Comment

Planning Reforms 2020 - Snapshot: Infrastructure Levy

Head of Development Viability, Matt Spilsbury MRICS MRTPI provides his initial thoughts on the Infrastructure Levy.

The Government has placed the capturing of a greater proportion of the land value uplift generated by planning decisions, in order to fund new infrastructure, affordable housing and public services, at the heart of its vision for renewal of the planning system.

It cites the objectives of providing greater certainty and transparency for funding and delivery within an accelerated process. The Government proposes to achieve this by substantial overhaul and ‘streamlining’ of the current legislative framework, policy and guidance for securing developer contributions (currently governed by Section 106 of the TCPA 1990 [‘S106’] and the Community Infrastructure Levy [‘CIL’] Regulations 2010).

By revoking S106, and reforming CIL via new legislation, the Government is advocating a single centralised tariff-based ‘Infrastructure Levy’ (‘IL’) system that charges a fixed percentage of development value above a set threshold, with the charging rate (or rates) nationally prescribed and set singularly or on an area-specific basis. The system shifts payment to a ‘roof tax’ basis – paid locally to the Local Authority (‘LA’) as developments are occupied. It is also proposed to apply to changes of use under permitted development rights, which represents a sensible, long overdue proposition. The White Paper also confirms the intention that all use classes will be captured under the IL charge(s).

To seek to remain sensitive to viability, the Government proposes that the threshold will be set to prevent, presumably by exemption, low viability development being made unviable from the cost burden of the IL. Just where this threshold (or range of thresholds) will be set, and how these will vary between use classes, remains to be proposed, and will be of particular interest to the industry.

There is also reference to use of average build costs in the Government’s threshold setting methodology, which will clearly vary spatially, and by use, and will not account for abnormal costs.

The Government also refers to the threshold setting process incorporating a ‘small, fixed allowance for land costs’. Landowners will be particularly interested in the detail of this ‘allowance’, with this appearing to effectively cap land receipts / value in setting the thresholds for charging (and perhaps also the IL rates).

The proposals raise many other questions yet to be answered, of which a brief selection are as follows:

• How will the LA’s overall infrastructure funding requirements be determined, and when, to ensure that IL funds will be sufficient to meet needs, and how will this requirement be checked and monitored against the viability of the land supply?
• If utilising a development value threshold to support development, what is the most effective indicator? How has this been determined? Should it be sales value, or profit or land value instead?
• How will LAs assess the value of development? If collecting throughout delivery, will it be based on a forecast at the point planning permission is granted? If so, what is the process for value being calculated and agreed between parties?
• How will the system be flexible enough in setting rate(s) to ensure ‘all use classes’ can viably contribute to meeting their infrastructure burden, and do so through economic cycles without renegotiation or recourse to viability analysis?

Read closer and the single system may actually become multi-tiered again. The Government suggests that Strategic CILs (e.g. Mayoral CIL) could be retained for securing strategic infrastructure funding. This would add an additional layer of cost to development and further complexity in setting IL rates, and generating local funds, within such locations.

Is there then a risk the proposals will retain the least effective parts of the existing CIL system? Specifically, the top-down, inflexible aspects that led many LAs to resist CIL in the first place in favour of the flexibility of S106?

LAs will be expected to take on greater responsibility for management and delivery of funds under the proposals – borrowing against future IL revenues to both forward fund and deliver enabling infrastructure to accelerate developments. As the IL charges will be necessarily responsive to market conditions, funds may fluctuate, and this will clearly expose LAs to greater market and financial risk, which will need careful management. Developers will need the confidence that infrastructure delivered by LAs will be procured and completed in a timely fashion to avoid wider delays or creating a detrimental impact on market appeal and revenues. LAs will need to ‘gear up’ considerably to ensure the requisite capacity and expertise is in place.

Affordable housing is also now proposed to be secured and delivered via the IL system, as a form of on-site payment-in-kind. The Government proposes that developers and LAs could ‘flip’ affordable units to market sale if market conditions deteriorate, which suggests a lowered bar for renegotiation of affordable housing provision. There are also proposals for the IL receipts to be utilised far more widely by LAs to fund wider public services. What is unclear is how LAs will be able to prioritise expenditure where funds are limited. For example, what happens to LAs with low IL receipts due to restricted viability/low land values? How do these LAs secure sufficient infrastructure funding to meet local and strategic requirements? There appears a high risk that funding deficits will emerge, leaving LAs and communities in lower value locations inequitably exposed.

The Government confirms the objective of the system would be to ‘remove the viability risk’ from the process. However the level of detail is presently insufficient for stakeholders to understand whether this is realistic or achievable. Substantial frontloading of viability testing will be undoubtedly necessary centrally, but also locally via the new Local Plan process, to ensure that the IL thresholds and rates set are effective. From the level of detail provided so far, the system will not, however, be able to account for the challenges faced by regeneration sites, or those with high abnormal development costs. Like with CIL and S106, there appears the need for a ‘release valve’, should the system prove to be insufficiently flexible to localised viability and deliverability issues, without undermining infrastructure funding and stalling delivery.   

The proposals are also silent on critical supply side and market factors – notably how this process will incentivise landowners to release land for development, whilst ensuring sufficient returns are secured for developers to commit to purchasing and building out for all uses. Capturing land value uplift via a reformed system of developer contributions will require a delicate balance to be struck by Government. Push too far and land will be withheld, and. without plentiful land supply and market delivery, none of the Governments proposals in the White Paper will be effective.

Please contact Matthew Spilsbury for further information.

7 August 2020