Much of the causes for concern laid out by the thirty unsupportive organisations are fraught with conflict and inconsistent arguments

Christopher Worrall is a housing columnist for LFF. He is on the Executive Committee of the Labour Housing Group, Co-Host of the Priced Out Podcast, and Chair of the Local Government and Housing Member Policy Group of the Fabian Society. 

Michael Gove’s Infrastructure Levy proposals have been slapped down by thirty organisations who have come out stating they cannot support his reforms, on grounds that they are “likely” to leave communities with fewer affordable homes and less of the infrastructure than they need.

It comes after a range of stakeholders reviewed the “Technical consultation on the Infrastructure Levy” launched by the Department for Levelling Up, Housing and Communities (DLUHC) in March 2023 and which closed on 9^th June 2023. Within the consultation was a 303-page document “Exploring the potential effects of the proposed Infrastructure Levy” published in February 2023, which set out an academic review and modelling of the proposals by Professors from the University of Liverpool, Reading, Sheffield and the London School of Economics. It was commissioned by DLUHC in 2021 and was based on the initial design for the Infrastructure Levy at that time and prototyped across six local authorities.

The proposed mandatory charge has been proposed to be set locally, levied locally, and locally spent. It requires local authorities to set several locally specific levy rates (e.g. brownfield and greenfield), whereby local authorities can create different charging zones, and a threshold below which the levy would not apply.

The infrastructure levy, which will replace section 106 contributions for most developments, will prevent developers from negotiating down the amount they contribute to the community when they bring forward new projects.

Under the proposals, the amount developers will have to pay will be calculated once a project is complete, instead of at the stage the site is given planning permission. The government claims that the new levy will see developers pay a fairer share for affordable housing and local infrastructure such as roads, schools and GP surgeries.

This is being carried out all with the aim of not compromising viability of development whilst raising the scale of funding for infrastructure and affordable homes no less than has been historically provided through Section 106 (S106) and Community Infrastructure Levy (CIL). Yet the letter signed by the organisations including the British Property Federation, Land Promoter’s and Developer’s Forum, Chartered Institute of Housing, Construction Industry Council, Federation of Master Builders, G15, G320, Home Builder’s Federation, The Housing Forum, National Housing Federation (NHF), Local Government Association, Shelter, Royal Town Planning Institute and the Town and Country Planning Association, to all but name a few, have requested a reconsideration of how S106 and CIL could be improved – rather than backing the proposed developer contribution reforms set out by the government.

So, what are the alleged issues? After all many of these organisations had previously backed some of the plans. There are a number of concerns raised against the levy, such as the provision of affordable housing being made harder, qualms over the time it would take for the roll out of the system following the introduction of a trial period, alleged more complex charging schedules that would prove too much for “chronically under resourced” local planning authorities, complaints over councils being capable of borrowing against the funding stream, as well as general concerns over wider operational and economic challenges associated with the roll out.

But what was proposed? The Infrastructure Levy has been proposed to be mandatory. At present CIL, a non-negotiable charge for developers when implemented, was found to increase land value capture by 60% of authorities who utilized the charge. Unlike CIL, which is collected at the point of granting planning permission, the Infrastructure Levy would be liable on the final value of the development. For the local authority, this brings upside and downside risk. Upside if values increase, downside if values fall. This is where some of the concerns around planning for funding first arise. Albeit these concerns are no different to the risks the developer must face given the nature of the business being taxed.

The Infrastructure Levy was also supposed to broaden the scope for developer contributions into the system, where alternative asset classes such as student accommodation would be liable for the charge. The academic review commissioned by DLUHC highlighted three significant areas for reflection by policymakers. Firstly, the impact of the levy on the development industry. As it was found conceivable that developers may reconsider where and what they develop in response to rates set in the levy. Secondly, the time it would take to replace the existing system with concerns raised over the length to implement. A key point picked up by the unsupportive organisations in their letter. Thirdly, the concentration of the value of contributions raised being in higher value areas, which was stated as being equally true of the current system.

The report did not suggest it would result in fewer affordable homes. Instead it specifically stated that in all the modelling an equivalent number of units, by assumption that local authorities do not change their mix of housing types, remain the same.

The ‘Right to Require’ would enable local authorities to secure affordable homes as a proportion of levy liabilities or as an “in-kind” payment if they so wish. Yet despite this safeguard, the RTPI set out in its response that it is “crucial that the planning system is not seen as the main vehicle” for funding social or affordable housing. 

