The community infrastructure levy: A tax too far

Last week communities secretary Eric Pickles opened a new front on the government’s ongoing battle to get more homes built: the conditions attached to planning applications, which he says are making schemes unviable for developers to build. The plan he outlined will mean teams of advisers going along to local councils to help them renegotiate planning conditions (so-called section 106 deals) agreed at the height of the pre-credit crunch boom. “We simply cannot afford to have [sites] lying idle,” he thundered, “because of earlier agreements that are no longer viable.” There is also talk of dropping the requirement for affordable housing altogether, for the same reason. The publication of the government’s latest housebuilding stats reinforced the importance of the issue - in the last quarter there were just 21,540 starts, the lowest number since 2009, and a drop of almost a quarter on the same time last year.

Of course Pickles isn’t alone in wanting to address the woeful housebuilding stats - politicians of all colours are saying that if we can only fix this sector, then the economy as a whole might begin to claw its way back to growth. In short, housebuilding is regarded both as a potent symbol of the depths of the UK’s woes and, increasingly, its most likely cure.

And yet Pickles’ stance on planning conditions is, for some, deeply ironic. Because while he rails against restrictive planning conditions, he is nonetheless pushing ahead with the introduction of a whole new tax on development that, some say, could stop any potential recovery in its tracks. The community infrastructure levy (CIL) is attempting to formalise and replace large chunks of the loathed section 106, the mechanism through which councils charge developers for improvements to local infrastructure in return for granting planning permission.

The consultant’s report said that by the time the tax is brought in, house prices will be up by 3% and all will be hunky dory. When you’re making those kinds of assumptions, you’re in cloud cuckoo land

Roger Humber, HBA

However, as implementation of CIL gathers pace, and the first local tariffs have been published, a sense of confusion has emerged. Developers are reporting over-inflated rates and inconsistency between councils in the way they set the tariffs. There are disagreements about the wording of the regulations themselves. And some argue that the levy will allow anti-development councils to prevent housebuilding in their area. The crucial question for economists, politicians and the wider public is, are these just teething problems, or could the planning tax snuff out any nascent housebuilding recovery?

There are plenty of arguments in favour of CIL. Section 106 was always deemed complicated and confusing - agreements were reached on a site-by-site basis, which meant that negotiations were protracted, developers were never sure how much they would have to pay and councils were never sure how much they were going to get. CIL was supposed to bring greater certainty for both sides, with each council publishing a tariff of charges that would apply authority-wide.

Unfortunately, it isn’t working out quite like that. Far from bringing clarity, the birth of CIL has been a tortured process - conceived by the last government during an economic boom, then rejected by the Conservatives in opposition in favour of a simplified section 106, only to be unexpectedly revived by the coalition, with a few twists of localism added to the mix, and finally implemented in April last year.

How it’s set

So far, six councils have introduced the new planning tax and 50 more have published draft proposals of their rates. Although CILs are voluntary for councils, the likelihood is that all English and Welsh planning authorities will seek to implement the levy by April 2014, because after that date the use of section 106 will be limited to a maximum of five sites for any single piece of infrastructure. In other words, if councils want any serious new roads, bridges, health centres and so on, they will need to use CIL.

There has therefore been a flurry of activity to set rates, with local authorities employing consultants to calculate the levels of subsidy that development can support. But as the draft proposals have come in, housebuilders and developers have become concerned at the burden they place on them and the viability of certain schemes. Carl Dyer, a planning lawyer and partner at Thomas Eggar, points to the London mayoral CIL, brought in by Boris Johnson in April on top of local boroughs’ charges in order to help pay for Crossrail. “In the last working week before it came in, my firm managed to put through three planning agreements. Two of those schemes would not have happened if they’d had to pay CIL. One of them was going to incur a charge of £1.8m and the other one was something like £600,000. These are charges that were not sustainable to these developments.”

For housebuilders, the worries are magnified by the “tsunami” of extra costs the industry is facing at the moment, as Roger Humber, strategic policy adviser to the House Builders Association, puts it. These include the development of zero-carbon homes, as well as the pared-down section 106 that still exists - and which, if set too low, could seriously impede councils’ ability to provide affordable housing.

At stake, housebuilders stress, is not their profits but the viability of development at all. “If you get this wrong, then you get landowners saying this isn’t the time to sell my land because it’s too expensive, and housebuilding will start to slow up even more,” says Peter Andrew, director of land and planning at Taylor Wimpey. “It’s purely about delivery.”

Housebuilders’ are concerned about how the viability assessments calculate fundamental aspects of development economics such as land value, developers’ profit and house prices. Humber cites the example of the Greater Norwich CIL, which proposes a residential charge of £75-£115 per m2. “The consultant’s report said quite clearly that in current circumstances the CIL would be non-viable; however, it added that by the time it’s brought in, house prices will be up by 3% and all will be hunky dory. When you’re making those kinds of assumptions, you’re in cloud cuckoo land.”

Inspectors

There is also growing anxiety that independent inspections of councils’ rates are not robust enough - an issue of particular importance when cash-strapped councils are “inevitably going to push for as much as they can”, as Roger Hepher, head of planning at property consultant Savills, puts it. Following public consultation on draft charging schedules, they are examined by the Planning Inspectorate, which is supposed to make sure that they will support rather than harm new development.

However, Hepher describes the inspections to date as “rather muted affairs”, a point backed up by Jamie Sullivan, associate director of Tetlow King Planning. “The examiner’s reports I’ve read are very, very short, haven’t really said that much, and haven’t really recommended any changes either,” he says.

