UK: Community Infrastructure Levy

Last Updated: 14 May 2013

Article by Ian Ginbey and Laura Nation

The Community Infrastructure Levy ("CIL"), as introduced by the Planning Act 2008 (ss205-225) ("the Act"), is a tax (in all but name) on new development.

The mechanism by which CIL operates is detailed in the CIL Regulations 2010 ("the 2010 Regulations"), which took effect on 8 April 2011. Owing to various unanticipated issues arising with its operation, the Government introduced the CIL (Amendment) Regulations 2012 ("the 2012 Regulations"), which came into force on 29 November 2012 (taken together "the Regulations").

Whilst a local planning authority ("LPA") has discretion as to whether to collect CIL or to continue to secure contributions through planning obligations (i.e. pursuant to section 106 of the Town and Country Planning Act 1990 ("the Act")), it is likely that the vast majority of LPAs will move to the CIL model in due course. In particular, whereas Section 106 Agreements tended to be reserved for larger developments and were often subject to negotiation over their terms, CIL is chargeable on most development above a (low) minimum threshold and there are few exceptions available for developers seeking to avoid payment.

As such, CIL is set to be a major consideration for developers, investors and surveyors on future projects. Unfortunately, the calculation of CIL liability can be complex. This article is intended as a brief overview of this increasingly important area.

Developments liable to CIL

CIL is chargeable on any new building or extension, which creates over 100 square metres (or less, if the development involves the creation of a dwelling). CIL does not apply to planning permissions granted for a limited period and is not applicable to buildings into which people do not normally go.

Whilst any new build with more than 100 square metres of gross internal floor space will be subject to CIL, the gross floor space resulting from (i) a change of use and (ii) any existing building on a site which is to be demolished is disregarded where it has been in lawful use for a continuous period of at least six months during the twelve months before planning permission was granted. The 2012 Regulations have corrected a previous error in the formula which meant retained floor space was not properly excluded from the total CIL liability. Unhelpfully, the 2012 Regulations have not specified any minimum part of the existing building which must remain in use in order for the floor space of the whole building to be deducted.

Calculating CIL

CIL is calculated by reference to any increase in the square footage of gross internal floor space. The charge is calculated by reference to the time when planning permission first permits development. For outline permission, this is the date on which final reserved matters approval is granted. If outline permission is phased, each phase attracts CIL separately and in respect of a full permission, CIL will be calculated on the date on which final approval is given in respect of any pre-commencement conditions.

Charging schedule

The introduction of CIL is dependent on the relevant LPA adopting a CIL charging schedule, which is to sit alongside an up-to-date development plan. The charging schedule will identify the infrastructure on which CIL receipts will be spent, which is broadly defined to include roads, schools and open spaces, but not affordable housing, as this will continue to be provided through planning obligations. All planning permissions granted in London above certain threshold are subject to both the local CIL set by the relevant London borough and the Mayor's CIL.

Once the LPA has assessed the infrastructure necessary to support the development (and mainstream funding sources have been taken into account), the remaining funding gap will be met by CIL, expressed as a pound per square metre figure. Before being formally adopted, the rates and zones set out in the charging schedule will be subject to consultation with interested parties and be approved by an independent examiner.

When and by whom is CIL payable?

Any party can assume liability for CIL by serving "an assumption of liability notice" on the collecting authority prior to commencing development. Once works begin to implement a development, the party who has assumed liability must then serve a "commencement notice," which triggers the charge to CIL. The collecting authority will then send to the applicant, the owner and any party who has assumed liability, a Liability Notice specifying the amount payable and providing a 60 day payment window. The assumption of liability notice can be withdrawn prior to commencement or transferred before the final payment is due. The liability is registered as a local land charge and will pass to successors in title.

