Contributors
Please note: this article is only able to provide a summary of a complicated policy area and of some key proposals in the consultation.
The Department for Levelling Up, Housing and Communities (DLUHC), has sought views in advance of drafting regulations to implement its proposals. The consultation questions cover thresholds for applying the proposed Levy and the application of receipts. It is asking for views on how to deliver infrastructure and affordable housing, as well as a wider set of questions about how to introduce the Levy.
The information set out below is subject to the outcome of the government consultation and the Levelling Up and Regeneration Bill (LURB) achieving Royal Assent (RA).
Background
The LURB sets the framework for government to introduce a new Infrastructure Levy (Levy). The Levy would replace the current system of developer contributions (via the Community Infrastructure Levy (CIL) and Section 106 Planning Obligations), as a charge on development for infrastructure. Planning obligations would not disappear, but their use would be refocused.
While the LURB sets out the framework for the new Levy, the detailed design will be delivered through regulations.
Further details on the Levy are contained in the LURB's explanatory notes and the Policy paper 'Levelling Up and Regeneration: further information', published on 11 May 2022.
What are the drivers behind the proposed levy?
The DLUHC view is that the current system of developer contributions is not working effectively to capture increases in land value resulting from development. The Government considers a key problem to be that most developer contributions are currently negotiated (and often renegotiated), in circumstances where there is an imbalance of bargaining strength. Government believes that developers have more negotiating power and local planning authorities have (LPAs) less.
The Levy proposals are focussed on capturing the uplift in value resulting from development.
What is the proposed Levy?
Once passed primary legislation will make it compulsory for charging authorities to charge the Levy, and for local authorities to be the charging authorities with limited, defined exceptions.
The exact method of charging the Levy would be set in regulations.
Levy rates and minimum thresholds would be set and collected locally. Local authorities would be able to set different rates within their area. The proposal is that the Levy would be charged on the value of property when it is sold and applied above a minimum threshold.
In summary, the rates would be set as a percentage of gross development value (GDV). There is inherent complexity in this, see further below under the heading thresholds and minimum thresholds.
The Government hopes to ensure that the amount of developer contributions delivered will be less dependent on negotiation and to reduce incidence of downward negotiation of contributions.
Scope of the Levy?
The LURB sets a wide definition of development that can be subject to the proposed Levy. So that the Levy can be charged on permitted development, the definition includes material changes of use to an existing building, or part of a building.
For what will Levy receipts be used?
This is one of the key 'design choices' identified by DLUHC. The LURB sets out a non-exhaustive list of infrastructure that the Levy could be applied to which (unlike CIL), includes affordable housing. Facilities and spaces that preserve or improve the natural environment; and for the mitigation of, and adaption to, climate change are also included. The LURB also provides for a power for regulations to alter the scope of exemptions from the Levy, e.g., by applying a zero rating to specified items.
DLUHC wants the Levy to fund infrastructure, but not all infrastructure. Government considers that some items of infrastructure to be integral to make a development function and for it to be saleable. Examples of integral infrastructure in the consultation include, e.g., mains connection, onsite roads, sustainable urban drainage systems (SUDS), biodiversity enhancements and net gain.
DLUHC considers 'integral' infrastructure elements to be separate from the Levy. Developers will be expected to provide integral infrastructure and to include this in their build costs. Planning conditions and narrowly targeted section 106 agreements would be used to make sure this type of infrastructure is delivered.
The LURB will require regulations to ensure that Levy receipts would be applied to supporting the development of an area by funding the provision, improvement, replacement, operation, or maintenance of Levy infrastructure.
Levy infrastructure will be infrastructure that is required because of the cumulative growth in the local area. The consultation provides a non-exhaustive list of potential examples ranging from the expansion or improvements to local healthcare to tree planting and maintenance. The consultation also suggests that receipts would be able to be passed to third parties such as county councils, highway authorities, and water and sewerage undertakers, if they are best placed to provide the infrastructure.
How will developer contributions be secured?
The consultation proposes three distinct 'routeways' for securing developer contributions. How infrastructure is secured, and how section 106 agreements operate in each routeway, will depend on the size and type of site being brought forward.
Under the 'core routeway' the local authority will collect cash amounts to deliver infrastructure. In addition, any integral infrastructure that is required may be secured via 'Delivery Agreements' (essentially section 106 agreements).
There will also be an infrastructure 'in-kind' routeway for discharging the levy liability, for example by the developer delivering the infrastructure (including affordable housing), or by making land available. The Government propose to retain the negotiated section 106 planning obligations for the large and complex sites. If the in-kind delivery value falls below the Levy liability, the developer would be required to make a cash payment to make up the difference. The Government intends that a substantial portion of the value captured by the Levy will be delivered in this way.
For a minority of developments there will be a 'section 106 only' routeway. In summary, this will be development where GDV cannot be calculated or where buildings are not the main focus, i.e., development that does not meet the definition of development in the LURB. This type of development would remain subject to section 106.
The introduction of the Levy will mean the end for CIL, but not Section 106. Section 106 planning obligations are likely to be retained, but only for use in specific circumstances (to secure integral infrastructure), and for the largest complex sites.
Both CIL and section 106 will continue to operate in a charging authorities' area until a Levy is implemented. Sites permitted before the introduction of the new Levy will continue to be subject to CIL and section 106 requirements. In London, the Mayoral CIL would be retained.
