Infrastructure levy for Scotland: discussion paper

This paper is to support discussion on options for an Infrastructure Levy for Scotland, to help fund infrastructure that supports wider growth.

8 Issues for discussion

The following issues are based on the provisions in Schedule 1 of the 2019 Act, in order to inform what should be included in draft infrastructure levy regulations. Many of the issues are interconnected but we have tried to separate them out for clarity. Each section sets out the key considerations and possible options, followed by points for discussion. The final summary sets out our initial proposals for the ILS (section 9), but this is not fixed and we would be interested to hear arguments for alternative approaches.

The points for discussion are not intended to be restrictive and any additional comments or suggestions are welcome.

8.1 Setting the payable amount

The legislation requires that the infrastructure levy is to be collected and spent by local authorities. Under paragraph 5 of schedule 1 of the 2019 Act (“the schedule”), regulations may set out:

“(d) The amount to be paid by way of infrastructure levy in respect of a development (“the payable amount”) either by –

(i) stating the amount, or

(ii) setting out how it is to be calculated.”

Following the PBA research published in 2017, it seems unlikely that a simple flat rate for the Levy could be stated in regulations that would produce a reasonable result across Scotland. Such an approach is likely to overcharge lower value developments, potentially impacting on viability, and significantly undercharge higher value ones which could contribute more. We therefore assume that some form of calculation will be required to tailor the payable amount to individual developments.

The regulations will need to set out the elements of the calculation, it would be outwith these powers to simply allow local authorities to freely determine how to set the Levy in each area. However, flexibility can be provided, for example by allowing local authorities to determine key elements of the calculation. The Scottish Government will work in partnership with local authorities and COSLA to establish an appropriate level of flexibility.

The following sections therefore consider approaches that could allow a standard methodology to be applied with local variation. This also needs to avoid placing excessive burdens on local planning authorities or creating too much inconsistency for developers who operate in more than one area.

8.1.1 Unit of charge

The next issue is whether the charge should be based on the size or value of developments and how that is measured. This is a key area where a balance is required between proportionality, simplicity and predictability.

For residential developments, the number of units would be the simplest approach. However, this would charge the same amount for a one-bedroom flat as for a six-bedroom house, and therefore would not take sufficient account of the development’s value. It could impact the viability of some developments and could inadvertently disincentivise the provision of smaller units.

The size of houses could be taken into account by charging by the number of bedrooms, or total number of rooms. While this would not account for larger room sizes, it would provide some reflection of the difference in value.

A more precise approach would be a charge per square metre of development, as for CIL. This would be more complicated to calculate, but it has the advantage that it could also be applied to commercial development, whereas per unit or per room calculations could only apply to housing. This would be our preferred option. There are various approaches to measuring the area of a development, for which RICS provides guidance. A charge per square metre of Gross Internal Area is the approach used by CIL, while fees for planning applications (for non-residential buildings) are based on an external measurement of gross floor space.

The most precise, but also most complicated, option would be to base the charge on the actual residual value of the development. The 2017 research found that GDV, which is ultimately expressed in the price achieved for the completed development, is the major factor in calculating the difference between residual land values and existing use values of the land. GDV therefore effectively reflects differences in land value uplift between areas and can be used as a proxy for residual value. Decisions would need to be made about when the value is assessed, by whom and on what basis. This is particularly important given that the actual GDV of any given development will not be known until it has been completed and units have been sold/let. While the valuation of housing for sale is relatively straightforward, valuation of commercial and rental property is more complex, and a standard approach would need to be prescribed. Requiring a valuation of the development would introduce additional cost to the process, as well as more potential for disputes and appeals.

Consideration will need to be given to how redevelopment of brownfield sites is treated. Policy 9 of NPF4 encourages the reuse of brownfield, vacant and derelict land and empty buildings, and clearly redevelopment of property in the same use is unlikely to increase the demands on infrastructure. CIL discounts the area of any existing property that is demolished or renovated, but this is subject to a complex determination of whether the property is in appropriate use. It may be simpler to allow the planning application system to deal with the implementation of this policy.

Points for discussion

  • Do you agree that the charge should be based on a calculation per square metre of development? Are there any options or issues we have not considered above?
  • Should the area of the development be calculated by internal or external measurement?
  • How should existing property that is demolished or redeveloped be treated in the calculation?

8.1.2 Setting the Levy amount

We recognise that the return available on development, and therefore the viability of development, varies widely across Scotland, including within local authority areas. The amount of the ILS therefore needs to reflect this, to avoid the risk of making development unviable.

