Introduction of an Infrastructure Charging Mechanism in Scotland: research project

5 Shortlisted Options

5.1 Introduction

This section summarises and focusses the key priorities emerging from the preceding chapters. In particular, it synthesises the outcomes of the stakeholder workshops, focus groups and the literature review, into propositions categorised according to key principles established at the outset of the research.

Following from Stage 1 and Stage 2 outputs, two shortlisted options have emerged which meet the practical requirements set out in the ‘revised key priorities’. The options represent the considered position of the Project Team and key stakeholders emerging from the initial research. In particular, it recognises the importance of avoiding imposing onerous obligations upon local authorities and developers, presenting a simple process which minimises risks of lengthy negotiations and contention.

The “Infrastructure Growth Contribution” ( IGC) can be distinguished between a ‘Central’ co-ordinated option and a ‘Local’ co-ordinated option. These are considered below:

• A Central Coordinated Option (i.e. developed centrally and governed by an arms-length agency); and
• A Local Coordinated Option that would likely rely on local planning authorities to collect and administer a levy. Potential provision for Local Authorities to contribute to infrastructure bodies (e.g. Transport Scotland – other public body, or Scottish Power – private body) for required strategic infrastructure, and to strengthen the duty to co-operate with nearby planning authorities so that “shared” needs can be met across neighbouring authorities and levied across these.

The two shortlisted options emerged from an initial ‘scoping’ exercise which elaborated on the key themes, considered in Section 5.2. These options are compared side-by-side in Figure 5.1.

Figure 5.1 Infrastructure Growth Contribution Variants

5.2 Initial Scoping of the Options

There are significant variations inherent within the preferred high level options. The high level options therefore need to be narrowed down based on considerations of geography, responsibilities, requirements for infrastructure plans, and collection & distribution. The scoping of the shortlisted options represents a ‘sense-check’ of those options based on consultations with key stakeholders and subsequent options development.

The scoping of high level options therefore informs the characteristics of the shortlisted options.

Geography ^[8]

Stage 1 and Stage 2 outcomes, and the outputs from the various Scottish Government infrastructure workshops undertaken in relation to the review of the planning system in Scotland, suggest that in addition to the identified geographies suggested above a mechanism set out requires consistency to be effective. While not considered explicitly in Stage 1 and Stage 2, a ‘two-pronged system’ is recommended for an infrastructure charging mechanism based principally on the requirement for resource efficiency, oversight and consistency.

The functional geography of the charge could be for the local authority, or for regional or city deal based bodies or partnerships, with a statutory responsibility (perhaps through a lead local authority on behalf of the others) to work with utilities, planning authorities, and other relevant infrastructure providers to undertake co-ordinated infrastructure planning for growth within their area. Outputs from Stage 1 and Stage 2 similarly identified the need for the functional geography to be ‘greater than local’, so long as infrastructure needs of local authorities are met. As such, the nature of strategic infrastructure items suggests that the required items would likely be cross-boundary. The majority of ‘emerging options’ in Table 4.1 and Table 4.2 therefore recognise functional market areas or regional partnership areas as suitable geographies. A minority of “emerging options” do recognise that the functional geography could be at the individual local authority level perhaps in co-operation with a neighbouring authority as long as benefits accrue to people in the individual authority.

The second aspect is defining the administrative geography through which charges are set and collected. Stage 1 and Stage 2 of the research did not consider the mechanics of the charge setting in detail. However, evidence from the CIL review and subsequent consultations suggest that there may be difficulties in ensuring consistency and resource efficiency of the charge setting process. The second key aspect could therefore involve the Scottish Governmentin setting out the charging mechanism and rates to apply nationally and for this to be collected and distributed either by an individual authority or by a body such as Scottish Futures Trust ( SFT). It is envisaged that such a body could have a role in developing a funding strategy for “regional” infrastructure planning of which the land value uplift charge capture would just be a part, but would help to give the body leverage over ‘realistic’ plan production.

In this “national body” scenario, planning authorities would retain their local role, have to participate in and co-operate with “regional” strategic infrastructure planning, operate “site related” S75 (perhaps under a more codified national guidance) but not be the levying bodies for the charge. Removing the role of the local authority from the role of a collecting and charge setting body would reduce conflict between site specific s75 contributions, which could thereby be retained for local infrastructure impacts.

