scorned scapegoat of the housing crisis, with delay and uncertainty caused by section 106 negotiations being just one of the complaints. Add in the CIL minefield, and we can see why developers might be put off from bothering at all. But, in practice, they do. There is a risk of increased cost, but in our experience developers are still prepared to take that on as they often either appreciate the complexities of the situation or are trying to secure flexibility themselves to safeguard or bolster their position in the market.
Yes, it is incredibly frustrating to suffer delay in negotiations when the key terms for the section 106 have been agreed and set by the planning committee. Yes, CIL drives us mad at times and new problems present themselves as different circumstances (and new legislation) arises. But would it be better to improve the existing system rather than introducing a brand new one, particularly at a time when local authorities are overstretched? We think so.
As to where this leaves developer contributions in the anticipated Planning Bill, we are monitoring things closely at the Ministry of Housing, Communities and Local Government. We understand that many of the 44,000 responses to the white paper commented on the new infrastructure levy, so combined with the select committee report and various letters from industry bodies to the secretary of state, we hope that the concerns raised about the levy will be paid due care and consideration.
Kathryn Hampton is a senior expertise lawyer and Claire Dutch is co-head of planning at Ashurst LLP