Where no one has assumed liability for the levy, liability vests in the landowner by default (which includes any leaseholder with a residue of over seven years) upon commencement of development. Where there is more than one freeholder/leaseholder then the LPA will apportion liability between owners according to the value of each interest. Purchasers will want to ensure that the assumption of liability is clearly dealt with in advance of the transfer of land as any unpaid CIL relating to development already carried out could be imposed on them.

Relief, exemption and payment-in-kind

The Regulations grant full relief from CIL where the chargeable development will be used wholly or mainly for charitable purposes. Relief is also granted on those parts of a chargeable development, which are intended to be used as social housing. This relief is subject to a "clawback" provision if the development no longer qualifies within seven years of commencement. The 2012 Regulations have amended the formula used to calculate social housing relief to ensure it is not wrongly credited to developments.

Charging authorities also have discretion to grant relief in "exceptional circumstances" where the cost of complying with the existing section 106 agreement relating to the chargeable development is greater than the CIL payable, such that paying the full CIL charge in addition to the s106 contribution would threaten the development's viability.

The Regulations also permit charging authorities to accept transfers of land and existing buildings as payment for CIL provided that the intention is to use the land for infrastructure to support the development.

Enforcement

In addition to surcharges and interest for late payments, LPAs can issue a Levy Stop Notice, which prohibits development from continuing until payment is made or seek a court's consent to seize and sell assets of the liable party. In extreme circumstances of non-compliance, the liable party may be subject to a short prison sentence.

Differential residential CIL rates

Rates of CIL aim to reflect the balance between the desirability of funding infrastructure and ensuring they do not put the viability of development at risk. The Regulations provide little guidance on how the balance should be struck.

The Guidance to the 2012 Regulations published on 14 December 2012 ("the 2012 Guidance") recognises that LPAs may decide to set differential CIL rates by reference to specific geographic zones or intended uses of development provided the viability evidence supports this. A review of charging schedules currently proposed and adopted by LPAs suggests that differential charging rates are being used by LPAs to maximize revenues from high value areas. For example, the London Borough of Wandsworth's charging schedule imposes a small number of differential rates for specific zones in its area. Adopted on 11 July 2012, its charging schedule sets a levy of GBP 575 per square metre for the residential development in the riverside area of Nine Elms, in comparison to GBP 250 per square metre levied in other areas of the authority and a zero rate for Roehampton. Whereas the London Borough of Redbridge has opted to charge a flat rate of GBP 70 per square metre, to ensure overall viability of development throughout the authority, regardless of use or location.

The CIL rates proposed by some LPAs also seek to distinguish between types of residential development. By way of example, Plymouth Council's revised draft charging schedule suggests a zero rate for high-rise (6 storeys or more) residential developments in the city centre, which have notoriously high build costs, whilst purpose-built student accommodation which have the potential for long-term rental income, attract a rate of GBP 60 per square metre. It is clear that ensuring viability remains a significant issue for residential schemes in many areas. It appears entirely for the LPA to decide how much infrastructure costs it wishes to recover, and the Regulations seem to offer no opportunity for developers to challenge these rates even if these are based on a series of high-level assumptions by the LPA.

CIL and s106 Agreements

To avoid a situation where the developer pays CIL and is also asked to contribute to infrastructure through a s106 agreement, Regulation 123 requires LPAs to publish a list of the items or types of infrastructure it intends to fund through CIL. The LPA cannot then seek the provision of, or contributions towards, those items through S106 obligations. However, to cater for instances where the CIL raised is likely to be less than the value of s106 obligations, LPAs can publish a Regulation 123 statement on their website, which exempts certain infrastructure from CIL funding.

Since the introduction of the Regulations, the scope of Section 106 agreements has largely been restricted to focus on site-specific mitigation measures, such as affordable housing. Regulation 122(2) places on a statutory footing, the policy test previously contained in Circular 05/2005. It is now unlawful for a planning obligation to constitute a reason for granting planning permission, if it is not: (i) necessary to make the development acceptable in planning terms; (ii) directly related to the development; and (iii) fairly and reasonably related in scale and kind to the development. These now mandatory legal requirements have the potential to allow developers to argue as to the lawfulness of certain financial obligations.

