Infrastructure Levy: Proposals and Consultation

The government has now closed its technical consultation on the proposed Infrastructure Levy ("IL") to widespread opposition and concern. Here is a recap of the key aspects of IL.

Under the Levelling Up and Regeneration Bill, the government is proposing to introduce a streamlined, mandatory, and locally determined IL to fund infrastructure needs arising from development. IL is designed to replace the Community Infrastructure Levy ("CIL") and reduce use of the negotiated s106 regime. 

How will IL differ from CIL?

Both IL and CIL are tax-like charges; however, while CIL is charged on any increase in floorspace above 100sqm and charged at commencement, IL will be charged as a percentage of gross development value ("GDV") at completion, with a provisional payment made prior to first occupation and a balancing payment on completion.

Like CIL, IL rates will be set by local authorities and charging schedules will be subject to consultation and public examination. The key difference with IL is that local authorities will be able to vary rates by type of development and by areas within their boroughs.

Unlike CIL, IL will be mandatory, and it will apply to all types of development (subject to limited exemptions). It will also apply to changes of use through permitted development rights.

The two levies also differ in how they will be spent. For example, a percentage of IL will be delivered in-kind as affordable housing. This diverges from the current system, under which affordable housing is secured separately via s106 agreements rather than through CIL.

What will happen to Section 106 Agreements?

The role of s106 agreements will be determined by the development "routeway", which are as follows:

• Core routeway – applies to majority of developments. s106 agreements will be known as "Delivery Agreements" and will retain a restricted role limited to securing matters that cannot be conditioned.
• Infrastructure in kind routeway – applies to the largest and most complex sites. s106 agreements can be used to deliver infrastructure as an in-kind payment of IL.
• s106-only routeway – applies to sites where GDV per m2 cannot be calculated, or where buildings are not the focus of development. These developments will not be subject to IL and s106 agreements will be retained.

What are the legal concerns?

There is a great deal of concern across the industry where the following issues, amongst others, have been raised:

Complications in calculating IL

IL will be calculated as a share of the GDV of the development at "completion" (not yet defined), rather than the anticipated development cost. Complications arise from the proposed calculation of IL, such as the following:

• Method of calculation - There are various ways of calculating the GDV of a scheme. This is potentially extremely complex and burdensome for local authorities and assumes that local authorities have the necessary valuation expertise.
• Minimum thresholds - Local authorities will be required to set minimum thresholds, below which IL will not be charged. These thresholds will represent, on a £ per sqm basis, the costs of the development in a particular location and the value of the land being developed in its existing use. This will vary by locations within boroughs, which has the potential to cause further confusion.
• Index-linking - Minimum thresholds will be index linked. This is problematic as indexation is widely acknowledged not to react quickly enough to market conditions, as we have seen with the rise in build costs and the current market. Again, the market and valuation expertise that will be required falls outside the current role of a planning officer.

The undefined role of "Delivery Agreements"

The government aims to sweep away "the sometimes-protracted negotiations of s106 agreements" by replacing s106 agreements with "Delivery Agreements". These will only be required for "integral" infrastructure which cannot be secured by way of a planning condition.

While these proposals sound promising in theory, in practice this is unlikely to work; larger schemes have requirements for infrastructure which are integral to the development such as on-site play areas, cycle parking areas and, from November 2023, Biodiversity Net Gain provisions. 

Separately, s106 agreements provide for a number of obligations to control the use of land, such as car free obligations and affordable housing provisions. The government has not addressed whether these will be provided for via delivery agreements.

Uncertainty surrounding delivery of affordable housing

The consultation states that the government is committed to IL securing at least as much affordable housing as developer contributions do now. Proposals include the introduction of a "right to require", which will enable local authorities to establish the proportion of IL to be delivered as affordable homes.

Under the current system, s106 regime deals with affordable housing which is designed into developments from the outset, long before planning applications are submitted.  In contrast, under the IL regime, affordable housing will be secured by IL on the majority of sites as an in-kind payment. It will be down to the local authority to let the developer know how much affordable housing they require under a new right to require route which is unlikely to take place until an advanced stage of construction of the development. Affordable housing will likely then need to be shoe horned into a scheme that has already been built.

There are legitimate concerns as to whether the right to require will adequately guard against a reduction in affordable homes being built. There are currently no mechanisms preventing councils from setting the right to require at low levels and diverting IL receipts elsewhere (although we note that a proposal that 75% of IL be spent on affordable housing is currently being voted on). The right to require also adds a further layer of complexity; how will councils calculate the number of homes that a proportion of IL should deliver, and how will a rebalance be addressed if the GDV of the project turns out to be less than expected?

What happens next?

The Bill is currently being examined by members of the House of Lords. If the Bill is passed, IL will be rolled out nationally through a "test and learn" approach over a 10-year period. The government expects "test and learn" authorities to introduce charging schedules from late 2024/25 and operate IL from 2025/26. In practice, this means that while IL would be implemented in some areas, CIL would continue to apply in others. Mayoral CIL in London will continue to apply.

There is a possibility that IL will never be rolled out; Labour's shadow housing minister, Matthew Pennycook, tweeted that "[a] Labour government would not take it forward".  Watch this space!

Please contact a member of the team if you wish to discuss how this might impact you and your development.