Infrastructure Levy & Its Potential Impact On Development In The UK

The “defining mission” of the Boris Johnson government, the ‘leveling up’ plan, is in the news again. And yet again, it has managed to rake up a controversy. Leveling up Fund was launched to make the rich and poor areas of the country more equal. The aim was to spread opportunity, create good jobs, and support economic growth.

One of the critical policies of the leveling fund is the Infrastructure Levy. It is a simple, non-negotiable local levy aimed at ensuring that developers pay their part of the share to provide the infrastructure that communities need. The Infrastructure Levy will replace CIL, Section 106, and affordable housing contributions with a single flat-rate levy. The calculation will be based on the final sale values of development and will be computed on a final gross development value of a scheme or phase of a scheme.

The plan is ambitious and innovative, but many experts do not expect the Infrastructure Levy to achieve its intended goals. Like many others from the industry, they are aware that private developers and house builders are unlikely to provide affordable housing. Most of them profit by selling off plots allocated for affordable housing or working with an RSL as a delivery partner.A key downside is that in the period between planning permission and signing an S106 agreement, there can be market changes, and new legislation may be introduced. This can impact the financial viability of development significantly. Such a scheme can only become viable through a reduction in affordable housing.

It is clear that the CIL is outdated. The CIL was introduced as a simple levy that allowed developers to budget for infrastructure payments at the beginning of the development process. The troubles began when it was used in parallel with S106 agreements. The necessary funds were not generated to finance the infrastructure needs. Also, it does not work for larger sites.

A set levy agreement can help mitigate these problems, reduce the last-minute negotiations involving multiple stakeholders, and invest more powers in the local authorities. Developers would benefit from payment being made on completion of the scheme and have spare capital. Local authorities will borrow against future infrastructure levy revenues. This would put them in an advantageous position to push early for the development of infrastructure for major new settlements.

Some will probably face challenges in providing affordable housing because they have had to deal with years of underfunding. This has resulted in curtailing the strength of technical planning and architecture teams. They may also face land ownership issues in some places due to the short supply of appropriately located municipal land. Some councils may have to bid against private-sector house builders.

The problems do not end there. Any new tax introduction will need support from multiple parties. Some landowners are hoping for a change of government because they believe that a new government will likely repeal any new legislation allowing a greater future land price to be secured. Taxation will have to be set at a rate that can help raise funds needed without affecting the speculative land market. Local authorities must develop the skills required to ensure the application of the new levy. With a significant quantum bound by option agreements, the financial advantages of these changes may take some time to accrue.

The government has not clarified if the Infrastructure Levy will be imposed at a standard rate. Property experts are not very optimistic about this as there is considerable disparity in land values at various places. If the government aims to levy at a regional or local level, it could result in a huge burden and cause inconsistent delivery of new homes across the country. The levelling up plan runs contrary to this concept.