Gary McGovern, Partner and planning and infrastructure specialist at Pinsent Masons

The development sector has legitimate concerns about the proposed Infrastructure Levy for Scotland (ILS), the purpose of which is to capture an element of the uplift in land value caused by development and put that towards contributing to infrastructure.

Presently planning agreements are used to secure contributions towards infrastructure where there is a direct link with a development, but the pooling of funds towards wider infrastructure requirements because of incremental development is not permitted.

ILS is proposed to rectify this, but it will be charged in addition to planning agreement contributions, which will continue. Developers thus view ILS as an additional burden at a time when developers face many financial pressures.

The Scottish Government’s Discussion Paper (DP) on ILS, which closed for submissions last month, sought views on and proposed some ideas on how ILS should operate. This includes the chargeable amount being based on a formula linked to floor area (sq. metres) – somewhat similar to the Community Infrastructure Levy in England. How that formula will operate is to be confirmed but it is proposed that at least some of this will be up to the local authority to determine.

Local authorities would not be obliged to charge the ILS which would allow for regional variation and could also have discretion to waive or reduce the amount if they considered it could inhibit development. This flexibility also introduces complexity and scope for an uneven playing field, and we could continue to see viability discussions case by case, which an infrastructure levy type system might be thought to avoid.

ILS will apply to residential development, with exemptions likely for residential institutions, householder development and self-build housing. No decision has been made on whether affordable housing, purpose-built student accommodation, and very small developments are included/excluded. There is also no decision yet on whether commercial/industrial development should pay the levy, and on what basis.

Infrastructure development itself will not be liable for the ILS. However, there is significant concern in the renewables sector that the DP sought comments on applying ILS to renewable energy infrastructure.

There is also no clear position yet on when ILS should be paid. The Scottish Government appear to have a preference that it is paid at the point of commencement of development.

This is an important issue. Payment upon commencement of development is simpler to police but raises cash flow issues, while payment at completion could be more difficult to enforce. Payment upon completion also means there could be variation in the amount due depending on market conditions in the intervening period, particularly on large projects that take years to complete.

The DP notes there is no prohibition on borrowing against ILS income and local authorities are expected to front-fund infrastructure projects, from capital budgets or through borrowing until levy receipts build up. Given financial pressures, there are doubts over whether there will be local authority appetite to borrow against future ILS receipts.

Introducing an infrastructure levy has been on the statute books for more than five years, so it is a concern that fundamental details as to how ILS is to operate won’t be known until draft regulations are published for consultation next year.