A new infrastructure levy?
Reports this weekend in the Telegraph and Planning Resource add weight to recent reports that one of the few parts of the much maligned 2020 ‘Planning for the Future’ White Paper to survive is the proposal to ‘scrap’ CIL and section 106 developer contributions (under s106 Town & Country Planning Act 1990) and replace them with an ‘infrastructure levy’. This is suggested to be brought forward in the next Queens Speech in May 2022, although any legislative timetable is as yet unclear.
The proposals
Few details are known at this time, but reports suggest that planning obligations (currently secured via s106 agreements) and CIL, will be scrapped in favour of a new levy set on final sales value only. Political comments suggest this is more likely to be locally set, although there may be a centrally set element as well.
The suggested benefits of this include:
- Reducing bureaucracy of current s106 negotiativeand administrative process
- Reducing delays and costs associated
- Reducing uncertainty
- Removing need to viability test individual sites
- Reduce barriers to delivery
- Improve delivery of community benefits
A consultation is likely to be brought forward in the near future following the Queen’s Speech, and we will comment as further detail becomes available.
The current system
The charge laid against the current system of negotiating s106 and affordable housing contributions is that it is overly convoluted, time-consuming, inconsistent, negotiable, and flawed.
All valid criticisms.
A local plan viability study justifies adopting policies setting levels of contributions and affordable housing. These policies are generally caveated by viability – ensuring development is profitable and deliverable. Site-specific viability assessments form the basis for discussions during a planning application, and negotiation on marginal viability sites can result in reductions or changes to tenure and unit mix. Negotiated agreement is then secured via s106 agreement, which also requires drafting, redrafting and negotiation of terms, and often now includes a further viability review at a later stage with clawback provisions. The current system is certainly complex and causes delays.
Lichfields have produced an interesting report outlining the scale of potential delays due to issues of affordable housing policy and viability, and how these disproportionately impact smaller sites with marginal viability.
Despite this, it is a system which has been used for a long time and with which all stakeholders are largely familiar. Further it should be noted that not all obligations are monetary, and it appears entirely unlikely that s106 agreements could be entirely done away with unless councils ramp up their delivery capabilities to levels not seen since the post-war period.
Comparison with CIL
CIL (Community Infrastructure Levy), while also not without flaws, is at least a more predictable, less variable system of a per m2 charge on new floorspace with some exemptions and caveats.
However CIL was originally developed under a similar brief to the currently proposed ‘Consolidated Infrastructure Levy’, before being simplified due to the issues found in delivery of a more comprehensive vehicle for obligations. Is the current suggestion really a new idea, or just a rehash of an old, shelved approach?
Further, the ongoing problems with CIL will be seen to represent the challenges ahead. In our experience there is a significant level of user error by both local authorities and applicants and their agents even where CIL Charging Schedules are well established. It is overly form based and therefore open to user error, and the adoption of CIL Charging Schedules is ultimately predicated upon, wait for it, viability assessment. So will anything really change, or does the emphasis simply change to a different stage?
The caveats
In principle, a shift towards a taxation or levy approach would have many benefits.
The caveats, however, are many.
How will it be administered, tested and controlled: centrally like the NPPF, or individually and locally, like CIL?
Is it a flat 10% rate on value nationally – in which case await councils' comment thatthey can do better under adopted s106 policies, with most adopted development plans in the south exceeding 20% affordable housing contributions at a minimum, with no maximum.
Or is it set locally through a viability tested charging schedule – as with CIL– in which case developers will find themselves with undeliverable sites when councils adopt high rates based on flawed typology area wide economic studies which cannot capture site specific costs.
In either case delivery falls – either through setting the bar too high or low nationally, or through sites overnight becoming unviable with no recourse.
These questions have been raised often, with recent suggestions of a local system to reflect the UK’s disparate economic geographies, potentially with a 'floor' percentage set nationally. But as evidenced by CIL, this has its own issues and there is little regional strategic planning facility in the UK to support a consistent and joined up approach over inconsistent economic geographies.
In addition, how will this interact with s38(6) and the adopted development plan? Simply legislating for a new ‘tax’ without development plans being updated accordingly to remove current affordable housing policies would create overlaps or conflicts in legislation. This in itself suggests a long and potentially inconsistent adoption and transition period - as with CIL.
It has been reported that this will be a straight levy on final sales values. Is it proposed that costs, land value and profit (the other elements of development appraisal) are completely ignored? This would be a significant departure and would overnight render many marginal developments undeliverable.
When will the levy be administered? If on disposal – which would be the only way to accurately assess total value – then the development is completely sold already – and therefore the proposals to allow developers to ‘buy back’ the levy through onsite delivery are rendered undeliverable. If earlier, then the same issues of valuation, professional opinion and ‘predicting the future’ occur as in viability assessment, with differing professional opinion opening the way to negotiation remaining included.
