Replacing s.106 - the road ahead

08 December 2020

The Government’s planning white paper sets out proposals for a consolidated infrastructure levy designed to replace negotiated s.106 Agreements and the locally set Community Infrastructure Levy (CIL).

It aims to address:

  • delay and uncertainty in outcomes which “diminishes trust…and reduce[s] the ability of LPAs to plan for and deliver necessary infrastructure”;
  • the protracted negotiation of planning obligations, particularly for smaller developers; and
  • the inflexibility of CIL to account for market changes between planning permission and the date for payment.

Calculating the new levy

Under the new proposals the payment is calculated by reference to a proportion of the uplift in land value or an assessment of the sales value (where the development is not sold). Presumably the value will need to be agreed by the local authority and one or more developers and valuers which could perpetuate lengthy and costly negotiations and undermine one of the key reasons for departing from the s.106 approach.

In seeking to address what the Government calls “uncertain and opaque” planning obligations, the revised basis for developer contributions may, from a developer perspective, compound such shortcomings. Developers would no longer have up-front visibility of their required contribution resulting in a lack of cost certainty.

To preserve viability of low-value developments there will be a minimum threshold under which no levy will be charged. However, there are concerns that the revenue raised will be insufficient to support social infrastructure and that the exemption for smaller sites will protect developer profits without prioritising community requirements.

Depending on tax structuring and GDV, increased value-capture will likely result in developers making larger payments than under the current regime and will need to be balanced against viability, particularly for developers focusing on higher value areas. Furthermore, the new tariff will be set at a national level which will fail to take into account local constraints/viability considerations.

Replacement of s.106 agreements

Section 106 agreements do not only address developer contributions but also important matters such as sustainable travel. It is unclear where those additional elements will sit following introduction of a single developer contribution. For developers, the use of s.106 agreements captures reciprocal legal obligations from the relevant local authority. This comfort may be lost if they are replaced by the new levy without sufficient supporting legal documentation.

If infrastructure is not going to be delivered by developers via the s.106 route will local authorities be expected to carry the burden? The requirement for infrastructure delivery (off and on-site) will need to be woven into any requirement for payment and both must be balanced so as not to deter development.

It is intended that the streamlined process will encourage prompt spending on infrastructure by local authorities. Developer contributions would be levied at the point of occupation to “incentivise local authorities to deliver enabling infrastructure, in turn helping to ensure development can be completed faster.” However it is unclear whether such incentives would be enough to overcome other historic factors which often inhibit speed (i.e. under-resourcing).

It is proposed that councils may have more freedom as to how the levy is spent, i.e. for the reduction of council tax. If councils can allocate levy funds for non-infrastructure purposes what assurances are there around infrastructure delivery and does the new levy simply amount to a general tax on developers?

The new levy will be payable on completion (point of occupation) of a development rather than prior to commencement of construction. This will assist in alleviating developers’ cash flow concerns but as a result local authorities will find themselves responsible for funding any infrastructure required at the start of a development. To address this shift in financial burden the new proposals will allow local authorities to borrow “against Infrastructure Levy revenues so that they could forward fund infrastructure.” Local authorities are expected to “assure themselves that this borrowing is affordable and suitable” however given that certain local authorities are already chronically under-resourced they simply may not have capacity to properly deal with such additional responsibility.

Related matters

The Government intends to deliver the same amount of on-site affordable housing (if not more) via developer contributions. Affordable housing providers currently obtain a discount to market rate secured by a s.106 planning obligation. The new proposals offset the discount from market rate “from the final cash liability to the Infrastructure Levy.” The intention being to incentivise developers to build on-site affordable housing. The paper suggests that a s.106 planning obligation could still be used to secure a covenant on the land but with the value captured through the Infrastructure Levy - although a practical solution, this seems to contradict the move towards a consolidated approach.

If the new levy is applied across the spectrum of land uses it may encourage less brownfield and greater greenfield development, which avoids costs for remediation. The white paper does however promise that the “reformed planning system will continue to protect the places of environmental and cultural value.”

On its introduction, CIL was intended to replace section 106 agreements. However we currently have two imperfect methods of securing development benefits; both of which have well-recognised flaws. On the face of it, it appears the new infrastructure levy may lead to its own set of uncertainties but whether these proposals remain intact following the consultation remains to be seen with the devil in the detail of any draft legislation.