If the Levy is charged as a proportion of the value of each development, this would automatically reflect the differing values of development across Scotland. The PBA research provides a formula for such a charge, based on value per square metre of development[5], which works out at between 1.7% and 3% of GDV. However, this approach requires a valuation of each development, which we have identified as the most complex option for the unit of charge.

We have noted that CIL is charged as a set amount per square metre of development, but the rate is set by each local authority and is usually differentiated for different types of development and in particular zones. This is based on local calculations of viability and development value.

To reduce the burden on local authorities of carrying out multiple viability assessments, an alternative to using the actual value of each development might be to use average values for different areas, to determine a set amount per square metre for each development type. While this is less precise than using actual values, it would provide some reflection of local variation.

It would be possible to set the amount according to average values in each local authority area, or regionally. However, market areas and development values vary at a very local scale, both within and across local authority boundaries. Planning authorities are therefore best placed to understand this variation, including through the LDP / delivery programme process and their work with neighbouring authorities to identify regional spatial priorities, regional transport strategies, and in future on Regional Spatial Strategies. This will also include joint work between local authorities and National Park Authorities.

Potentially the Scottish Government could set a formula for the Levy, in the regulations, which planning authorities would apply to average values across relevant zones in their area, to determine a set amount per square metre. It would be for the planning authority to determine the boundaries of the zones and to calculate the average values. If there are areas where the local authority considers it would not be appropriate to charge the Levy, taking account of market conditions, incentives for development etc, this could be allowed for either through zero rating or by an exemption – see section 8.2.1.

Sale prices for houses are widely available and there are generally enough sales in any given area to be able to determine an average. Commercial and industrial developments are more difficult to value and there may not be enough of any particular category coming onto the market each year to provide an average. An alternative mechanism may therefore be needed to set a levy rate. For CIL this is often done by setting the rate for commercial property at a percentage of the rate for housing. Some types of development may be zero rated because it is considered that they are never likely to provide sufficient value to pay a levy – although this also links to the issue of what types of development should pay a levy (see section 8.2). Zero-rating for the purposes of the ILS would not preclude use of planning obligations or conditions to deal with site-specific impacts of commercial or industrial developments.

Points for discussion

  • Do you agree that the Levy should be charged as a set amount per square metre?
  • Is it helpful to use average sale values to set the amount of the Levy? What other methods could be used?
  • How can a set amount best reflect local variation in development value? Do you agree that local authorities should set the zones across which the amount is set?
  • Should local authorities be allowed to charge the Levy only in parts of their area (or not at all)?
  • How could amounts for commercial and industrial development be set?

8.1.3 The ILS and other demands on value

The powers to make regulations include an option to permit planning authorities to grant relief from liability for the Levy where it considers that it would duplicate a contribution required under a s.75 planning obligation. However, as noted in section 7, we propose that the Levy should in general be charged in addition to any s.75 obligations, and for a separate purpose. Further detail on what the Levy could be spent on is set out in section 8.7 below.

It is intended that the ILS will be set at a low enough level that it should not impact viability in the majority of cases. Monitoring will be needed to ensure that it does not impact on levels of affordable housing or other on-site infrastructure being provided. We consider it may be helpful to allow local authorities discretion to waive or reduce the Levy in individual cases where they believe that charging it would inhibit development, taking account of other costs such as planning obligations and, in the future, the Scottish Building Safety Levy. This could also be used to avoid duplication of contributions to the same infrastructure. However, planning obligations are already flexible and could potentially be adjusted to reduce the overall demands on a particular development. Any discretionary reduction of the ILS would need to take account of the requirements of the Subsidy Control Act.

Points for discussion

  • Would it be helpful for local authorities to have discretion to waive or reduce the ILS in individual cases?
  • Should the impact of planning obligations and other charges / requirements be considered in this assessment?

8.2 What kinds of development should pay the Levy?

Our thinking at the time of the primary legislation had been that the ILS should not be charged on developments which are themselves infrastructure or do not increase demands on infrastructure. The developments that would most likely be chargeable are sometimes described as “buildings used by people”, and excludes structures which are not buildings (such as bridges, pipelines, pylons, masts, wind turbines) and buildings which people do not go into, or only go into to maintain equipment. Infrastructure buildings that are used by people would include, for example, railway or bus stations, schools and medical facilities.

The majority of new development, and the type that most clearly drives the need for infrastructure, is residential. It is therefore clear that new build housing for market sale should pay the Levy. Residential institutions such as care homes, hospitals and residential schools or colleges would be excluded as being infrastructure, as would criminal justice accommodation and military accommodation.

