The new infrastructure levy and its impacts on developers

1. Introduction

The new infrastructure levy and its impacts on developers

1.1. The Levelling Up and Regeneration Bill (the Bill) was introduced into the House of Commons on 11 May 2022. The Bill proposes an Infrastructure Levy (IL), which would enable local authorities to impose a “tax” on development used to fund traditional infrastructure such as roads, transport facilities and open spaces, as well as additionally defined infrastructure such as childcare provision and affordable housing. 

1.2. The new levy is intended to meet the shortfalls of the Community Infrastructure Levy (CIL) which is currently in force in England and Wales, introduced by the Planning Act 2008. The proposals will allow charging authorities to determine contributions according to the local context, measured against the Gross Development Value (GDV) of a completed development. 

Summary of changes

1.3. The proposed changes as at today’s date (noting that amendments to the Bill are still being debated) between CIL and IL are set out in the table below:

2. Consequences for Developers

Two areas where the proposed infrastructure levy will affect developers are the new mechanism for calculation of IL by reference to GDV, and the potentially narrower application of s106.

2.1. GDV

2.1.1. The levy will be measured as a percentage of the GDV, intended to reflect the market value of the completed development. However this gives rise to further questions:

a) How will GDV be assessed?

• Developers may need to work with their Local Planning Authority (LPA) to estimate the GDV and assess the quantum of IL throughout the development process, starting at application stage and then through interim reviews during the construction phases. Developers may also need to provide IL estimates and viability assessments to lenders.
• Rate setting may be more complicated given the vast range of land values even within a single borough, and may require further viability assessment.
• Developers may need to instruct and factor in additional professional fees for viability consultants throughout the construction process.
• The good news for developers, however, is the potential to pay IL at the back end of the process from revenue receipts (in relation to sales or lettings), rather than through development finance on commencement of development as is often the case. This could assist significantly with development cash flow, reduce borrowing, and should prevent the need to renegotiate s106 contributions in the event of cost increases and/or value decreases. 

b) The meaning of “completion”

• GDV is assessed in relation to value at completion or sale. The point of “completion” is not identified. This could be identified as the date that a professional instructed by the developer issues a practical completion certificate, or a Building Regulations completion certificate, or when a property is registered for council tax or business rates. It is unclear whether completion could be identified as sectional completion, or even by reference to individual units. The latter is likely to be administratively burdensome for both developer and LPA if IL has to be assessed and paid on each unit individually in a multi-unit development. 

c) Liability?

• Proposed amendments to the Bill include provisions that would allow charging authorities to require developers of 50+ units to pay their full IL liability before development commences, or require infrastructure funded by the levy to be built before development commences. These requirements may make it more complicated for the developer to “claw back” payments if IL is overvalued when GDV is assessed at completion. Other provisions refer to development not being occupied until infrastructure has been delivered. These Grampian style requirements are likely to be deeply unattractive to developers who will have to rely on a public body to secure land, secure funding, procure a project, and deliver it in a timeframe that may not synchronise with a developer’s construction programme. 

2.2. Limiting section 106

2.2.1. The proposed levy seeks to narrow the application of s106, limiting its use to large development sites and site specific mitigation. However, since site specific mitigation will apply to development sites both large and small, it is difficult to see that this will have anything more than a marginal benefit in terms of speeding up the determination process. Although affordable housing and financial contributions may now be stripped out of s106 obligations, the usual raft of obligations relating to e.g. on-site open space, local employment, travel plans, parking permits, and construction management plans all seem likely to remain. 

2.2.2. If affordable housing is to be separated out from s106, it is unclear if this will be the subject of an IL agreement, or will be covered by an IL charging schedule. Presumably site specific affordable housing matters will still need to be agreed e.g. the trigger for when the affordable units have to be provided, affordable tenures, the specification of the units, rent levels, identity of the registered provider, nomination agreements, and service charge levels. If an IL agreement and s106 agreement both have to be negotiated then there may well be no time saving at all in the determination process. 

2.2.3. IL, however, does allow a LPA to negotiate with a developer to provide a single type of infrastructure in kind, rather than paying contributions towards multiple infrastructure pots. So, an LPA could require a greater provision of social rented housing, or the construction of a road and forego other contributions. This could simplify some schemes.  

2.3. Simplicity or confusion

2.3.1. The existing system for developers applying both s106 and CIL can be difficult to navigate. It is yet to be seen if the new regime will be simpler as intended, or will create further uncertainty. Developers may confront new challenges securing development finance where the levy is estimated. 

2.4. Timeline

2.4.1. The Bill is currently at Report Stage in the House of Commons and will soon move to its Third Reading before entering the House of Lords. Once the Bill is finalised, there are indications that the Government will take a “test and learn” approach to the Infrastructure Levy, which will be phased in gradually and trialled in certain areas. The contents of the regulations that support the Bill are also to be consulted on. This approach shows that if there are problems, or aspects in which the proposed regulations are unclear, complex, or cause confusion, then it is likely that the regulations supporting the levy will be tweaked accordingly.

2.4.2. The Norton Rose Fulbright Planning team will continue to monitor the Bill as it gradually moves through the legislative process and comes into force and we will keep a close eye on the accompanying regulations as these are developed.  

If you have any questions or would like any further information on these issues, please contact sarah.fitzpatrick@nortonrosefulbright.com