At this stage it is difficult to scope out local authorities for collection or distribution, as this depends on the extent of legislative change. If significant legislative change was achieved, sub-regional geographies for administration, collection or distribution could be scoped out of the options assessment with respect to options allowing for significant legislative change. Local authorities would be closely involved in identifying required infrastructure. Local authorities could collect and distribute funds within current devolved powers.

Responsibility for Setting the Charging Mechanism

Stage 1 & 2 research identified local authorities as key actors in setting and implementing an infrastructure charge. It is necessary to ensure that local authorities are involved in determining where funds may be spent, but the process for setting the charge needs to reflect availability of resources and also be informed by a wider view of strategic infrastructure needs.

In order to avoid inefficiency, duplicative work, politicisation of decision making and to resolve varying expertise, it may be more straightforward for some processes to be centralised. ^[9] Indeed, consultations suggested that a preferred option ought to make use of existing processes (e.g. through those established by the Land and Buildings Transaction Tax ( LBTT) or through Council Tax and Non-Domestic Rates) rather than establishing a new charging system.

To achieve this, and in line with the geographies identified above, responsibility for charge setting may best be assigned to an independent ^[10] organisation offering expertise, resources and consistent methodologies. This then may be applied nationally. However, there has equally been concern that local authorities should not be excluded from this process—there is therefore scope to consider local authorities as charge-setting bodies.

It is not possible at this stage to scope out local determination of charges, though consultations to date seem to favour nationally prescribed charges.

Infrastructure Planning

Stage 1 and Stage 2 of this research indicated the importance of aligning a prospective infrastructure charge to evidenced-based spatial planning, whether at the local level or at the strategic level. However, there is equally a concern that local authorities may be overly burdened by identifying and costing required infrastructure, and indeed most strategic infrastructure items may require coordination between local authorities.

While the alignment of a charging mechanism to infrastructure planning at whatever scale would help align infrastructure investment to local and regional development objectives, consideration of this topic needs to be assessed in the context of emerging thinking from the Planning Review.

Should the scale of legislative change, allowing for new authorities with statutory powers, be extensive, individual local development plans could be scoped out in one option as the most appropriate process/document for identifying and costing infrastructure delivery plans. However, the local development plan process could identify requirements which contribute to regional or strategic infrastructure planning.

Collection & Distribution

Stage 1 and Stage 2 considered the potential collection and distribution of funds by an agency or existing government or arms-length body. This is due to concerns expressed throughout Stage 1 and Stage 2 regarding limitations on resources in administering the levy and potential conflict with other developer contributions and potential politicisation of decision making.

In addition to the potential limitations in resources amongst local authorities, there is evidence ^[11] that charges levied on development may become absorbed in general revenues, despite the obligation on the charging authority to provide the infrastructure. Agency arrangements with bodies (e.g. SFT) could be established in order to distribute required funds, though there must be arrangements to address any situation in which the agency becomes defunct, or a new agency emerges.

For the purposes of this Stage, local authorities and partnerships of local authorities are scoped out of this assessment as appropriate bodies for the collection and distribution of receipts.

5.3 IGC Characteristics

Based on the scoping exercise in 5.2 and following from the refined principles set out in the preceding section and initial considerations of the Central Assessment Criteria, key elements of the IGC have been developed. A description of the uniform charge proposed is detailed below.

Purpose

The purpose of the IGC mechanism is to raise funds for infrastructure that is not directly associated with a particular development so that the necessary services and amenities are available to enable additional land to be developed or that is needed to serve the additional growth within an area.

Application

The contribution would be progressively based on the open market capital value per square metre of net additional floorspace given consent by a planning authority for all buildings that are used by people (other than for the maintenance of the building or structure or for the operating and maintenance of equipment within the building or structure).

It would apply to all residential buildings of any tenure, retail buildings, offices, and buildings for light industrial, other employment, educational, transport and leisure uses. This could be scheduled to align to planning use classes. The status of the owner, controller, tenant or occupier of the building is not relevant to this option, for example it applies equally to private for profit, as to not-for profit, or public uses.