There is a question as to whether affordable housing should pay the Levy, particularly when it is provided through a planning obligation. Affordable housing places demands on infrastructure just like any other housing, and the PBA research recommends that affordable housing should be charged, otherwise it could distort the market for land, as affordable housing providers could offer more than other developers. Providing an exemption could potentially conflict with subsidy control requirements. On the other hand, charging the Levy on affordable housing could potentially lead to reduced provision, impacting the Scottish Government’s ambitious target of delivering 110,000 affordable homes by 2032 of which 70% will be for social rent and 10% in rural and island areas. There are a range of types of affordable housing, and it may be appropriate to exempt some and not others.

For other types of development the arguments are less clear. Developments which are not housing create less burden on infrastructure, although there is still some impact, particularly on transport. Commercial development is funded differently from housing, and may be built either for rental or for the developer’s own use, such as a factory or company headquarters, which means there is not the same immediate financial return. Purpose-built student accommodation and build-to-rent housing may have similar issues. Some, but not all, of these developments also have very low margins of viability, although there may be profitable exceptions in high-value locations. There are options, therefore, to either exclude all or some types of commercial and rental development from the Levy, or to allow local authorities to give them a zero rating in zones where they are unlikely to be viable if charged the Levy.

We are open to exploring whether new energy infrastructure and associated development should be liable to pay the Levy. Whilst these developments are fewer in number, the transition to net zero means that we expect substantial levels of investment and development in the coming decades, opening up significant opportunities particularly for more rural parts of Scotland. This is also generating significant associated needs, for example for increased housing provision to provide choice in growing communities. New homes will also depend on the provision of additional infrastructure and community facilities, and charging a levy to help meet such costs could be used to incentivise development by helping to overcome higher housing development costs in rural and island areas. We are therefore seeking views on whether the Levy should apply to these development types.

Onshore renewable energy developments are encouraged to provide community benefits on a voluntary basis, in line with Scottish Government guidance: Community benefits from onshore renewable energy developments. If the ILS were also to be charged for such developments, we would need to consider the interaction of the two schemes to ensure a continuing positive impact for local communities.

Points for discussion

  • Do you agree that residential institutions should be excluded from the Levy?
  • Should the Levy be charged on all or some types of affordable housing?
  • How should commercial development, purpose-built student accommodation and build-to-rent housing be treated?
  • Should renewable energy infrastructure and related development also be subject to the Levy? How might that impact on voluntary community benefits?

8.2.1 Exemptions

Since the purpose of the ILS is to fund infrastructure in response to increased demand, we would not expect the Levy to apply to “householder” development, such as an extension or renovation to an existing house.

There is a question as to whether very small developments should be exempt from the Levy, for example developments of 10 dwellings or less, and self-build homes. This could have a number of advantages; it could encourage redevelopment of gap sites, and provision of housing in small rural communities. It could also support small and medium sized enterprises (SMEs – defined as those with less than 250 employees) which are more likely to take on smaller sites. On the other hand, a number of small developments could have a cumulative impact that requires additional infrastructure.

Housing to 2040 recognises the challenges and diversity of housing delivery in rural areas and it also recognises the significant and generational impact that a small number of additional homes can make to the long-term resilience of rural communities. The Rural and Islands Housing Action Plan includes a strong focus on community-led housing and highlights that in remote, rural and island areas, small-scale actions can bring about significant impacts.

It may be most appropriate for local authorities to have the option whether to apply exemptions for very small developments and self-build in their area, enabling them to reflect local circumstances.

Other exemptions might apply to the character of the developer, for example for charities.

All exemptions will need to take account of the requirements of the Subsidy Control Act 2023 (replacing EU State Aid rules). The more flexibility local authorities have to grant exemptions, the more work is likely to be required to ensure they are compliant.

Points for discussion

  • Do you agree that householder development should be excluded from the Levy?
  • Should self-build housing and very small developments be exempt?
  • Are there any other types of development that should be exempt?
  • Should there be exemptions for charities or other types of developer?
  • To what extent should exemptions be set nationally, or at local authorities’ discretion?

8.3 When should the Levy be calculated, and paid?

The timing of the calculation and payment of the Levy needs to take into account potential changes to the development, and convenience to the developer and the local authority.

