The Community Investment Levy is a destructive raid on local development 3

Rory Meakin Campaign

The reason house prices are so unaffordably high and commercial rents are so crushingly heavy is because development isn’t taxed heavily enough. That’s the logic of the new ‘Community Investment Levy’ (CIL) being imposed by local councils on people hoping to develop their property. The levy is intended to finance infrastructure required by new development. Merton Council, for example, states what the appropriate charge should be in its draft charging schedule:

the ‘appropriate balance’ is the level of CIL which maximises the amount of development in the area. If the CIL charging rate is above this appropriate level, there will be less development than there could be, because CIL will make too many potential developments unviable. Conversely, if the charging rate is below the appropriate level, development will also be less than it could be, because it will be constrained by insufficient infrastructure.

So, because the proposed levy is not going to be zero, the Council obviously thinks that the extra Income Tax, Corporation Tax, Capital Gains Tax, Business Rates, stamp duties and Council Tax receipts the development would generate is not enough to fund necessary infrastructure. Presumably, the bureaucrats who wrote it think there are potential developments out there which developers do not currently believe to be viable because the levy isn’t yet in place.

The borough plans to introduce no levy on office and industrial development, however. Only residential and retail developments will be lucky enough to enjoy the new tax. Retail developments will be hit with a £100 per square metre levy anywhere in the borough whereas residential developments will be subject to one of three levies, depending on where it is. £42/m2 in the least affluent third, £140/m2 in the middle and £385/m2 for new homes in the most affluent third of the borough.

If the levy is supposed to finance infrastructure, why would the that required infrastructure per square metre of floorspace developed cost nine times as much in one part of the borough as another? If the levy is set at the level which “maximises the amount of development in the area”, why would developers only find it profitable to develop with a tax nine times as onerous as that in the other section of the borough? And is it really only retail and residential developments which need infrastructure – don’t offices and industrial developments benefit from infrastructure, too?

The answer is that the levy is an attempt to squeeze cash out of development and into town hall coffers. Buildings, obviously, do not require infrastructure. It is, to say the least, highly unlikely that building big expensive houses in the rich part of town requires nine times as much revenue per square metre to fund the additional NHS GP surgeries or local public transport infrastructure as the typically much smaller homes in the poorer part of the borough. The assessment produced by the Council’s consultants possibly ‘captures’ a more honest account of the rationale:

we test the these different developments without CIL, to see if they are viable in their own right and how far they produce a surplus value, or overage, from which CIL may be extracted. Secondly, we consider how much of this estimated surplus value (where it exists) should be captured through CIL.

Merton’s proposed rates are significantly higher than those recommended by the independent consultants, too. In all three areas they have proposed the levy should be 40 per cent above the recommendation (£42, £140 and £385 instead of £30, £140 and £275 per square metre).

The Community Investment Levy is proving to be little more than a naked cash grab by councils like Merton’s that will do little more than take off the pressure to stop wasting money while hitting development hard and with it all the jobs and prosperity it creates. Councils should look harder for savings from waste and factor in new revenues from existing taxes on additional residents and businesses to fund infrastructure projects. Hard pressed taxpayers and homebuyers simply can’t afford the job losses, higher taxes and higher rents that the CIL will create.

Rory Meakin

Rory is a Research Associate at the TaxPayers’ Alliance. Rory’s work is focussed on tax policy and economics, with a particular focus on tax simplification.

Follow @rorymeakin

Blarg1987

I agree it is dishonest for a local authority to do that, however it is right that the developer should pay towards the local area when building new properties, such as resurfacing or upgrading the main access road to the new developement for additional traffic.

The main problem some local authorities have had in the past is agreements where by the developer builds a piece of infasturcute be it toad or bridge however they are unwilling to provide detailed information on how long it will last, so an agreement is put in place whereby the developer deposits an amount to pay for the replacment of the said piece of infastrucure should it fail.

The big problem is that both councillers and the electorate see this money being put into savings accounts such as iceland and demand the money be spent (one of your articles did say about spending some money saved instead of increasing council tax). As a consequence if that infastructure fails we all as tax payers have to foot the bill.

http://twitter.com/rorymeakin Rory Meakin

I’m not sure why it is that development should be taxed in order to fund infrastructure. Suppose a plot of land in a town is developed into a house and a young couple with a child move out of their nearby one bedroom flat into the house. And then a young adult moves out of her parents’ house (also nearby) into that one-bedroom flat.
I don’t understand why a special tax or ‘levy’ ought to be imposed on that development. Suddenly the local Council will get another Council Tax stream of income with precious little additional spending. Shouldn’t that be enough?

Blarg1987

So by that logic are you suggesting if there is a large scale development of thousands of houses and new roads, rail station, street lights, and that requires the exisitng roads to be upgraded for the new commercial traffic and damage to the exisitng infastructure caused as the development is being constructed shoule be paid for by the tax payer?

As I have said I think it is right that the developer should pay for the capital cost of the infastrucutre and that money should be agreed to be put into an account if the standard of construction is questionable that could require tax payers have to fork out any repairs.