Infrastructure Levy – the latest attempt to capture land value

It’s worth putting this into context.  A workable form of development land tax has been sought by successive governments for decades.  In more recent times (i.e. during my career so far) we had, in the mid noughties, the touting of the Planning Gain Supplement (PGS) coming out of the Barker Review.  This was principally Treasury driven, to be collected centrally but on the basis that PGS revenues would be recycled at a local level to retain the link between developer contributions and local planning permissions.  PGS however quickly died a death.

CIL then came along, and despite a number of amendments to the regulations over the past 13 years, is now largely understood by the development industry, overall it works.  It is not mandatory and whilst many local authorities have adopted CIL, a large number have not.  Despite PGS and CIL being promoted as the death knell for S106 Agreements they remain a main stay for securing contributions to infrastructure and delivery of on-site infrastructure including affordable housing.

The new proposed Infrastructure Levy (IL), has been promoted on the basis that it largely supersedes S106 Agreements for most sites and thus speed up the consenting process. It is also now explicitly clear that it is intended to achieve more value capture. The main takeaway from the consultation paper is that the Infrastructure Levy is not coming in anytime soon. Pilot testing is envisaged and it is likely to be 10 years before it is brought into force (and as we all know 10 years is a long time in politics…).

The consultation document (issued on 17 March 2023) is long and technical.  In terms of key elements of the levy, at a very high level, it proposes:

1. The IL will be mandatory and non-negotiable – this means developers must take account of the levy payments which will need to be made when agreeing values for purchasing land.
2. Rates will be set by local authorities and will be based on the final GDV of a development project. Sales figures will be used to assess GDV or there will be a valuation of GDV where developments are retained as assets.  The consultation recognises that the valuation process will create an area of dispute.
3. The “sell” is that IL responds to market conditions as the amount payable will increase or decrease depending on the final GDV, this removes the need for S106 variations and is more flexible than CIL which is a set rate.
4. There will be a minimum threshold below which IL does not apply and rates would be charged.
5. Contrary to original sound bites, S106 Agreements will remain, albeit now termed Delivery Agreements.  It anticipates that planning conditions should be doing much of the heavy lifting in securing site specific related infrastructure, but that for more complex sites, S106 Agreements will still be needed.
6. The paper seeks to differentiate between “integral” infrastructure which is needed for a site to function and expected to be delivered by the developer and “levy” infrastructure which is to be funded by the levy to address the cumulative impact of development.  A local authority will need to prepare an Infrastructure Delivery Strategy setting out the strategic plans for infrastructure delivery and affordable housing need.  Examples given of “levy funded” infrastructure include expansion or improvement of healthcare infrastructure or schools. But with wider flexibility to also fund service provision in their areas, such as social services or childcare.
7. Affordable housing will be secured on-site through a “right to require” and is to be treated as an in-kind provision.
8. There are 3 separate “routes” to infrastructure funding which is badged as a means of restricting the use of S106 agreements.  Oddly it seems to suggest that for large residential developments, the S106 Agreement secures in-kind payment of levy liabilities where the value of infrastructure secured would have to be equivalent to or exceed the value of the Infrastructure Levy otherwise payable.
9. It invites thoughts on stages for paying the levy but proposes a three step process for payment: (i) the calculation of an indicative levy is to be submitted with the planning application (ii) post commencement but prior to occupation of scheme (or a phase) payment of the provisional levy with a final (iii) adjustment payment post completion or once the development is sold.

As I was reading through the consultation report, it struck me that large parts of IL will likely be emperor’s new clothes.  The constant references to CIL suggests that the CIL regulations will be replicated to form the procedural elements in terms of how the levy is set, evidenced and goes through examination and adoption.  Similarly those parts around exemptions, surcharges, appeal and enforcement will also have the ability to be replicated in large part.

S106 (aka Delivery Agreements) and planning conditions will continue to have a role to play in ensuring that development washes its face in terms of development related infrastructure and mitigation.

The main difference, and what is not clear so far, is the relationship between the levy and the actual cost of levy infrastructure.  CIL and S106 both work on the basis of contributing towards the cost of providing infrastructure.  In terms of the Infrastructure Delivery Strategy, this is prepared by the local authority to identify infrastructure needed to support development proposed in the Local Plan, how it will be funded and the approach to prioritising Levy fund.  There appears to be no relationship between the cost of infrastructure provision and the IL, as the levy is set based on a valuation approach rather than linked to the cost of providing that infrastructure.  There will doubtless be a funding gap – although saying that, this is not a new issue. The question therefore is whether the levy is likely to reduce or increase that gap.

The widening of the type of infrastructure the levy is anticipated to fund for example not just physical infrastructure but also potentially maintenance of strategic greenspace or social services means the pot for which infrastructure funding is needed is ever expanded.  One has to question whether this flexibility for spending of the IL is potentially a means of government pushing more of the funding burden on to local authorities.

It is not clear how affordable housing provision will be protected – in crude terms it is based on the cost of affordable housing provision.  It seems too simplistic that for example 35% of the infrastructure levy will actually kick out the equivalent of 35% affordable housing on-site – this just seems a potential area for dispute and consequently delay in provision.

Payment timings potentially can impact cash flow for developers, but as a mandatory levy there is no negotiation to alter the timings for payment, this in itself has the ability to stall development.  Part of the reasoning for IL is that it provides certainty on the contribution payable so that this can be baked into assessing land values at the point of purchase.  The final figure will not be known until the development is completed, and query how this translates into funding requirements.

The consultation paper also suggests that if local authorities require certainty of contributions towards certain types of infrastructure – so if the payment stages for example, don’t assist in the local authorities programme for delivery of certain infrastructure – then the contribution can be secured via a Delivery Agreement and this is then off-set against the final levy payment. This smells a bit like how S106 agreements usually work.  However in the context of IL, this may also provide a useful mechanism for managing cash flow for developers. The consultation paper confirms that the levy is subject to a “test and learn” roll out via pilot schemes, so no doubt we will all be watching carefully how successful the pilot schemes will be and how this all gets translated into secondary legislation.