Whether the ILS is calculated on the basis of the size or the value of the development, both of these may vary during the progress of the development. An earlier calculation (and payment) can provide more certainty for both the developer and the planning authority, but could also fail to reflect later changes that impact on the value and viability of the development, which could either increase or decrease the amount of levy due. If the charge is based on floor area, any changes are generally within the developer’s control and therefore the effect on the Levy can be predicted and allowed for when the change is made, whereas development value is more likely to be affected by external factors.

If the administration of the ILS is to be integrated with the planning system, it would be helpful if it became due at an identifiable point in the development management process. There are two main options:

  • Payment could be required when planning permission was granted, or on commencement of development. This could provide earlier funds for the planning authority, but could create cashflow difficulties for the developer, as well as failing to allow for any changes during construction.
  • Alternatively, the PBA research suggested that the Levy should become payable on completion of the development or of a phase of the development, described as “when floorspace is available to be used”. Payment of the Levy at this stage could be triggered by the notice of completion required under section 27B of the 1997 Act. This would support the developer’s cashflow, but could create risks in terms of who pays the Levy, and enforcement if it is not paid, as set out in the following sections.

If the Levy is to be charged on development that benefits from Permitted Development Rights, and does not require prior notification to the planning authority, other arrangements may need to be made to ensure the local authority is aware of the development and able to charge the Levy. The majority of development under Permitted Development Rights would not be subject to the Levy, but some may be depending on what approach is taken, for example if very small developments are included.

Where the planning authority is not the local authority (ie in Loch Lomond and Trossachs National Park) arrangements will need to be made to manage charging and enforcement of the Levy.

Points for discussion

  • When would be the best time for the Levy to be calculated and paid?
  • What arrangements could be made in the case of development benefitting from PDRs?
  • Is any special statutory provision needed to manage arrangements in LLTNPA?

8.4 Who should be liable to pay?

The intention is that the responsibility for paying the ILS will fall to the developer, who will take it into account in calculating how much they pay for land. However, it can be difficult to legally identify the developer, particularly in large developments where there may be a number of partners and agents involved. The owner of the land while it is being developed is probably the easiest person to identify, and if they are not the developer it may be assumed that they will have a relationship with the developer through which the apportionment of costs can be agreed.

Identifying who should pay is also linked to when the Levy becomes payable. The developer may take an option on land and wait until planning permission is granted before completing the purchase, and they may sell the development, or some parts of it, before construction is complete. Commencement of development may be the best time to identify the owner of the land, even if the charge is payable at a different time.

It is unlikely that the cost of the Levy will be transferred to homebuyers, because property prices are set by wider economic considerations rather than the developer’s costs. However, if this is a concern, it may be possible to prevent the responsibility for the Levy being passed on to purchasers, as can be done with planning obligations. Homebuyers will normally seek to ensure that any such liabilities are cleared before concluding the purchase.

Points for discussion

  • Do you agree that the owner of the land at commencement of development should be liable to pay the Levy?
  • If not, who should be liable, and how (and when) should they be identified?
  • Should there be specific provisions to prevent liability for the Levy being passed on to homebuyers?

8.5 Appeal process

Infrastructure levy regulations may make provision for appeals either against a decision that the Levy is payable in a particular case, or about the amount being charged. They can set out that the appeal is to be made either to the Scottish Ministers, or to a person appointed by them. There are existing appeals processes for planning matters, and also for valuation issues, for example in relation to council tax / non-domestic rates. The form of the appeal process will depend on choices made about the design of the Levy.

8.6 Penalties and enforcement

The 2019 Act allows for infrastructure levy regulations to make various provisions for enforcement of the Levy and for penalties if it is not paid.

They may allow or require local authorities to charge a financial penalty if the Levy is not paid on time. This could be a fixed amount or a proportion of the amount due, and it could increase over time if it is not paid. Any penalty fees become part of the “infrastructure-levy income” for the local authority to spend on infrastructure projects.

The regulations may also allow the local authority to require that development stops until the Levy has been paid in full (including any penalty fees). This again links to when the Levy becomes due; if the Levy is not charged until the development is ready for use, stopping development may have less impact, although it could be effective on large sites which will be completed in phases. The regulations may also set out the consequences if the developer does not stop work when required to do so, including making it an offence.

Powers need to be available in case any developer should try to evade payment of the Levy, or try to pay less than they should. Regulations may make it an offence to do so by withholding information, providing false or misleading information, obstructing the investigation of someone’s liability to pay the Levy, or to cause anyone else to do any of these things. Regulations may also enable local authorities to confer powers on someone to enter premises for the purpose of investigating liability for infrastructure levy, and to seize things they may find in the process. This power does not allow entry into dwelling houses. Since the Levy could represent a significant amount of money for some developments, we would expect to implement these powers so that local authorities are able to enforce the ILS if necessary.

