In the second look in our series on the planning changes in the Leveling Up and Regeneration Bill (the first looked at proposed changes to local plans), we examine the proposed new infrastructure charge that will eventually replace the municipal infrastructure charge, how the two charges compare and how it should work in practice.
The Infrastructure Levy (IL) is being introduced as a new mandatory development fee under the terms of the Leveling Up Bill (the Bill) to replace CIL in England (excluding Mayoral CIL in London). In many ways it’s similar to CIL, but has been redesigned to capture more of the land value increase generated by development, and these are a few key differences.
The draft law provides the legal framework for the new IL, but the detailed design will be defined in regulations. The framework and how it works is broadly similar to CIL, but with some key differences.
IL will be mandatory for charging authorities (CIL is optional) and is based on a Percentage of Final Gross Development Value (GDV) (in contrast to CIL, which is based on the footprint of a development at the time of approval) are above a specified threshold. It applies to the development of new or existing buildings, as well as significant changes of use, meaning that “allowed development” will be in the frame.
When setting the rate and threshold, fee authorities must consider a much longer list of factors than is currently required under the CIL regime, including the Degree to which land value has increased from different aspects of the planning and development process, the viability of development in an area (which may include the actual or potential economic impact of IL), maintain the supply of affordable housinglevels of IL earnings in the area and the infrastructure deployment strategy.
Payments in kind will be possible, which will allow for the provision of affordable housing locally through s106 agreements and other infrastructure or through the provision of land. Although not foreseen in the bill, a new “claims law” is proposed to remove the role of negotiation in determining the level of local affordable housing and allow local authorities to determine the proportion of the levy to be paid in the form received in kind.
In the same way as CIL, IL revenues are used to fund the costs of infrastructure needed to support an area’s development, as specified in the local infrastructure delivery strategy, but can be spent on a broader range of infrastructure than CIL affordable housingFacilities for emergency services, improvements to the natural environment and mitigation of climate change.
How does IL work in practice?
IL’s collecting authorities are generally the local planning authority but could also be the Homes and Communities Agency and development companies if designated and are responsible for setting rates and collecting the levy. Charge plans are created, consulted and reviewed in a manner similar to CIL, but there are more requirements in relation to what evidence can be used to inform them and how evidence can be used.
Liability is calculated by reference to the schedule of fees in force at the time the building permit was granted. However, the exact timing of when IL will be collected is less clear as this is reserved for regulations. Generally, collection appears to occur upon the sale of a development, but regulations may allow for down payments or installment payments, which would allow for payments prior to the completion of a development or phase of development, repayments if IL is overpaid, and benefits in kind.
Fee-paying authorities may be required to provide estimates of the IL due before a developer receives a notice of ultimate liability, which in most cases is not known until a development has been completed or sold.
In practice, it is expected that in-kind contributions, particularly for local affordable housing, will account for a significant portion of the value captured by IL.
What about s106 agreements?
Despite rumors that s106 arrangements would be abolished, this is not the case. There will continue to be a more narrowly targeted role for s106 agreements, limited to:
- Providing local affordable housing in kind, with developers unable to negotiate affordable housing levels;
- delivery of other forecast profit commitments for larger sites;
- Provision of infrastructure that is “an integral part of the operation and physical design of a site” e.g. B. Play areas and flood risk mitigation measures.
What we don’t know
We don’t know when IL will go into effect, but it will roll out in different areas at different times. This is because the government is taking a “test and learn” approach to allow for adjustments and changes as needed. Savings provisions are being made so that development already allowed under the existing system of developer contributions will continue to be subject to the current system and not the IL.
Many of the details will be set out in regulations and are not known at this time, such as exceptions, relief and the retained role for Section 106 agreements. Crucially, there is no indication to developers of what the rates and thresholds might be .
What does IL mean for developers?
The proposed IL is closer to a land tax than the CIL. As such, and in addition to the other new fees developers will have to bear in the form of the building security levy, residential property developer tax and increases in Social Security, this is likely to be an issue.
For all the criticism, since CIL is ground plane based, it has some certainty and the liability found at the time development began is clear. However, since IL liability depends on GDV, there is room for disagreement, especially when development costs change during the development process, for example due to inflation.
There are many outstanding issues with the IL, particularly where developments are being sold piecemeal (e.g. sale of individual units) or in multiple phases, with the risk that delivery of later phases will be discouraged if it yields the new one not compensate for tax liability. It must be clarified when liability arises and becomes due. The definition of the term ‘sale’ will also be crucial, and it needs to be clarified whether it is triggered in corporate sales with transfer of title and in BTR sales.
One of the major hurdles for the IL will be its detailed design and how to set local rates that broadly reflect the cost of providing affordable housing. A generalized IL rate may not reflect the financial dynamics of individual systems, so the impact on overall development sustainability is very uncertain.
However, the new IL has the potential to be more flexible and responsive to market conditions, allowing the IL payments to reflect actual increases (and decreases) in the GDV and allow the value of the contributions to be factored into the value of the property upon sale.
However, some will remember the development profits tax and developing land tax of the 1970s and 1980s, which were enormously complicated and expensive and were eventually abolished, and will be nervous that the IL is their reincarnation.
The rationale for introducing the IL is clear that it could take years to be rolled out as it has not yet been piloted or road tested and the fragmented way in which it is being rolled out and many unanswered questions create uncertainty and could undermine the delivery of developments and particularly housing supply. From today’s perspective, developers should be open to future consultations so that they can help bring the IL into a form acceptable to the industry.