A Potential New Development Tax
It has been widely rumoured that the Queen's Speech on 10 May will include replacement of both CIL and S106 developer contributions with a single flat-rate levy based on the final sales values of developments.
The development industry has had some time to acclimatise to the idea, with proposals for a replacement tax having been raised in the 2020 Planning White Paper, Planning for the Future.
February’s Levelling Up White Paper later confirmed hints from ministers that a greater uplift in land value generated by a planning consent would be achieved through some form of land value capture.
Land value capture is not a new idea: in the run-up to the 1909 general election, Winston Churchill gave a series of speeches which promoted the creation of a land value tax. He said, “Roads are made, streets are made, railway services are improved ...water is brought from reservoirs a hundred miles off in the mountains - and all the while the landlord sits still… To not one of these improvements does the land monopolist as a land monopolist contribute, and yet by every one of them the value of his land is sensibly enhanced.”
The proposal today, it seems, would replace CIL, S106 and the requirement for developers to include affordable housing within new communities with a set sum of money payable by the developer to the local planning authority, for housing and other uses.
I welcome a change to what, most would agree, is a broken system.
Private developers and housebuilders are not best placed to deliver affordable housing and most recognise this, either selling off plots allocated for affordable housing or working with an RSL as a delivery partner.
Furthermore, in the years that pass between a planning committee resolving to approve planning permission and a council signing the S106 agreement, market or legislative conditions have often moved on. This can have significant impacts on the financial viability of a development, which in practice often results in a scheme only becoming viable through a reduction in affordable housing.
And the replacement of CIL is long over-due. In its original form, CIL was intended as a straightforward and simple levy which allowed developers to budget for infrastructure payments at an early stage in the development process. However, when used in parallel with S106 agreements, CIL became overly complex. It does not yield the necessary funds to pay for the infrastructure needs and does not work well for larger strategic sites, particularly around ensuring that onsite infrastructure provided by the LPA is delivered in step with the development. For example, Boyer is currently progressing a new community of 2,000 homes at Orchard Grove in Taunton. The Council’s CIL 123 list identified education as a CIL item, and as such the provision of the new primary school on our site could only be delivered via CIL payments. As a consequence, to deliver the school the County Council was dependent on the District providing it with sufficient CIL receipts; the District was dependent on funding being available in its CIL pot; and the developer was dependent on this process happening expeditiously and in step with the delivery of the new homes.
The agreement of a set levy, which is expected to be ‘non-negotiable’, would reduce these last-minute, multi-party negotiations on both infrastructure and affordable housing, resulting in more certainty for local authorities.
Furthermore, assuming that the levy is to be based on final sales values, in a climate of rising land values, greater land value uplift could be captured for local authorities. Developers would have the benefit of ‘patient capital’ as a result of the payment being made on completion of the scheme. For local authorities, the delay in the payment being received would, according to recent news reports, be circumvented by new rules allowing them to borrow against future infrastructure levy revenues. This would provide the substantial advantage of enabling the development of infrastructure for major new settlements at an early stage. The question here is whether all local authorities will have the appetite to borrow against this fund, particularly as authorities can currently borrow against CIL funding, but some choose not to.
The challenge, at least for some local authorities, will lie in their ability to deliver affordable housing and other elements of infrastructure. The proportion of homes provided by councils has dropped, from 46% in 1977 to 2% in 2019. Local authorities have experienced years of under-funding which has resulted in the considerable reduction of their technical planning and architecture teams. Land ownership will be an issue for many: where appropriately located municipal land is in short supply, it will be necessary for councils to bid against private sector housebuilders.
Additionally the creation of new council housing estates will end the aspiration of ‘pepper-potting’ privately owned and affordable housing and consideration must be given to how the ‘ghettos’ of the 1970s can be avoided.
And there are many other issues. The introduction of any new tax would require cross-party support to avoid landowners simply waiting for a change of Government before bringing forward land for development (in the belief that a different government might repeal any new legislation allowing a greater future land price to be secured); the level of taxation must be set at such a rate with raises necessary funds without stymying the speculative land market; and local authorities will require the necessary skills to oversee the administration of the new levy. Furthermore, the financial benefit of any change may take some time to filter though, as much land around existing settlements is already tied up under option agreements.
It is yet to be confirmed whether the new levy would be imposed at a standard rate. This seems unlikely because of the considerable variety of land values across the country, but the determination of the levy at a regional or local level would be a considerable burden and could result in an inconsistent delivery of new homes across the country.
The major benefit of such a change is to untangle developers from the lengthy negotiations currently faced and deliver more certainty to local authorities – but there is a lot of detail to work through before this can be achieved.