Simplicity is attractive, but land economics are not, inherently, simple. How will this interact with design quality and newer (and significant) legal requirements such as biodiversity and nutrient offsetting?It appears inevitable that any formulation would severely impact delivery in lower value areas and on smaller more marginal sites. And some forms of development would effectively be precluded.
Take, for example, a recent case in Richmond – who have a policy of seeking affordable housing contributions on reversions (from 2 flats to 1 house). The client in question was making their family home by reverting two older run down flats. Cost was not in question. Clearly a net profit position in this scenario (and many others) makes more sense – as the cost far exceeded the end value. However, a contribution was sought nonetheless before a successful viability case removed it.
How will the current NPPF definition of major development interact with this? Will development under 10 units be exempted, as currently advocated by the NPPF, or will all development be subject to the proposals? In which case this is likely to impact on delivery - and how will subdivision of sites be addressed?
And one of the biggest questions is – are councils currently best placed to deliver affordable housing in particular. While this new direction would hugely benefit areas with well established delivery mechanisms and partnerships, it could potentially severely reduce delivery of affordable housing in areas where housing companies or partnerships are not in place – which is why the emphasis has remained on s106 onsite delivery by private companies for so long.
There is some suggestion that councils will be able to use the Infrastructure Levy to ‘buy back’ dwellings from developers to deliver as affordable homes – but does this not simply shift the negotiation to a new stage, and in fact increase the developer’s leverage in this discussion as planning permission will no longer be contingent on signed s106 agreements and onsite delivery prior to building out?
Finally, any transition arrangements will need to be cleverly designed to avoid either a rush of applications prior to any cut-off, further over-burdening the planning system, or a complete failure in delivery as housebuilders and landowners down tools awaiting certainty.
Our proposal
Many have posed the above questions, but very few constructive suggestions have been made.
Our suggestion is formulated below. It is likely quite different to the government’s proposal.
Late review mechanisms are increasingly common and essentially a re-run of a viability case against the application stage prediction but completed once a significant portion of the development is sold. So actual build costs and sales values are used. And an actual profit position is more predictable (within reason). What’s less widely appreciated is that any ‘surplus profit’ over a certain level is split between council and developer (generally 60/40 or 50/50), much like an overage provision.
Overage is a widely accepted and fully understood legal mechanism. It is uncontroversial. It could potentially fulfil CIL Reg 122:
(a)necessary to make the development acceptable in planning terms;
(b)directly related to the development; and
(c)fairly and reasonably related in scale and kind to the development.
So why not simply obligate that all developments must enter into a nationally templated and non-negotiable overage provision with councils on grant of planning, such that any profit on development over a centrally defined minimum (say 10-15%) is split 50/50 between council and developer? Or 33/33/33 between developer, landowner and council (unless the developer and landowner are the same party in which case default to 50/50)? This profit share arrangement could potentially ratchet down for smaller sites to improve marginal viability for SMEs with larger start-up and operational costs.
This would provide a predictable floor or minimum profit for developers, but no maximum if profits exceed a base level. Overage is an established vehicle, there is no need to reinvent the wheel, and it provides, arguably, a fairer and more consistent, less risky, and more predictable approach countrywide. Most importantly this would not impact delivery, as it is net profit based rather than sales value based. Evidence would comprise actual sales and costs, and therefore this becomes an accounting, rather than a financial prediction and modelling approach, removing negotiability or potential abuse by all parties.
This proposed approach would circumnavigate many of the issues outlined above. The issue of delivery remains a thorny one. This might be partially solved through the approach taken in late review mechanisms, whereby the scheme’s value is assessed on disposal of 75% of the units – allowing fairly accurate consideration of achievable value and reducing any negotiability. That 75% of units could then be employed to ‘buy back’ the proposed levy amount as suggested – however this would still be a market transaction with the same issues surrounding tenure, value of different types of affordable housing, and negotiation over pricing with registered providers, but potentially with more power to developers who will have the choice to pay cash (and will almost certainly opt for this option consistently in marginal viability cases).
Therefore some level of amendment to current compulsory purchase law might be required. This could be balanced against an obligation on councils to spend any levy monies within a defined timeframe or return them to the developer as in current clawback provisions in s106 agreements, to incentivise and speed delivery of infrastructure and community benefits.
However, ultimately this proposal would not involve any wholesale reform of legislation - with its complexities, pitfalls, errors and political challenges. It would utilise existing established vehicles for the most part, and would not require complicated localised procedures and variations between local authorities. It does not reinvent the wheel, but reduces complexity, variation and negotiable elements. And ultimately, any approach which reduces rather than increases uncertainty would likely be welcomed by all stakeholders.
