Nationalisation of development land is hindering home building in Britain

 
Graham Chase

THE Community Infrastructure Levy (CIL) regulations quietly dropped on the doorstep of land owners on 6 April 2010, with the property industry greeting the arrival with a weary “here we go again”. Taxes on the development of land, to pay for infrastructure needed as the result of development, have failed dismally on three previous occasions. This time looks to be little different.

The Development Charge at 100 per cent of “Betterment” under the 1947 Planning Act, the reduced Betterment Levy under the 1967 Land Commission Act, and finally the Development Land Tax (DLT) under the Community Land Act 1975 and Development Land Tax Act 1976 all failed spectacularly. The betterment levy raised £46m – less than it cost to implement. The Development Land Tax is rumoured to have been paid by only one party, a state-owned enterprise.

This fourth attempt to nationalise development land is an upfront tax, payable at the start of development, and charged by local authorities by the square metre. The tax can be as high as £265 per square metre in some boroughs, and is not sensitive to viability, construction costs, or returns. In London, the mayor applies a separate CIL, on top of borough levies, at between £20 and £50 per square metre. If the combined CIL is £115 per square metre, the levy on a standard 70 square metres two bedroom flat would be £8,050.

But alongside the burden of an upfront cost, the practicalities of CILs are also causing difficulties. The regulations are complex, poorly-drafted and open to interpretation. They are applied differently in different boroughs, causing delays and disputes. They have been amended three times, with a fourth series of amendments due next January.

Once a charging schedule is adopted, there is an absolute liability to pay the full CIL unless a relief applies. But reliefs are complex, frustrating and inconsistently applied. There is social housing relief for affordable homes that meet relevant criteria. But there are clawback provisions if the home ceases to qualify as “affordable” within seven years of starting development. This raises issues as to who should repay, who could be liable (the developer, the provider, the owner), and whether the audit processes are in place to ensure the CIL is repaid.

Discretionary circumstances relief is also available. Again, the legal requirements are frequently misunderstood and, if wrongly applied, development can be hindered on viability grounds, despite the purpose of the relief being to ensure viability is promoted.

Viability is supposed to be at the heart of the CIL. But unless exceptional circumstances relief is properly applied, the combined effect of mayoral and local CIL liability could be a barrier to development, as the collecting authority has no discretion to disapply the CIL. The CIL becomes a rigid cost and determines a development’s viability. There are now reports that developers are not proceeding with schemes because the CIL has pushed projects into the red. A tax that should be levied on development is preventing that development from taking place. This is exactly where we were in 1976 with DLT.

And as the CIL takes first call on any planning gain pot, Local Planning Authorities lose some of the flexibility they once enjoyed to determine what it could be spent on. In London, there is a double effect. The mayoral CIL has first call on the pot, the local CIL takes the second slice. Only once these levies have been satisfied can any of the pot be directed towards the funding of affordable housing, for example.

Previously, local authorities and developers entered into a contract for “planning obligations” to decide what a developer should pay for, and when it should be delivered. But the CIL’s one-size-fits-all approach fails to account for individual site circumstances or market conditions. While CIL charging schedules have to be backed by evidence in the form of a viability assessment, this assessment only looks at generic characteristics. Viability assessments are often based on assumptions resulting from anecdote, not evidence.

Current CIL levels may prove to be undeliverable, and local authorities will have to reassess what can be charged, while achieving an appropriate balance of planning gain priorities like affordable housing. But in the meantime, the UK will have lost the race to provide the housing it desperately needs. In London, 400,000 extra homes will be needed over the next decade, with 250,000 required as quickly as possible. Yet as an experiment, the CIL will take years to adjust.

It is too early for any substantive body of empirical evidence on the effect of these changes, but it is logical that the delivery of affordable housing will be worst affected. Perhaps government should learn that, if supply is to be increased, state intervention has a record of doing precisely the opposite.

Graham Chase is senior partner of Chase & Partners, president of the Association of Town & City Management, and a former president of RICS. He wrote this article with Andrew Haynes, associate at Allsop, and Lindsay Garratt, solicitor at Winckworth Sherwood.