IL Defined

Except that you can’t really define the Infrastructure Levy yet. This blog post summarises what we know so far and asks some open questions.

Town Legal’s summary of the Bill and related announcements contains this section on the Infrastructure Levy, for which thanks go to Clare Fielding:

8. Part 4 – Infrastructure Levy

8.1 Part 4 of the Bill introduces a charge to be known as the “Infrastructure Levy” in England. In addition the Secretary of State is given the power to designate the HCA a charging authority for the purposes of the Infrastructure Levy.

8.2 The Community Infrastructure Levy (CIL) is abolished in England, other than Mayoral CIL which continues to exist in Greater London.

8.3 CIL continues to apply in Wales.

8.4 Schedule 11 of the Bill inserts new sections 204A to section 204Z1 into the Planning Act 2008 (“PA 2008”) giving the Secretary of State the power to make regulations (IL regulations) providing for the imposition in England of the Infrastructure levy. The regulation-making power creates the framework for an IL regime that looks is strikingly similar to CIL in some respects, but with some significant differences. Key features:

(a) Like CIL, LPA to be IL charging authority and IL regulations can so designate other councils and bodies as well;

(b) Like CIL, a person will be able to assume IL liability before development commences, and becomes liable when development commences;

(c) Like CIL, the IL regulations must make provision for liability when no-one has assumed liability;

(d) Like CIL, the IL regulations may make provision about matters such as partial liability, apportionment of liability, transfer of liability and exceptions from and reductions in liability;

(e) Like CIL, IL to be calculated when development “first permits development”, and IL becomes due on commencement [but Regulations may provide for it to be paid on account or in instalments];

(f) Like CIL, “development” is a defined term and IL regulations must define planning permission, define the time at which the planning permission is regarded as first permitting development;

(g) Like CIL, IR regulations must make a charitable exemption where the building is wholly or mainly used for charitable purposes, and may provide for charitable exemption in other circumstances;

(h) A charging authority must issue a charging schedule and in setting rates must have regard to the level of affordable housing funding from developers over a given period, the economic viability of development, the potential economic effects of including land value increase of certain matters, the amount of IL received from developments over a given period and the charging authority’s infrastructure delivery strategy;

(i) Unlike CIL, the IL regulations may allow for a much wider variety of approaches to rate-setting: differential rates for different uses or zones areas; nil or reduced rates; rates calculated not just by floorspace but by numbers of units, buildings, or by allocation of space within units or buildings, or in any other way;

(j) Unlike CIL, IL is to be charged as a proportion of property value (this has not yet been fully fleshed out);

(k) Like CIL, charging schedules must be subject to public examination procedures;

(l) IL to be applied in the same way as CIL, to fund the provision (etc) of infrastructure to support the development of the charging authority’s area. “Infrastructure” includes affordable housing (as the PA 2008 did before that reference was removed by the CIL Regulations), and the regulation-making power still includes power to amend the definition of infrastructure for IL purposes;

(m) Unlike CIL, there is an interesting “relationship with other powers” paragraph (para 204Z1), under which the IL regulations may include provision about how the following powers are to be used or are not to be used:

(i) Part 11 of the PA 2008 on CIL;

(ii) section 70 TCPA 1990 (planning permission);

(iii) section 106 TCPA 1990 (planning obligations); and

(iv) section 278 Highways Act 1980 (execution of works).

8.5 The Policy Paper explains further that it is the Government’s intention indeed to reduce the scale of s106 planning obligations so that s106 agreements will be used:

(1) on the largest sites in place of IL (provided that the value of the infrastructure being provided in that way is not less than that which would be achieved under IL); and

(2) on other sites where “narrowly focused” s106s will be used to provide onsite infrastructure.

8.6 The Policy paper also makes reference to removing the role of negotiations in delivering affordable housing, suggesting that the Government’s intention is that AH will be delivered through the IL.”

As set out in the policy paper, when providing for the detailed regime by way of Regulations, the Government will:

Introduce a new ‘right to require’ to remove the role of negotiation in determining levels of onsite affordable housing. This rebalances the inequality between developers and local authorities by allowing local authorities to determine the portion of the levy they receive in-kind as onsite affordable homes.

Consider how the Levy should be applied to registered provider-led schemes.

Require developers to deliver infrastructure integral to the operation and physical design of a site – such as an internal play area or flood risk mitigation. Planning conditions and narrowly targeted section 106 agreements will be used to make sure this type of infrastructure is delivered.

Detail the retained role for section 106 agreements to support delivery of the largest sites. In these instances, infrastructure will be able to be provided in-kind and negotiated, but with the guarantee that the value of what is agreed will be no less than will be paid through the Levy.

Retain the neighbourhood share and administrative portion as currently occurs under the Community Infrastructure Levy.

Introduce the Levy through a ‘test and learn’ approach. This means it will be rolled out nationally over several years, allowing for careful monitoring and evaluation, in order to design the most effective system possible.

By way of IL the Government is attempting to extend the Community Infrastructure Levy, massively, in three directions:

(a) to make local planning authorities responsible for the delivery of affordable housing, using funds raised by the levy – meaning that the monies raised from development will be at many multiples of current CIL rates.

(b) to charge the levy on the basis of gross development value rather than floorspace.

(c) to make introduction of the levy compulsory.

I have now read the relevant parts of the Bill (sections 113 to 115 and Schedule 11), explanatory notes and policy paper many times and I must confess that there is much that I still don’t understand or which is still a blur pending further detailed work.