Infrastructure Plans

Under the IGC variants, items suitable for funding would be detailed in an infrastructure plan (either regional or tied to a local development plan). The types and location of infrastructure to be funded are not pre-determined in advance of or at the point of collection. Ministerial guidance to an agency, or local authority discretion, could set out priorities to be met within which the agency or local authority may distribute funds. Funds may be applied in any area, not necessarily in the area in which they are raised.

Contribution Rate and Date

The contribution rate would be set by a predetermined formula of the capital value of the floorspace created at the point that the floorspace is able to be used (less any equivalent IGC for existing floorspace – see below). The valuation would include any common facilities, amenities, or land uses (e.g. parking spaces) that are available to the users of, and associated with, that floorspace.

It is important that developers are able to estimate the potential charge well in advance so that this can be taken into account when the price to be paid for land is calculated. The final actual charge will be based on the outturn value of the development.

Existing Floor Space and Change of Use

The formula is applied to the estimated value (Scottish Assessors to determine on appeal) at the contribution date of any floorspace that existed at the date of planning consent and that equivalent charge is deducted from that due on the final floorspace. ^[12]

A change of use (requiring planning consent or changes to planning obligations) after the implementation date will incur a charge based on the new consented use value (on completion) less the charge that would have applied to any previous use.

A National or Uniform Charge

The formula for the rate will be applied consistently across the nation for all relevant development and will be such that it can be calculated in advance by any party based on an estimate of future value. The formula would be based on nominal values, i.e. it will not require frequent adjustment or indexing for inflation. ^[13] Therefore, an estimate/ prediction of charge liability can be made in advance, though it is only on the actual valuation date that the true charge will be known.

The formula would have a threshold effect so that low value dwellings or uses will have a zero charge, for example a small terraced house or building with a market sales value of at less than £1,250 per square metre (equivalent to an 80sm dwelling with an open market vacant possession value of £100,000).

There will be benefit in using self-assessment methods, which can substantially reduce disputes and appeals.

The charge due on the contribution date is due from of the Developer of the land at that date. There is no intention that a purchaser or occupier of the completed dwelling or building should pay the charge.

The charge would be calculated on current values applicable at the contribution date, evidenced either by open market (true) transaction prices recorded by The Registers of Scotland, by a self-assessment that has not been rejected by Scottish Assessors within three months of presentation, or in the case of dispute by a valuation by Scottish Assessors. If the payment is outstanding more than three months from the contribution date, then a revaluation is made so that the payment date referred to in the payment certificate is within three months of the date to which the valuation applies.

Transitional arrangements

The charge would apply to planning consents from one year after the ministerial announcement of the introduction of the charge. This implementation date recognises the lag that sometimes exists between land acquisition and seeking planning permission. If consent is already given before the implementation date then no charge will apply.

The charge will be included in Decision Notices after the implementation date for applications revising existing permissions.

The Contribution Date

The contribution date would be the date, as determined in case of dispute by the assessor for Council Tax or Non-Domestic Rate purposes, that the floorspace is able to be used. The charge is based on the valuation at that date and is due at that date (see Annex F for late payments and revaluations). There would of course be a risk of stalling completion to delay payment, but this is a risk to any charge based on value, or on the definition of completion. Methods adopted for assessing values for Council Tax, and appeals on assessments, mitigate this problem with minimal abuse.

Exemptions

The IGC would apply to most developments which are used by people. There may be exemptions for buildings or structures that are not used by people (other than stated above), such as a power station, bridge, tunnel, road or railway track. This definition will require further refinement—for example, it should exclude people who maintain the building’s function such as a wind farm, where people do not normally enter the structures for its purpose to be served. Many public infrastructure buildings will have low open market values for their consented use and thus be below the proposed value threshold. Some infrastructure provision, for example a city centre health centre, will pay the charge if it has a higher market value (in £psm) than the threshold

5.4 IGC Variants

As noted in Section 4, two IGC variants have been developed. Points of differentiation are considered in turn according to collection/distribution, the role of infrastructure plans, and legal implications

Central Co-ordinated Option

Collection and Distribution

The rate will be set by national government through Ministerial order under an enabling power of parliament. The charge would be collected centrally (potentially by Revenue Scotland) and amounts collected will be passed to the holding and distribution agency.

