The Year of the Community Infrastructure Levy

January 31, 2012

Debates over viability and value ­capture are an inevitable part of planning in a cool economic climate. The Community Infrastructure Levy (CIL) is the latest attempt to capture land value in the planning system. Although CIL started life as a measure to broaden the base of those contributing to the costs of the infrastructure required to support development, it has led to a debate about who reaps the benefits, and who bears the costs, of the allocations the system makes.

What is CIL and why does it matter?

CIL is a charge that local authorities may levy on new development in their area. CIL was originally introduced (under the Planning Act 2008) to be spent on providing infrastructure to support development, but can now be spent on maintaining and operating that infrastructure too. Section 205 of the 2008 Act confirms its overall purpose as ensuring the costs of infrastructure, to support the development of an area, can be met (wholly or partly) by owners or developers of land in a way that does not make development of the area economically unviable (italics added by the Localism Act 2011).

CIL was intended to enable more money to be raised to fund infrastructure than Section 106 agreements legally allow (see below). The CIL Final Impact Assessment (CLG, February 2010) revealed that only around 6% of permissions make s106 contributions. As well as offering a source of extra funds (estimated by the last government as £700m per year), CIL should also offer a more certain and transparent basis for developers to price schemes.

CIL controls

In preparing to adopt CIL, charging authorities must comply with the regulatory requirements as modified by the Localism Act, including the appointment of an independent examiner (see below).

The process is relatively straightforward (see below). Charging authorities must decide the appropriate balance between infrastructure gap funding and development viability in their area and "how much" potential development they are willing to put at risk through the imposition of CIL.

Following the Localism Act's reforms to the CIL regime, the examiner's role is to consider whether the charging authority has complied with the "drafting requirements" under Part 11 of the 2008 Act and the CIL Regulations 2010. In particular, by using evidence to identify the infrastructure funding gap that could be met by CIL, to determine whether an appropriate balance has been achieved.

The Localism Act now confirms that development must still, overall, be viable, and there must be appropriate evidence confirming that development of the area, in line with the up–to–date development plan, has not been put at "serious risk". Government guidance dictates that in considering whether the development plan and its targets have been put at serious risk, examiners should only consider whether the proposed CIL rate will make a material or significant difference to the level of risk (on the basis that the development plan and its targets could already be at serious risk in the absence of CIL).

Any recommended modifications to the draft charging schedule made by the examiner will no longer be binding on the charging authority, unless it is rejected for adoption. Even then, the Localism Act reforms mean that an authority may find its own route to redemption and correct errors itself to enable adoption.

Crucially, with limited exceptions, CIL is non–negotiable (see below). As a result, and in combination with s106 ­continuing to cast a shadow on appraisals, the development sector is recognising the importance of both collaboration in, and thorough scrutiny of, the CIL setting process.

Frontrunners

On 1 December 2011, Newark and Sherwood District Council adopted the first CIL charging schedule. The council is now authorised to charge new development at its published rates. As a result, it may no longer treat any s106 obligations that secure infrastructure on its published list as a reason for granting consent. Similarly, it cannot take account of more than five post–April 2010 contributions to the same infrastructure as a reason for approval.

This is intended to inhibit, if not prevent, planning authorities asking for planning contributions to infrastructure that should be paid within CIL. Once regulations (via the Localism Act) come into force, charging authorities must also pass a "meaningful proportion" of CIL receipts to parish councils.

Other frontrunners are close behind (see below) and include the mayor of London. If mayoral CIL is adopted in April, development in London boroughs will be charged at £20 to £50 per m2 to raise £300m for Crossrail until 2018. In setting their own CILs and applying s106, boroughs will then have to factor in the overall effect on development viability. In many areas (including those that gain little directly from Crossrail), the impact will be significant. The mayoral CIL is expected to net around £40m per year and Croydon's emerging charge is expected to take its planning–related receipts from £2m (via s106) to £7m per year. Because CIL will not replace all s106 requirements, there is every reason for those interested in delivering development to scrutinise the charge–setting process.

Lessons learned

The frontrunners have already shown that there are good reasons to be vigilant. CIL rates may be differentiated by type of use and by area. The guidance says such differences must be restricted to viability reasons alone. At Newark and Sherwood, the examiner rejected differential rates for "large" and "small" retail units without "a very clear viability justification" for such rates, that "could be said to unreasonably favour smaller retailers over larger ones and/or constitute a policy decision by the charging authority to support smaller units".

The mayoral CIL is a further example of the difficulties that can arise where insufficient attention is paid to the rationale for the amount of infrastructure for which CIL is to be used and the reasons for setting differential rates. The guidance confirms that, in identifying the cost of infrastructure they wish to fund from CIL, charging authorities "will want to" consider what additional infrastructure is needed in their area to support development and what other funding sources are available. The mayor's charging schedule sets out to fund the whole of the costs of Crossrail from CIL and will require all boroughs to contribute, regardless of their relationship to the Crossrail infrastructure.

