The proposed new levy, designed to replace section 106 agreements and the CIL, is now to be stuck in pilot phase for a decade. What does this mean for developers?

The infrastructure levy is part of the sweeping reforms to the construction sector being introduced by the Department for Levelling Up, Housing and Communities (DLUHC). It is intended to largely replace the use of section 106 agreements and the community infrastructure levy (CIL). While the levy has its pros and cons, perhaps the biggest problem now is the extreme slowness of its implementation.

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The DLUHC issued in March a consultation paper on the infrastructure levy. Its executive summary says the government鈥檚 intention is to ensure that local authorities receive a 鈥渇airer contribution of the money that typically accrues to landowners and developers鈥to] support funding for the infrastructure 鈥 affordable housing, schools, GP surgeries, green spaces and transport infrastructure鈥. So, this is a tax on development.

Importantly for developers, the infrastructure levy will be calculated on the basis of the value of a development at completion or the point of sale, unlike CIL which is based on the square footage of the development and payable within 60 days of the commencement of works.

The government anticipates the cost of compliance will be absorbed by the sector through discounted land prices

As the paper explains, the government intends that the new levy will not be charged until after a scheme is completed, to maximise tax returns to the Exchequer, and local authorities will be entitled to require affordable housing provision in lieu of payments as a new 鈥渞ight to require鈥.

However, it is uncertain whether the infrastructure levy will be charged immediately upon completion (perhaps practical completion, in which case, the vagaries of that term may provide developers with some flexibility) or upon the sale of the units (which would assist developer cash flow). The consultation paper suggests it will be charged provisionally 鈥渃lose to scheme completion鈥 and then a 鈥渇inal adjustment鈥 will be charged 鈥渙n completion鈥.

Section 106 agreements will only be retained in respect of the largest and most complex developments or where buildings are not the main focus of development, for example, in the mining of minerals. It is anticipated that charging authorities will be given the discretion to create different 鈥渃harging zones鈥.

The consultation paper attempts to justify the infrastructure levy鈥檚 existence by arguing that developers will be able to 鈥減rice the value of contributions into the value of the land and for levy liabilities to reflect market conditions鈥. In other words, the government anticipates the compliance cost will be absorbed by the sector through discounted land prices. The sound of developers groaning at that suggestion will no doubt be heard in Westminster.

Greater thought is needed on how government will ensure it meets its ambitious building targets while raiding developers to bolster its coffers

A key issue for some developers will be whether or not the final legislation enables certain brownfield sites to qualify for an exemption where otherwise paying the infrastructure levy would render the development unviable. The extent to which such an exemption would apply has not yet been set out 鈥 but, clearly, greater thought is needed on how government will ensure it meets its ambitious building targets while raiding developers to bolster its coffers.

The abandoning, at least in large part, of section 106 agreements is a positive for developers, who are often frustrated by the delays caused by negotiations with local authorities and unnecessarily complex conditions upon which developments are granted consent. The question is whether the proposals offer something better.

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It will not be lost on developers that any increased cost of meeting the infrastructure levy compared with the current regime will be exacerbated by new energy performance certificate regulations, the Minimum Energy Efficiency Standards, inflationary pressures on materials and labour, and interest rates at their highest in a decade. Something has to give. The government says landowners will take the hit, which will be offset by discounts on the price of land. If that does not happen, the pace of development is likely to slow significantly as developers struggle to identify viable schemes.

The consultation paper accepts that reform of the scale anticipated by the proposals represents a substantial change for housebuilders, local authorities, registered providers of affordable housing and other participants in the construction sector. As a result, the government announced an intention to phase in the infrastructure levy through a 鈥渢est and learn鈥 process over a period of several years 鈥 in fact, this has now been coined an 鈥渆xtended鈥 pilot phase that will take 10 years.

Developers may boycott certain areas to avoid early-implementing local authorities, stifling much-needed new housing

Yes, that鈥檚 right, 10 years. In consequence, developers seeking to progress schemes in certain local authorities will be hit by the infrastructure levy almost immediately, while it remains inapplicable in others. Developers may boycott developing in certain areas to avoid early-implementing local authorities, stifling development and much-needed new housing in those areas.

Kicking full implementation into the long grass, particularly with a government facing a challenging general election in 2025, does raise concerns as to whether the infrastructure levy will become reality. This is particularly so given Labour鈥檚 voiced opposition to the proposals. Matthew Pennycook revealed on Twitter in February that 鈥渁 wide range of organisations have concerns about the government鈥檚 new infrastructure levy and rightly so because it will secure less affordable housing and infrastructure than the current system. A Labour government would not take it forward.鈥

Political uncertainty, an 鈥渆xtended鈥 pilot phase and a complex new system. It feels like this is the wrong time to be introducing such reforms, which may, in the usual way, reappear in a different form under a new government or simply be abandoned. Either way, there is uncertainty in the construction market, which given the other challenges that it faces at the moment, is unwelcome.

John Wallace is a director at specialist construction and real estate law firm Ridgemont