The thresholds and minimum thresholds
The Government anticipates that the process for setting the thresholds for Levy application will be largely similar to the process for setting the current CIL rates. The charging authority would have to issue a 'charging schedule' for development in its area and setting out the Levy rates. The process would include consultation and would broadly follow the current process for CIL.
The Levy would apply above a threshold. Below the threshold the Levy would be charged at a zero or reduced rate. The minimum threshold could be set out on value per square metre basis, with the Levy being charged on any value above the threshold.
Key questions for the authority in setting minimum thresholds would be the development costs and the existing use value. For the Levy to achieve the Government's purpose the art will be in balancing development liability and land value capture across sites - avoiding taxing the build costs of development but capturing the increase in value above these.
A new requirement for an Infrastructure Delivery Strategy
Planning effectively for infrastructure and delivering it in a timely way is a stated priority for the Government. The framework set by the LURB will give local authorities flexibility to determine their spending priorities. They will also be required to prepare, consult on, submit to independent examination, and publish an 'Infrastructure Delivery Strategy'.
The strategy will set out their approach to infrastructure planning and will include a strategic plan for how Levy money will be spent. Regulations will set out the form, content, and process. The consultation makes it clear that local authorities will be required to engage with key infrastructure delivery partners in the preparation of their strategy.
The consultation includes a number of questions related to the strategy, including how to ensure that infrastructure providers are able to effectively influence the identification of Levy priorities.
Delivering affordable housing
That the proposed Levy will deliver at least as much if not more on-site affordable housing is a key stated outcome for the Government.
The consultation makes it clear that Government does not wish to see an outcome where local authorities use receipts to build affordable housing off-site. The Government wants to maintain its on-site 'pepper-potting' policy and with equal access to services.
Under the proposals, local authorities will be able to require as an in-kind payment a certain proportion of the Levy liability as on-site affordable housing (called the 'right to require'). On sites where the GDV is much above the Levy threshold, this is intended to ensure that more affordable housing would be secured.
Paragraph 5.1 of the consultation states, "The 'right to require' will operate on residential development.", and paragraph 5.11 goes on to state that, "On mixed-use development, where a portion is used for commercial purposes and another for residential, the 'right to require' will only apply to the residential portion of the site. Developers will not be required to provide affordable housing on elements of development that are not residential."
Based on the above, our understanding is that, affordable housing delivered, via the 'right to require', will only operate on wholly residential schemes or those which include a residential element. It is government's expressed preference that delivery will be on-site.
There are some difficult questions that arise in relation to these proposals. It is likely that a more specialised examination process would be required of the local authority's spending strategy.
A three-stage process to calculate and charge the Levy
Liability to pay the Levy occurs on commencement of a development. The calculation and collection of the payment will be on completion of the development or in instalments leading to completion.
At the application stage an assumed GDV will provide an indicative liability. The indicative liability will also be the basis for calculating the affordable housing to be delivered. When the developer is still in control of the site, a provisional liability payment will then need to be paid prior to occupation of a scheme. A final adjustment payment is envisaged, post-completion or once the development is sold.
DLUHC acknowledge that not all developments are sold. They are working with RICS on the mechanism where this is the case. There will be a penalty mechanism for late payment, and a process for the return of any over payment to developers.
Throughout the consultation there is a refrain that the Government wish to see the end of lengthy viability negotiations. However, the proposed three stage process increases the potential scope for valuers to become involved. The indicative liability stage is going to be very important for developers. It is at this stage the provisional liability is determined. It is conceivable that both the indictive liability and the final adjustment payment could both involve contested valuations.
Other matters the consultation is seeking views on
The Government intends to maintain the value of the 'neighbourhood' share, and the 'administrative' share. It is seeking views on constraints and if the value of the shares should be maintained.
Enforcement
It is proposed that the Levy will be listed as a local land charge that cannot be removed until the provisional liability has been discharged. Recognising that this may not be sufficient to prevent or deter sale and incentivise payment of the liability, it is intended that Stop Notices will be available where no assumption of liability is in place. It is intended financial penalties for non-payment will be available and 'greatly increased'.
Transition to the new system
It is intended that the Levy will be introduced over time, to allow a ‘test and learn’ approach to the regulations.
The LURB provides a power to the Secretary of State to set a deadline date for the introduction of the Levy in a particular charging authority’s area.
The consultation indicates that the 'test and learn' process will begin sometime in 2025. There will then be a gradual expansion from 2027 and a national roll out from about the middle of 2029.
What happens next?
As DLUHC has emphasised it is not consulting on the framework as set out in the LURB. In its own words, it is consulting on the 'complex plumbing' of policy proposals. Regulations to implement the Levy can only follow the LURB achieving Royal Assent.
The technical consultation finished on 9 June 2023 and contained forty-five rather wide and open questions. After considering the responses DLUHC has said that it intends to consult again on the draft regulations.
There has been commentary that the ultimate implementation of the Levy is fundamentally uncertain. Some of the statements of the opposition and the long lead in under the 'test and learn' approach have led some to question if the proposals will ever be adopted.
There is also commentary that local authorities may lack both resources and capacity to implement the proposals. Further that the development market may struggle to absorb the level of complexity contained in the proposals.
If you have any questions on anything arising out of the above, please do not hesitate to get in touch with your usual contact at Womble Bond Dickinson, or the contacts named above.
