UK: Community Infrastructure Levy - A Tax On Development

Last Updated: 15 November 2012
Article by Martin Courtney and Colm Egan

CIL is a new levy that local authorities are empowered, but not required, to charge on new developments in their area. CIL is, therefore, a tax on development.

Money raised by the community infrastructure levy (CIL) can be used to support development by funding infrastructure that the council, local community and neighbourhoods require. Currently, only six authorities are charging with three more to follow shortly. However, the expectation is that 50% of local authorities will adopt the CIL by April 2014. That said, many have yet to start any detailed work on how they will be dealing with the levy. London, on the other hand, is well ahead of the curve.

Certainly one criticism of CIL is that the money raised goes into a general pot which can be spent on projects unrelated to the development concerned. CIL is, however, intended to be a fairer approach to infrastructure funding in contrast to section 106 agreements, which are perceived to be negotiable and arbitrary, but whose benefit is directly linked to the relevant development.

Rates of CIL (known as the charging structure) are set by the relevant local authority and based on a funding gap, calculated with reference to their own infrastructure plans. The rate bandings for CIL may be zoned and will typically be different for residential, retail and other. The proposed rates are published in advance and have to be approved locally after consultation. CIL has passed largely under the radar so far but will be a significant cost, which one way or another will be passed onto the end user. Wandsworth has caught the eye recently with a proposed CIL rate for residential developments of £575/m2.

The legislation is structured along similar lines to normal tax legislation, with rules about scope of tax, charging mechanism, collection and administration. The key elements are as follows.

  • CIL is calculated with reference to the increase in gross internal areas of the proposed development from what is currently on the site. The result of this is 'net area chargeable' which is then multiplied by the relevant rate (£/m2).
  • The default position is that the liability sticks to the owner of the land, or leaseholder, if leasehold interest is greater than seven years. Liability can be transferred to a nominated third party.
  • The liability arises upon grant of planning permission, and will be collected upon commencement of the development.
  • Payment is upfront, but there is an instalment payments regime available dependent on size of the CIL charge.
  • There are defined rules for notification of relevant events, and a comprehensive system of penalties for non-compliance.

Key themes

Despite it being very early days, some common themes regarding CIL are already arising.

  • The obvious point is to secure planning permission as soon as possible before CIL is adopted locally.
  • Because CIL is broadly levied on an increase in internal floor space, CIL will be more expensive for zero-base greenfield sites and seems to favour brownfield developments with existing buildings that may need to be demolished.
  • Property rates must have been paid on the existing building on the site to be taken into account for the purposes of the CIL calculation.
  • There are real concerns of double CIL charges. CIL liability is triggered on grant of planning consent but subsequent minor amendments to the scheme requiring consent can trigger another CIL payment. This has been pointed out and a draft regulation is to be considered to correct this, though it may only apply from the date the regulation is approved.

Exemptions

There is discretionary relief from CIL in exceptional circumstances, but the indications are that this relief will be used sparingly. There was some hope that section 106 agreements might alleviate the CIL burden, but that seems to be fading fast. There are also specific exemptions from CIL for charitable concerns and affordable housing which, given the absence of grants, and with the figures now being offered by housing associations for the section 106 affordable element, is just as well.

Understanding the implications and conclusions

CIL is with us even though most local authorities are still behind with their core strategies and charging structures. This means CIL will not be in place for many authorities for a while. However, there will be a number of areas to consider.

  • Timing will be key. Planning departments can expect a pre-CIL surge of applications.
  • For accountants: project funding, cash flow profitability forecasts and pricing decisions will need to take into account CIL.
  • For tax advisers: there may be CIL mitigation strategies, and the interaction with the other mainstream taxes has to be considered. Company auditors will need to be mindful of recognition of CIL liabilities in the accounts.
  • Measuring existing internal space (the denominator in the CIL liability calculation) is not normally considered important in planning applications, but will become significant.
  • There are a number of notifications and compliance obligations which will occupy the accountants and lawyers.
  • There will be a steep learning curve with local authorities and collecting agencies as they become familiar with CIL.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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