This is how the levy was sold to us in the Planning For The Future White Paper (August 2020):

The process for negotiating developer contributions to affordable housing and infrastructure is complex, protracted and unclear: as a result, the outcomes can be uncertain, which further diminishes trust in the system and reduces the ability of local planning authorities to plan for and deliver necessary infrastructure.

Securing necessary infrastructure and affordable housing alongside new development is central to our vision for the planning system. We want to bring forward reforms to make sure that developer contributions are:

responsive to local needs, to ensure a fairer contribution from developers for local communities so that the right infrastructure and affordable housing is delivered;

transparent, so it is clear to existing and new residents what new infrastructure will accompany development;

consistent and simplified, to remove unnecessary delay and support competition in the housebuilding industry;

buoyant, so that when prices go up the benefits are shared fairly between developers and the local community, and when prices go down there is no need to re-negotiate agreements.” (paragraph 4.5)

Now that we see what is emerging, I do not believe that anyone is suggesting that IL will be simpler than CIL. Undeniably it will be more complex (and indeed in London we will need to grapple both with CIL and IL – the work is doubled).

But I am concerned that it will be less predictable as well. Why does predictability matter? The main inflexion points in a typical development are as follows:

1. the contract to acquire the property, pricing-in likely development costs, including CIL/IL

2. scheme formulation so as to arrive at a proposed quantum and mix of development which is likely to be financially viable whilst working within likely planning constraints

3. negotiation of section 106 agreement and conditions such that permission can be issued

4. securing development funding and potential pre-lets and land parcel sales

5. letting the construction contract

6. sale of completed development, whether individual plot/flat sales or investment disposal.

If a reliable estimate of IL liability is not available for stages 1 to 3 and a concluded figure, which can relied upon as a final outcome, is not available for stages 4 to 6, development becomes much more difficult. How do you price, allocate risk and enable each party to the development to decide whether they are prepared to press the button?

The current proposals seem very blurred so far as to how and when gross development value, and therefore the amount of IL payable having regard to any relevant local thresholds, will be determined.

In terms of “how”, will it be for each developer to submit its valuer’s estimate of GDV for the completed development (or relevant completed phase), presumably prior to commencement of development? Or will there be some independent assessment? Or will there be any standardised values (for instance for development below a defined scale or value)? It is difficult enough with CIL where the moving parts are floorspace levels for each use plus the application of reliefs and exemptions. To these moving parts will now be added the inherent subjectivity that comes with valuation (accentuated where you have a type of development without readily available comparables, or subject to unusual restrictions or constraints?) and then the application of so far undefined thresholds – building costs for the area have been mentioned, but what about, for instance, existing pre-development land values (and will these be sufficiently site-specific)? The number at stake will also be much larger than is currently the case with CIL. Each process is going to be strongly argued over as the outcome will directly impact the financial bottom line of the developer and, ultimately, project viability.

In terms of “when”, will we be able to go “nap” on a figure at commencement of development or is the figure to be revisited on development completion or sale? Will any procedures for review or appeal carry on after development has commenced or will commencement of development be the cut-off?

If the authority subsequently requires affordable housing to be provided in the scheme by way of the “right to require”, how does this get taken into account in the calculation of GDV?

At what stage will a developer have certainty that a scheme is regarded as sufficiently large or strategic for IL not to apply? Can he opt in or out? Will there be local thresholds (which would inevitably influence scheme size, depending whether IL was regarded as a more or less advantageous mechanism than simply relying on section 106)?

It seems that “in kind” section 106 or other types of agreements will be required but the actual quantum of IL attributable to the development will not be known for certain at the stage the section 106 agreement is completed.

Will an authority’s targeted quantum of affordable housing, both borough/district wide and for particular areas or sites, be set out in its local plan, or infrastructure delivery statement? And will developers in future be bringing forward development proposals without reference to any anticipated affordable housing element? The local messaging is going to be complicated.

How rigorously will IL charging schedules be examined? The underlying valuation work and the thresholds to be applied will be critical.

How can we make sure that IL proceeds are used in the right way and that more affordable housing is indeed delivered, as well as the infrastructure needed to enable particular development proposals to come forward without delay?

Will the system be robust and workable in appeal situations where the developer and authority may not necessarily see eye to eye?

It is going to be fascinating to work through these sorts of issues as the proposals take shape. At this stage, what protections do we want to see in the Bill itself to safeguard against the detailed regime subsequently not living up to the Government’s promises? The Government’s commitment to a “test and learn” approach to the introduction of IL is welcome but of course risks adding to complexity by creating a patchwork of different processes dependent on geography and/or when schemes come forward – and accepts that there are inevitably going to be mistakes and unanticipated outcomes along the way.

I wasn’t particularly planning to run a clubhouse session this Tuesday but if anyone would like to join a discussion on these sorts of issues, let’s re-think that. Let me know!

Finally, another plug for the Town Legal/Landmark Chambers webinar at 5 pm on Monday 6 June back on the theme of housing: “Will the Bill deliver more or less housing? Yes or no?” Simon Gallagher (Department of Levelling Up, Housing and Communities) will join Zack Simons (Landmark Chambers), Kathryn Ventham (Barton Willmore now Stantec) and myself in a session chaired by Town Legal’s Meeta Kaur. Join us here.

Simon Ricketts, 28 May 2022

Personal views, et cetera

Details from image by Megan Bucknall courtesy of Unsplash