Two main issues arise from this. First, whether adequate attention has been paid to the desirability of funding either the whole or just a part of the Crossrail cost from CIL. Second, where different charges are levied in different areas, there needs to be clear evidence that there are no state aid issues. While the relationship between development in an area and Crossrail might have justified different charges, the mayor rejected this approach as a basis for setting differential charges. He is instead relying on house price differences as a proxy.

CIL is payable in one hit, unless charging authorities adopt a statement allowing payments by instalment. Unhappily, the statement is not considered in the CIL setting process and can be changed or reviewed at any time. An issue highlighted as part of the mayoral CIL examination is the oddity that where there is a borough instalment policy in place, this may govern, even if the mayor had already published an earlier conflicting one. This potentially gives real power to the boroughs, which could publish an instalment policy that dictates the payment timetable for the mayoral CIL.

Future of Section 106

Section 106 obligations will not die. Evidence suggests they will be reborn, as authorities ensure they have clear policy justification (in local plans and supplementary planning documents) for site specific mitigation and "softer" types of contributions (ie, those not within the scope of CIL, such as employment and training contributions).

The regulations introduce an event horizon for s106. Once CIL is adopted, planning obligations must not be a "reason for approval" where they concern things on an authority's published r123 infrastructure list. Nor may they be a reason for approval if they seek to pool more than five CIL–able obligations (including those since April 2010). For authorities that have not adopted CIL, similar restrictions will apply after 6 April 2014.

As well as participating in the CIL process itself, developers and their advisers will therefore need to monitor this use of policy to avoid "double dipping" – being asked to pay under CIL and under planning agreements. At the same time, authorities will need to be careful about what they include on their published infrastructure list. For every type of development it mentions, s106 is intended by the Department for Communities and Local Government to be unavailable under regulation 123(2). Being very specific and limited about the projects mentioned preserves the ability to use the full range of powers where appropriate.

Further consultation

The government has recently consulted on further reform of the CIL regulatory framework. We wait to see how it will legislate to pass money that was intended to deliver essential strategic infrastructure to neighbourhood bodies. The option to re–introduce affordable housing as a category on which CIL can be spent also raises some difficulties. In practice, it is likely that although more cash would be raised, less affordable housing, and less mixed–tenure developments, would result. That would be a poor planning outcome.

Continuing weaknesses

Several areas need further reform. First, the regulatory framework should work to secure delivery of infrastructure. At the moment it does not – authorities may simply pass on CIL receipts, even if they are not actually used to deliver infrastructure. Similarly, developers should be entitled to expect that Grampian conditions (restricting development until delivery of specific infrastructure) will only be permissible where they match timescales in the authority's delivery programme.

Second, far better guidance is needed to assist promotion of area regeneration by setting CIL at a level that will boost investment. The guidance currently states that differential rates "need to be justified by reference to the economic viability of development". Given the regulatory context, that is not surprising, but the statement in the guidance that "charging authorities should not set differential rates by reference to the costs of infrastructure, either in different zones or for different classes of development" is policy, not law. An allocation of CIL based on impact, or other patterns that do not directly stem from viability differences, is legally permissible. In some cases it will be entirely sensible.

What differential rates must not do is fall foul of the state aid rules that generally prohibit selective advantage being conferred on economic undertakings. The recent preliminary charging schedule for Croydon, for example, will need to include far greater justification for the "central area" rate it proposes.

Authorities can accept "payment in kind" for CIL liabilities and the previous minimum threshold (£50,000) has been removed. However, the credit is still only the value of land transferred (and not the cost of any works that have been undertaken).

Conclusion

CIL has changed since 2008. It was meant to broaden the base of contributors to infrastructure and ensure that even developments with small impacts contribute. It was also meant to ensure infrastructure delivery and wipe out planning agreements other than for affordable housing and site–specific obligations. Although CIL ensures broad–based contributions, payment is normally on the basis of ability to pay, rather than being broadly related to the infrastructure needs generated by that class of development. Although not a charge "to the margins of viability" (at least not yet) it has moved away from an impact fee towards a value–capture mechanism.

It offers no comfort that the infrastructure needed to support development will actually be provided. Indeed, that aim has been undermined as money can be diverted to operation and maintenance of infra­structure, and part will be paid across for the use of local communities. The proposed protections against "double dipping" are not wholly effective. Disappointingly, a raft of CIL charging schedules and arrangements are being put in place that deliver too little. With relatively limited changes, CIL could be made to work far better.

Originally published in Estates Gazette, 28 January 2012.