For any offences that may be introduced, the maximum penalty that can be set in the legislation would be a potentially unlimited fine or up to 2 years imprisonment (or both) if tried in the High Court, or up to £10,000 or 12 months imprisonment if tried in the Sheriff Court. The method of trial can be set in the legislation or may be left to be determined by the prosecutor.

Points for discussion

  • Should there be a penalty fee if the Levy is not paid on time?
  • If so, should it be a fixed amount or a proportion of the amount due?
  • Should the penalty increase over time if the Levy is still not paid?
  • Should the local authority be able to require development to stop if the Levy is not paid? Would this be effective?
  • Do you have any views on offences relating to failure to pay, failure to stop work, or attempting to evade full payment?

8.7 What should the Levy be spent on?

The 2019 Act provides a broad definition of “infrastructure” on which levy income can be spent, as set out in section 6. We do not consider that any changes are needed to this list at present.

It seems that a levy is most likely to be well received when it is clear what it will be spent on. The intention of the ILS is to help fund infrastructure projects which are needed as a result of the cumulative impacts of development, or regional projects. These are projects which are less clearly connected to the impacts of particular developments, and therefore could not be readily be funded or provided through s.75 planning obligations. We would expect that these projects will normally be identified in local development plans and delivery programmes, in accordance with the Infrastructure First approach advocated by NPF4. If an authority wants to implement the Levy before an adopted LDP and delivery programme identifies expectations, they could perhaps publish a separate list of relevant infrastructure which the Levy income is to be put towards.

Infrastructure levy monies could also be used to pool funding or contribute to infrastructure which will be of benefit to more than one planning authority area, as identified through the regional spatial priorities in NPF4 and in future through Regional Spatial Strategies. Where the Levy is charged on development in a National Park, it would be expected that money would be spent in the Park or on regional infrastructure that will benefit communities in the Park.

The ILS is not expected to fully fund specified infrastructure; there will be a range of funding for any particular project, and the ILS is not intended to replace national funding or existing local authority funding. We propose that the Levy rate will be set by reference to development value and viability rather than to the costs of identified infrastructure. In addition, in most cases it will not be practical for levy income from a particular development to be put towards infrastructure needed by that development, because the developer will not have funds to pay the Levy until the development is completed, creating a “chicken and egg” situation. Local authorities will need to front-fund infrastructure projects at the start of the process, either from capital budgets or through borrowing, until levy receipts start to build up. There is no prohibition on borrowing against ILS income, if local authorities consider it prudent to do so. Over time the Levy income will become an ongoing stream of funding for infrastructure identified in subsequent LDPs.

Unlike CIL, the 2019 Act does not allow for infrastructure-levy monies to be used to cover the costs of administration of the scheme. Although our aim is to make the Levy as simple as possible to administer, we recognise that costs will still be an issue for local authorities. Once we have a clearer picture of how the Levy will operate, we will work with local authorities to estimate what the costs will be and how they could be covered, taking into account both the Verity House Agreement and our current consultation on resourcing Scotland’s planning system.

Points for discussion

  • Are any changes needed to the definition of infrastructure?
  • Do you agree that the Levy should fund infrastructure identified in the development plan, or should local authorities provide a separate list?
  • How could the costs of administering the Levy be covered?

8.8 Accounting for levy income and expenditure

The Act states that infrastructure levy regulations may make provision about the accounts that local authorities are to keep in connection with (a) the exercise of their functions under those regulations, and (b) their expenditure of infrastructure levy income (including any financial penalties for late payment).

Given the purpose of the ILS, it seems clear that the money collected should be accounted for separately and not subsumed into general local authority funding. We would propose that the local authority should provide an annual report showing the amount of infrastructure-levy income collected in the previous financial year and the amount spent, and what it has been spent on. Since delivery of development and of infrastructure will often stretch over multiple years, it would be helpful to show figures from previous years and predictions for future years (especially if the Levy is to be payable later in the development process). This will help to show how levy income is accumulated for later expenditure. Either three or five years in each direction might be appropriate.

Points for discussion

  • Do you agree that the local authority should publish an annual report on infrastructure levy income and expenditure?
  • How many years should reporting cover – six, ten, or a different period?
  • Are any other provisions required on accounting or collection of the Levy?

Are there any other issues to be considered?

Additional comments are welcome.



Back to top