There isn’t a mechanism whereby developers can say, ‘Hang on, this rate has been set too high, it’ll never work on this particular site’

Liz Peace, BPF

Sullivan and Hepher agree that this isn’t so much the fault of the inspectors as the lack of guidance from the communities department. “CLG should look carefully at what’s happening,”says Hepher, “and encourage examiners to think hard about what the real-life implications are likely to be.”

Sullivan says his key message to clients is always to get involved as early as they can, “because it’s a lot easier to make changes earlier on than wait for the examination”. But part of the problem is that inspectors are finding it hard to determine categorically what those “real-life implications” will be when a single rate is being set across a whole borough. Islington in north London, for example, has proposed a residential CIL rate of £300 per m2, and this is the same in Finsbury Square, within the rarefied bounds of the Square Mile, and Archway, several miles away and much poorer.

Hepher suggests that councils could adopt a “more forensic approach, breaking boroughs down into smaller areas”. For example, in Wandsworth, where the CIL was brought in last month, the rate differs wildly depending on the ward - the Roehampton regeneration area has “nil CIL” on residential development, while at the prestigious Nine Elms district it is an eye-watering £575 per m2, in part to help fund the Northern Line extension to that part of the borough.

Localism

But this too provokes as many questions as answers. Dyer sees Wandsworth’s £575 rate as a precedent for councils looking to block all forms of housing development. He says: “The only logical reason why that rate is coming in on those selected wards is to make sure that no houses get built on them. And that’s not what [CIL] was designed to do.”

Dyer argues that councils will use CIL to favour the developments that they want, and that will be popular with local voters, rather than what they, and the wider UK economy, need. He points out that councils are using the flexibility inherent in CIL - which allows charges to vary between types of development as well as from borough to borough - to target housebuilding and large retail in particular. “A lot of councils are thinking, ‘Hey, big retailers make a lot of money, we’ll put a big charge on them’, and ‘Hey, housebuilders make a lot of money we’ll put a big charge on them’. They’re effectively asking those two land uses to subsidise all the others.”

This, he says, will create a “massive distortion” in what developments get built where - a problem that is further exacerbated by the piecemeal way in which CIL is being brought in. “If I’m a housebuilder and I have a choice between going to a borough that’s implemented CIL and is charging £200 per m2 and a neighbouring borough that hasn’t implemented CIL yet, all other things being equal, I’m going to go to the one that isn’t going to charge,” he says.

Not all CIL critics share the view that the levy is simply a boon to nimby councils. Steve Turner, communications director at the Home Builders Federation, says the real fight is to engage early with councils at consultations and, where this fails, challenge them at public inquiries.

The industry mobilises …

Developers and housebuilders are beginning to play their part in this fight. The first successful challenge to a CIL took place last month, when Sainsbury’s forced Poole council to drop plans to charge one of their superstores £200 per m2. Meanwhile, a group of major housebuilders, including Barratt, Taylor Wimpey and Linden, have collaborated on a £7m fighting fund, managed by the HBF, to contest inflated rates. In June, this challenged the CIL set for residential development by Bristol council of £50-£70 per m2 at a public inquiry (see box).

The challenge failed, but the HBF is continuing to target CILs that it believes are a threat to the viability of development. Taylor Wimpey’s Andrew says the next six months will be critical to the fighting fund as the rates set now will “set the precedent”. This is all the more important as the CIL regulations are currently non-negotiable and not open to review.

While this fight is going on at a local level, lobbying has been continuing nationally, with industry organisations asking the communities department to look again at certain regulatory issues outside of local authority control. The non-negotiability of rates is one of the major causes for concern, says Liz Peace of the British Property Federation. “There isn’t a mechanism whereby developers can say, ‘Hang on, this rate has been set too high, it’ll never work on this particular site.’”

In fact, this is just one of several regulatory quirks that are making the viability of development ever more shaky. Another is section 73 applications, which allow developers to alter existing planning applications. The concern here is that if a developer was given planning permission before CIL came into effect but needs to modify it subsequently, there’s a risk that it will attract CIL for the entire development rather than the small part it is changing.

There are also issues surrounding how charges work for net additional floorspace, potential double-charging in the grey areas where section 106 and CIL overlap, and blocks on developers providing infrastructure on their sites as payment in kind. The communities department has promised to tweak the regulations in the autumn. But many housebuilders think it needs to look more broadly at the whole issue of viability. “You may as well do the job properly, and review now exactly what the unintended consequences are going to be,” says Humber.

Whatever the communities department does come back with in the autumn, it seems the argument that CIL will bring clarity to the planning system might take longer to win.

BRISTOL: END OF ROUND 1

The Home Builders Federation’s challenge to the residential CIL charge set by Bristol council was the “first serious representation from the property world” against a CIL rate, according to Roger Hepher, head of planning at property consultant Savills, which advised the HBF at the public inquiry. A rate of CIL of £70 per m2 in the most affluent areas and £50 per m2 one the western side of the city had been proposed in a viability assessment carried out by BNP Paribas Real Estate, and this had been ratified by the planning inspector. But at a public inquiry in June, Savills argued that a rate of £30-50 per m2 was needed to make development viable in parts of the city that posed more difficult building conditions. At a public meeting in July, the council upheld the £50-70 per m2 rate. Roger Humber, strategic policy adviser for the House Builders Association, describes this as “a disastrous precedent”. “This is going to kill the kind of market that has seen a lot of redevelopment around Bristol’s old docks area [pictured below].”