Scottish Ministers, could, under general enabling powers, appoint the agency with a national remit to hold, invest, or borrow on a proportion of expected receipts, and to distribute funds and may set partial or full terms under which funds are held and distributed by the agency. The agency could support, serve, and consider recommendations, of an industrywide advisory board.

The agency would publically submit an annual report to Scottish Ministers on funds received, held, and distributed with details of the infrastructure investment projects supported and the terms and amounts of funding provided. The annual report would also include a statement by the advisory board of its assessment of the application of funds to date and any recommendations for future funding or changes to the formula.

The funds would be held in trust (by the agency or the providers) for the wider community. The funds arise from the growth in value of land arising from pre-existing infrastructure provision (whether public or private) or arising from a planning consent. The funds would not be public spending but are held by a public body or its agency on behalf of the wider community.

The agency could grant aid, lend to, or hold equity investment in any public or private infrastructure provider so that specific infrastructure may be delivered that enables growth or responds to infrastructure needs arising from growth in any area provided that such funding is additional to funding that would be available from public spending programmes, from investment by private bodies, or from other planning obligations and conditions.

Infrastructure Plan

Funds would be distributed by the agency to areas which have a fit for purpose strategic infrastructure growth plan produced by a grouping of one or more planning authorities and the infrastructure providers (whether public or private bodies). The adoption of such area plans would be subject to any conditions and/or approval by the relevant government department for national planning policy.

Fitness for purpose would be certified by the agency using guidance agreed by the minister (from time to time) which may include a realistic assessment of future funding from all other sources for infrastructure. The agency would issue public guidance and provide support on how to achieve a fit for purpose area strategic infrastructure plan, and could support area authorities in making proposals, bids, and lobbying to maximise effective infrastructure investment by government departments, other public or private bodies.

Legal Implications

This approach may not be implementable within the existing devolution framework, thus requiring an amendment to the “devolved taxes” definition in the Scotland Act 1998. The starting point for determining what is reserved/devolved is the reservation in paragraph A1 to Schedule 5 of the 1998 Act. Fiscal, economic and monetary policy (including taxes) is reserved, subject to only two exceptions:

(i) “devolved taxes” (including their collection and management); and
(ii) Local taxes to fund local authority expenditure (like council tax and non-domestic rates).

The approach may not be justified within the existing legislative framework provided under these exceptions.

With respect to local taxes , a scheme could be established whereby charges levied could be centrally collected (by Revenue Scottish) and administered (by an agency). There would be a central pot of money and the agency would determine the type and location of infrastructure to be funded. Crucially, it is clear that the funds may be applied in any area, not necessarily the area in which they were raised. That would mitigate against the possibility of categorising this as a local tax.

In terms of “ devolved taxes” , the only possible category the approach could fall under is section 80I – tax on transactions involving interests in land. This is the category that covers LBTT. However, it is considered to be too specific to include what is intended by the IGC. The only exempt taxes are those charged on the following transactions:

• The acquisition of an estate, interest, right or power in or over land in Scotland; or
• The acquisition of the benefit of an obligation, restriction or condition affecting the value of any such estate, interest, right or power.

Indeed, it may be unreasonable to assume that the grant of planning consent for additional floorspace (or for change of use of existing floorspace) amounts to an “acquisition” for these purposes. As this exemption as drafted was intended to cover the sorts of transactions that would previously have been subject to stamp duty, it needs to be read in that context.

For these reasons, it is considered that this option would require an expansion of the current definition of “devolved taxes” under the 1998 Act. That could be achieved using the powers under section 80B, using an Order in Council. The new tax could be narrowly defined to reflect what is intended by the option.

An Order in Council is a form of secondary legislation that would need to be passed by the UK Government. There are associated risks and delays inherent in this process (considered more fully below in the Annex E).

Local Co-ordinated Option

Collection and Distribution

The Local Co-ordinated option is a variant on the Infrastructure Growth Contribution that should be feasible within devolved powers. It would rely on administration and collection by local authorities. It may enable local authorities to pay other infrastructure bodies (e.g. Transport Scotland) for required infrastructure, and could strengthen the duty to co-operate with nearby planning authorities so that “shared” needs can be met across neighbouring authorities and levied across these. It would eliminate national redistribution and determination by a national government agency.

