The taxman cometh

Regeneration & Renewal, 16 May 2008

Over the past ten years, surging house prices have produced big profits for home owners and housebuilders, while faster private sector housebuilding and government growth plans have left the public sector facing spiralling bills for the services and infrastructure needed to support new developments. A few years ago, the Treasury put these two facts together, and began pushing for a new form of tax designed to extract more money from developers for public infrastructure: the result is the Community Infrastructure Levy, and it looks set to create a major shift in the way physical developments are planned and funded.

Ever since a 1995 legal precedent clarified the Town and Country Planning Act 1990, councils have obtained contributions towards building and supporting infrastructure from developers via "section 106" agreements. But the system of case-by-case negotiations puts a heavy burden on planning departments, and developers find the approach opaque and uncertain: councils' expectations vary around the country, and contributions aren't agreed until late in the planning process.

Tax rethink

Initially, the Government proposed replacing section 106 deals with a Planning Gain Supplement: a tax on the rise in land value that comes when planning permission is granted. But the idea was abandoned after lobbying by the development industry, and replaced with the Community Infrastructure Levy, which the Government describes as "a standard charge decided by designated charging authorities and levied by them on new development. For example, the CIL could be levied as a certain amount per dwelling or per square metre of development, following the example of existing 'tariff' schemes introduced by some local planning authorities" (see infographic).

The plans for the CIL are now passing through Parliament in the shape of the Planning Bill, but it is making slow progress and may not gain Royal Assent before the winter recess. If and when it is passed, the bill will allow councils to introduce a version of the "roof tax" system already in use in Milton Keynes, where developers are charged a flat fee of £18,500 per home and £67 per square metre of commercial floorspace.

The CIL will be paid when work starts on site, although local planning authorities will be able to introduce phased payments if they wish. While the section 106 system will be retained to provide affordable housing and site-specific costs such as drainage and access roads, most developer contributions will now go through the CIL: many developers welcome the prospect of increased clarity over project costs, while planning authorities will benefit from more predictable income streams.

Winners and losers

There will, however, be winners and losers under the CIL. Under the section 106 system, developers can only be charged for the additional infrastructure directly required by their new homes - so if there is spare capacity within the schools nearest to their development, for example, they need not pay for new school buildings. But the CIL is calculated by estimating the entire cost of infrastructure required to support all the development expected in that council area, then dividing it by the quantity of development. This breaks that causal link, meaning that every new home or square metre of commercial space in the borough will incur an equal charge. So developers building in areas with good existing infrastructure may feel that they're paying over the odds, while those working in areas where lots of new infrastructure is required will be pleased to find that some of these public works are, in effect, being paid for by other developers.

What's more, many details about the CIL's operation remain unclear, and there are fears that it may not achieve the level of clarity and certainty that has been touted as its greatest advantage. For one thing, Department for Communities and Local Government (DCLG) guidance states that councils will be allowed to retain the section 106 system if they wish. Where councils do reject the CIL - whether because they think that section 106 deals will yield more money, or to try to deter development - developer costs will remain opaque, limiting investors' ability to make comparisons between areas.

The Government has also elected to leave a range of important decisions out of the Planning Bill, with the intention of addressing them later through "regulations": secondary legislation that the bill will empower it to introduce. For example, DCLG guidance suggests that, while the landowner is primarily liable for paying the CIL, non-landowning developers may also be deemed liable. But the idea is mentioned without going into any further detail, and interested parties will have to wait until regulations emerge for clarification.

The deferment of such significant decisions will make it hard for Parliamentarians to form a view on elements of the Planning Bill - and there are several other such areas of ambiguity. Another key example is that the bill doesn't specify the punishment for those who fail to pay the CIL: the DCLG says it is considering whether to order developers to cease works on-site, or to pursue criminal penalties. Even the definition of what comprises "infrastructure" is unclear. The bill states that CIL revenues mustn't be used to support general council spending or to remedy pre-existing deficiencies in infrastructure (unless these have been or will be aggravated by the new development); but that they may be spent to improve the existing infrastructure in order to increase capacity. As to exactly what comprises infrastructure - that has been left to regulations.

Yet another group of major decisions that have been left for secondary legislation concern the imposition of penalties or incentives designed to shape developer behaviour - for example, the use of CIL discounts to encourage the use of brownfield land. It seems that the intention is to allow for a degree of flexibility in local decision-making over these issues. We believe that developers should be rewarded for building on brownfield sites: there are already enough sticks to push them away from greenfield locations, and those who do comply deserve the odd carrot.

Ongoing review

One other comment in the DCLG's guidance has the potential to raise eyebrows. This states that the level of CIL will be reviewed periodically by councils, and that the basis of that review - rather than revised costings of the area's required infrastructure, which will decide its initial level - will be the increase in land values within the area as a result of the granting of planning permissions. While the CIL will be levied as a fixed tariff rather than a proportion of land value uplift, it seems that the Government hopes to peg future rate rises to planning gain rather than any alterations to the plans for new infrastructure.

Assuming that councils widely adopt the CIL, it could provide investors with much greater certainty over the cost of development. But considering that the Government's proposals were designed to bring clarity to an uncertain situation, they leave plenty of questions unanswered - not least exactly what is meant by the word "infrastructure". For the answer to that and a number of other questions, we will have to wait for the promised regulations. In the meantime, though, we extend a cautious welcome to the Community Infrastructure Levy.

Julian Plescia is an associate and Nigel Hewitson the head of planning in the environment, safety and planning team at legal firm Norton Rose LLP.

THE STEPS BY WHICH THE COMMUNITY INFRASTRUCTURE LEVY (CIL) WOULD BE CALCULATED

1. Predict development

Drawing on the regional housebuilding targets, the availability of development sites and local masterplans, the local development framework predicts the quantity and location of homes and commercial premises to be built over the next ten to 15 years.

2. Identify necessary infrastructure

After consulting with local people and infrastructure providers such as the Highways Agency, primary care trust, education authorities and upper tier councils, the planning authority identifies the infrastructure required to support this development.

3. Cost infrastructure

Putting a price on the infrastructure "wish list" and dividing that sum by the quantity of homes and commercial premises required, the council calculates the infrastructure cost per development unit, and consults with developers on realistic values for the CIL.

4. Set CIL cost per unit

The council sets a CIL value per home, per room or per square metre of residential floorspace, and another value for commercial space. It decides any discounts or surcharges, such as a reduced rate for brownfield developments.

5. Pay CIL

The levy is paid when developers start work on a new project, and the sums raised fund the provision of infrastructure alongside the development.

6. Reiew CIL

After a few years, the level of CIL to be used in future developments is reviewed, with reference to the land value uplift achieved in recent years on the granting of planning permission.