The Regulations acknowledge that there is a transitional period for scaling back s106 obligations. At present, pooled contributions may be sought from separate planning obligations for larger scale infrastructure projects. However, on the local adoption of a CIL charging schedule, or nationally after 6 April 2014, LPAs will no longer be able to pool contributions under planning obligations from more than five developments toward a particular infrastructure project or type of infrastructure. The limited ability of LPAs to pool contributions will force a greater proportion to adopt the 'optional' levy.

However, the role of planning obligations may not be as circumscribed as the Regulations suggest. Notably, the 2012 Guidance acknowledges the continued role of s106 agreements and seeks instead to ensure LPAs are more transparent with developers as to what they are expected to pay for and through which route. The 2012 Guidance is a welcome attempt to (amongst other things) encourage LPAs to tie their Regulation 123 lists and section 106 policies to the examination stage and to clarify those matters for which a s106 contribution will be sought. However, in practice, there is still a risk that developers may find themselves in a position where they have to pay via both s106 and CIL to ensure the provision of adequate infrastructure. Entering into a s106 agreement, pursuant to which both parties covenant to provide infrastructure to a particular timescale gives developers the confidence to bring sites forward for development. In contrast, there is no guarantee with the CIL regime that the money spent on CIL will lead to the delivery of infrastructure necessary for a particular development; it could be used to fund infrastructure anywhere in the authority's administrative area. Further, under the CIL regime, the responsibility for delivering this infrastructure rests with the LPA, which brings with it the obvious potential for development to be held back. In the short term, the potential for double-payment is very real and could serve to make many sites unviable for development, particularly when in the current economic climate the additional costs cannot realistically be added to house prices.

The 2012 Regulations

The 2012 Regulations were brought into force to amend the largely unintended consequences of the 2010 Regulations. Notably, the 2010 Regulations provided that when an application is made to amend a planning permission pursuant to s73 of the Act, full CIL liability is triggered for the whole floor space of the development, even if it has been paid on the original permission or if a charging schedule has come into force since the date of the original permission. This is because a s73 consent comprises an entirely new permission attracting its own CIL liability.

The 2012 Regulations provide that where an application is made to vary a consent, which was granted before the LPA has introduced CIL, the CIL liable is that chargeable on the s73 consent minus the CIL that would have been payable on the original permission (using the charging schedule in force at the time the s73 permission is granted for calculation purposes). If a charging schedule is in place both at the time of the grant of original permission and when the variation to the permission is granted and CIL has already been paid, this amount can be credited against the amount due, so that CIL will not be payable twice for the same development. The 2012 Regulations also confirm that CIL will not be payable on planning permission replacing extant and unimplemented permissions granted before 1 October 2010. Taken together, these are largely common sense amendments to the Regulations which should help to achieve implementable planning permissions.

As a nod to the introduction of the Localism Act 2011, the 2012 Regulations extend CIL liability to those developments consented under a Neighbourhood Development Order, and provide that funds raised by CIL can be spent on the operation and maintenance of infrastructure and not just initial capital expenditure. Proposals the Government consulted on at the end of 2011, namely the requirement on LPAs to pass a "meaningful proportion" of CIL to neighbourhood bodies and proposals to allow LPAs to use CIL to provide affordable housing, have been omitted.

Summary

The introduction of CIL was intended to be a more transparent and predicable regime than the current system of planning obligations. However, the complexity of the Regulations means that ascertaining the potential costs of development at the outset will remain a challenge. The use of difficult formulaes, the ambiguities surrounding the discounts in respect of existing buildings in lawful use, and the tension between CIL and s106 agreements will make it difficult to assess the planning gain of any prospective development. It remains to be seen whether the CIL regime will strike the right balance between securing the provision of local infrastructure and setting rates at a level that does not hinder development.

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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