Whilst the contribution formula would be set nationally, the amounts will be collected by the local authority and used for capital investment in infrastructure that is:

• Not part of a S75 or similar obligation;
• Additional to National government department spending on infrastructure; and
• Is relevant primarily to growth in that authority area (enabling specific sites to be developed) or of benefit to (a growth in) people and businesses in that area.

There would be no restrictions on how that infrastructure was procured by the local authority. The location of the infrastructure could be outside of the Local Authority area but, if so, the expectation would be that it is no further away than an adjacent authority area. It is not unusual for local authorities to invest outside their area or to fund others to provide the council’s services.

The scheme would be national. It would apply to all authorities, and could be linked for administration to Council Tax and Business Rates as a form of initial charge on creation of the asset when it is available for use. There may be other existing administrative procedures which could be adapted for IGC charging at the local level.

Funds collected would not be hypothecated to a particular piece of infrastructure but would be held in trust by the authority in a general pool. There will be a requirement for an annual report on amounts collected and on the application of the spending. There is no return of “unspent” amounts as these will be rolled over for future spending.

Compared to the central co-ordinated option, a disadvantage of this option is the potential mismatch between infrastructure needs for growth in each authority and the amounts raised within the local authority area. The national formula and the ability to pay will mean that some authorities with low market values will have a low collection amount, and vice versa. The local co-ordinated option would not facilitate redistribution from areas that have the ability to pay to areas with greatest need for infrastructure funding.

Infrastructure Plan

The ability to raise funds through the charge could be made dependent on the authority having a Local Development Plan which identified new infrastructure needs and the sources of funding for these. Equally, contributing to strategic scale planning could also be a requirement.

Legal Implications

The option could be designed so as to fall under the exception to the tax reservation in paragraph A1 to Schedule 5 of the 1998 Act applying to “local taxes to fund local authority expenditure”. It could perhaps be linked to council tax and business rates, for example as a charge on the creation of new assets in a local authority’s area. Given that the concept of tax is so broad, there is nothing to prevent a one-off charge applied to (for example) the creation of new assets coming under the exception, as long as its purpose is to raise funds for local authority expenditure.

In order to fall under this exception, the charge would need to have a clear local dimension and would need to be a matter for the discretion of individual local authorities. However, the levy would not necessarily fall foul of the tax reservation simply because there were national rules which fixed the method of collection and amounts charged. Presently there is no discretion given to local authorities as to the underlying basis for levying council tax and non-domestic rates (in the sense that it must be linked to property values) and local authorities have only limited discretion over the rates to apply to different property bandings (in that they fix the rate for Band D properties, with central legislation determining the rates applying to properties in other bands in direct proportion to the Band D charge). A flat, national rate over which local authorities had no control is unlikely to meet the criteria for the exemption, however. But if local authorities had control over whether or not to charge a levy in their area then a nationally set rate (or better still a nationally set mechanism for calculating local rates) would likely meet the criteria for exemption.

If the levy did fall within the devolved Scottish Parliament, legislation could be made at a Scottish level without the requirement of consent or action by the UK Government. This option therefore has the advantages of posing fewer risks and being less susceptible to delay than the IGC.

It is worth observing that the council tax freeze that was effectively in force between 2007 and 2017 was the result of an agreement between the Scottish Government and the local government body COSLA as part of the financial settlement negotiations. In return for not increasing council tax rates, local authorities were guaranteed an additional funding allocation. Given that the purpose of a levy will be to allow local authorities to maximise revenue generation for local infrastructure, there would be no purpose to a similar agreement in this context, for example as a means to set and maintain a national rate.

Money generated in this manner will need to be accounted for by local authorities in their revenue accounts and will be available for allocation either to particular projects or may be applied to a more general pot of funding for capital investment.

Local authorities may be able to make contributions to other infrastructure bodies (e.g. Transport Scotland, Scottish Water) towards required infrastructure for their areas. In doing so, they may rely on the power to advance well-being under section 20 of the Local Government in Scotland Act 2003.

They may also seek to cooperate with neighbouring planning authorities to meet shared needs, again relying on the same power to advance well-being. Local authorities do already pool resources for capital projects that are of benefit to local regions and not just local authority areas, for example district heating projects. However, there would need to be a clear benefit to the local authority’s own area or persons in it.