Community Infrastructure Levy and the Infrastructure Levy: comparisons and reflections

Christopher Cooper, Partner in Carter Jonas’ London office looks at the proposed changes to the Community Infrastructure Levy.

Christopher Cooper | Carter Jonas
15th February 2024
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"A more streamlined approach to the provision of affordable housing is long overdue. But the jury is out on whether this change will benefit supply, as councils will ‘retain flexibility, and not be obliged to seek their full entitlement of on-site affordable housing,’ enabling them to ‘redirect levy resources towards other infrastructure priorities when necessary.’"
- Christopher Cooper - Carter Jonas

The Department for Levelling Up, Housing and Communities has consulted on plans to replace the existing system of Section 106 agreements and CIL with a new levy system of locally set rates, based on the GDV of a completed development, rather than on floorspace as is currently the case.

The rationale for the new levy is the Government’s stated objective in the context of levelling up: ‘ensuring local communities can take back control.’ Its ‘Right to Require’ aims to strengthen local government’s powers in the negotiation process, rather than contributions being determined through viability assessments. Specifically, it is intended to make developers pay a ‘fairer share’ towards affordable housing and local infrastructure including transport, healthcare and education.

Under the proposals, the final contribution will be calculated on completion of a project rather than during the planning process, the intention being that the public sector benefits from increases in land value.

Discretionary, charged on floor area – replaced with mandatory levy, based on GDV on completion

Possibly the most significant of the changes is that, whereas CIL payments are based on a charge on floorspace by square metre, as set out in a council’s CIL charging schedule, the final payment for the IL will instead be based on the GDV of the completed development, based on a rate set by the council, but will apply only above minimum thresholds. Essentially, a land tax, with the intention of capturing land value uplift.

Under the new system, the application of the IL would be mandatory for all councils, as opposed to the current discretionary status of CIL – indeed, not all local authorities have adopted CIL charging schedules. This could pose difficulties for councils, with land values ranging within administrative areas, and the associated work that would therefore need to be undertaken to inform setting viable levy rates.

Amendments to the Levelling Up and Regeneration Bill (LURB), tabled in early July 2023 and in response to the earlier consultation, went some way to addressing this point, proposing to dilute the mandatory nature of the IL, with councils potentially able to choose not to use it, should they consider that it would render development in its area economically unviable.

One of the issues that concerns the industry in this respect is, as the consultation document states, that this will, ‘remove the need for planning obligations to be renegotiated if the gross development value (GDV) is lower than expected; while allowing local authorities to share in the uplift if GDVs are higher than anticipated’: a win-win for the council, but the reverse for the developer.

Affordable housing funding via Community Infrastructure Levy / S106 – replaced with affordable housing through infrastructure levy

Another significant change is the way in which affordable housing, previously secured via Section 106, will be delivered.

The initial consultation proposed that the delivery of affordable housing would be secured via the IL, as compared to the current regime, in which it is secured through S106, outside of CIL. Significantly, councils would have a new, and rather draconian-sounding, ‘Right to Require’, which would allow them to set out the proportion of the IL which would need to be paid in-kind to deliver on-site affordable housing. There is uncertainty with this route.

It is unclear, for example, how a council would be able to determine the quantum of affordable homes to be delivered. Further, while delaying the final sum payable until the scheme is sold makes some sense in accounting terms, this approach is less satisfactory when providing bricks and mortar: if the affordable housing quota rises at the end of the scheme, will it be ‘required’ that homes built for the open market will be handed over to housing associations to fulfil the obligation?

In these circumstances, it is hoped that the levy can be a financial one; otherwise functions across the build programme, from master planning to fit-out, would be impacted.

The initial proposals have given rise to concerns by the industry that the IL would not provide equal or greater levels of affordable housing compared to the present. However, following the consultation, councils could require developers to pay a proportion of IL contributions as in-kind on-site affordable housing, which would go some way to addressing these concerns.

A more streamlined approach to the provision of affordable housing is long overdue. But the jury is out on whether this change will benefit supply, as councils will ‘retain flexibility, and not be obliged to seek their full entitlement of on-site affordable housing,’ enabling them to ‘redirect levy resources towards other infrastructure priorities when necessary.’

Certainty – replaced with uncertainty

The point in the development cycle at which the levy is agreed is a significant change. CIL is, in simplest terms, agreed upon the grant of planning permission and then paid upon commencement. The IL, on the other hand, is determined on completion. While there is some logic in doing so, especially for large-scale schemes which can rise (or fall) in value over the course of a long construction programme, this, together with the proposed move for the Levy to be charged on GDV rather than floor area, will create uncertainty for both the developer and the council.

This will particularly pose a problem at the very start of the process, when the land sale is agreed upon, because it will not be clear at such an early stage what the final GDV of a scheme will be, with long-distance forecasts and assumptions required to be made. The process of valuing the land prior to it changing hands becomes shrouded in uncertainty.

Rather than a fee which can be factored into budgets, the IL is effectively a tax based on profitability. This uncertainty may be mitigated to an extent if the final contributions are liquid rather than in-kind: in a downturn, non-existent profits are simply not paid, but homes constructed cannot be demolished – at least not in the interests of streamlining. Conversely, payments due in the final stages of development could at least assist developers in terms of cash flow, with less need for loans.

While the IL would appear to benefit local planning authorities and communities at a cost to developers, it is worth bearing in mind that all involved are impacted by uncertainty. For local authorities and communities, the benefit achievable from new development is entirely dependent on market forces: in a falling market, a reduced payment would result in a reduction in infrastructure and affordable housing – something that led to the RTPI branding the levy a ‘retrograde step’.

Uncertainty is a consistent theme in the various reflections on the levy, from a range of organisations. Furthermore, the time taken to roll out the scheme will create prolonged uncertainty, adding to a considerable burden of uncertainty already impacting the development industry.

This would remain during the 10-year rollout, despite the proposed ‘test and learn’ process which is intended to support the effective implementation of the IL. Of course, it may never occur: a change of Government would probably result in the levy being scrapped.

The shadow housing minister has already stated that a forthcoming Labour government would not take the policy forward. But that then raises the question, what would be put in its place, and how much uncertainty would this bring about?

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