The NHF, which has consistently raised concerns about the ability of the levy to deliver the necessary levels of affordable housing, claims there were “insufficient protections” in the proposals. Despite supporting the “Right to Require”, the NHF stated in its response that affordable housing provision should not be based on “competing political priorities”, but rather on “objectively assessed need”. It also went onto state that it was “unconvinced” it would deliver a greater share of uplift in value, in particular in lower value areas. While this ignores that lower value areas are vis-à-vis cheaper areas to live, its reasons for objecting to the proposals differed to those of the RTPI.

Gerald Eve, who did not sign the letter, set out in my opinion a considerably balanced briefing noted on the consultation, titled – “The Infrastructure Levy All a Little Fidd-il-y”. It highlighted the indication from the government that there would be a requirement for the system to deliver “at least as much” affordable housing as the current system. It notes the concerns from local authorities about the potential for the levy to deliver less affordable housing if receipts are focused on infrastructure provision. Albeit, if that is what a local authority deems a priority, in my opinion, should be the priority.

The HBF set out in its response that given the proposals would operate as a fixed charge it would lead to otherwise deliverable sites unviable, or result in a “significant volume” of sites paying less Infrastructure Levy than they could deliver. Output was argued on a “point of principle” would inevitably be lower than the amounts of affordable housing and CIL that could be delivered by the current system. It referred to work by BNP Paribas by way of RICS Infrastructure Levy workshops that illustrated this point.

Yet the RICS, who did not co-sign the letter of condemnation, did not mention this in their response. Nor did BNP Paribas appear to submit a response (at least not published at the time of this publication). But the HBF response has clearly got its principles wrong in what appears to be a sweeping generalisation.

Fundamentally, a shift towards a levy being paid out on occupation, rather than implementation, improves the viability of schemes. All things being equal. This is because capital requirements are reduced during the development period, which in turn leads to lower financing costs. In allowing developers to pay a levy out of capital receipts (i.e. recycled capital), rather than having to borrow or use up-front equity, it improves the viability of a scheme. If a scheme is more viable, all things being equal, then more affordable housing could be sought under a “Right to Require”. A levy based on the Gross Development Value is also more certain to determine. This is because the sales, no different to Stamp Duty Land Value Tax, is recorded through the Land Registry.

The HBF however claim that a fixed levy would make otherwise deliverable sites unviable. Yet it ignores how poorly negotiated S106’s also makes sites unviable. At present, we know 30%-40% of permissions lapse, with 10%-20% never materialising in a start. No research has yet been done into how poorly negotiated S106 have hampered otherwise viable sites unviable, although I know there is plenty of anecdotal evidence to that effect. In terms of suggesting that the levy would see sites not paying what they could under S106, such an argument ignores the upside that the levy provides.

Secondly on this point, a fixed levy would filter into land values. At present the negotiation entailed with S106, in large part over costs of a development, would shift to one determined by what has been achieved in the market. Yes there would be viability assumptions made in setting the rate, but this would be easily ascertained reviewing achieved sale prices in the relevant authority. No different to how any developer would look at it. In an economic environment where costs are rising and councils have little to base their negotiation positions on, a move towards a value-based levy should be more than welcomed.

A single digit percentage applied to Gross Development Value paid on receipt of capital, which may be heralded as uncertain, is no less certain than with what everyone else in the process has to live with. Local authorities’ ability to borrow would be no different to those lending to develop the asset in the first place, which is why I find those such as the Planning Officer’s Society complaining about council’s hypothetically borrowing against a development that has not gone ahead quite hard to believe. After all, most schemes that begin construction do go ahead to complete. Those that stall, after all stalls. In turn, meaning the likelihood of receiving the full amount of S106 receipts go up in a puff of smoke anyway. It would be down to the risk appetite of the local authority to determine to what extent, if any, they decide to borrow against future levy receipts.

It appears that Gove’s department have indeed fumbled the proposals. Uncertainty through trial runs bring nobody confidence. But it appears that much of the causes for concern laid out by the thirty unsupportive organisations are fraught with conflict and inconsistent arguments. The government after all was out for consultation on the Infrastructure Levy. I hope the civil servants can cut the wheat from the chaff but maintain a move towards a simpler more streamlined system as originally proposed.

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