News and Insights
19 July 2017
Proposed levy on new building developments in Jersey: stealth tax or welcome move?
A levy on any new building developments exceeding 75m2 could be introduced under the Jersey Infrastructure Levy (JIL) by April 2019. The charge will be set at £85 per square metre of net new floor area, a non-negotiable rate applicable to all residential or commercial developments.
The purpose of the levy is to generate funds to support the improvement of services and facilities around the island, such as public transport, cycle paths, and climate change mitigation measures. 90% of the income from the levy is expected to fund the current list of priority projects, including the regeneration of St. Helier and creation of a cycle path infrastructure beginning with the Eastern Cycle Route. The remaining 10% of funds will be allocated to the parishes to be used for local improvements. Unsurprisingly the levy is not seen as good news by everyone, not least by property developers.
How will the levy affect me?
Any new developments exceeding 75m2 (roughly the size of a 2-bedroom flat) will be subject to the charge. Developments by affordable housing providers or registered charitable bodies are exempt, and residential extensions will typically not be affected (because such extensions rarely exceed 75m2). It is therefore unlikely to affect anyone outside the property development industry. Any developments which have obtained planning permission before the introduction of the levy will not be liable. However, for any changes that occur after its implementation the levy will only apply to any floor space added after the original development received permission. Moreover, developments that do not require planning permission will not need to pay it.
Where a development is subject to the charge, the person intending to pay will need to make a formal declaration of liability when applying for planning permission. If they fail to do so, a surcharge may be applicable, and liability may default to the landowners.
The levy is payable in instalments once the development is started, with a suggested upfront payment to be made within 60 days of the start date. In England and Wales under the Community Infrastructure Levy, this upfront payment is typically between 20-30% of the total cost of the charge.
Impact on Planning Obligation Agreements
Large developments currently have to contribute to the amenities in their area under the system of Planning Obligation Agreements (POAs). However, POAs solely apply to developments, such as those exceeding five (sometimes ten) residential properties, or commercial developments of over 250m2, and can only be used for the benefit of the area directly related to the site of development. When the JIL is introduced, the current POA system will be changed to apply to more site-specific obligations but will remain in place to provide services not covered by the JIL. Restrictions would be put in place to ensure that developers are not charged twice. This means that the role of POAs is likely to be greatly reduced with the implementation of the JIL.
Lessons learned from the UK’s scheme
The levy is based on the Community Infrastructure Levy (CIL), in place in England and Wales. In the viability assessment for the JIL, the strengths and weaknesses of the CIL were considered and then used to assess the best way to implement the JIL in Jersey. Lessons learned include:
- a levy doesn’t make developments unviable, as long as the levy is set at a fair rate;
- the levy is a relatively minor development cost of around 2% of total market value;
- the simpler the system, the more effective it is – a transparent and clear legal framework with minimal variation in rates is ideal;
- the levy will generate between 5-20% of funding for new infrastructure in an area;
- the funds are most successful when income from multiple developments has been pooled to fund a specific infrastructure project.
In his proposal, the Planning Minister outlines significant benefits the levy would bring to the community, including:
- Improvement of services, facilities, and amenities;
- The ability for Parishes and the States to prioritise and decide on projects, resulting in more financial freedom for the Parishes;
- Greater certainty for States regarding income for community improvements;
- Greater certainty for developers as to the cost of development;
- A fair, flat charge over all types of developments;
- A clear, transparent, and straightforward system.
Significant potential risks have been identified including:
- A detrimental effect on the level of development as the charge is considered too high by property developers;
- An increase in housing prices for the buyer if the levy drives up the cost of development;
- A decrease in the supply of land as landowners become reluctant to release land due to a reduction in residual value.
These perceived risks were considered as part of the viability assessment which concluded that the optimal rate for the levy in order not to drastically reduce residual values was between £50 to £150 per m2. Given that the chosen flat rate is £85 per m2, this is unlikely to have a significant detrimental effect on the residual value or supply of land. The assessment strongly recommended a phased increase to the value of £85 over several years in order to ensure the market remains stable.
The debate surrounding the industry’s response to the levy
Since the proposal was announced the charge has been criticised by some in the development and construction industry for unfairly targeting the industry with a ‘stealth tax’ to ‘fill a government spending commitment hole’ (Jersey Construction Council (JeCC)). The justification given was that the development industry has a direct impact on infrastructure and the community, and should aim to balance this impact through contributions.
Martin Holmes, Chairman of the JeCC, fears a potential increase in house prices, exacerbating the affordable housing problem and having a detrimental effect on growth. The response to this issue was that house prices would not increase because the levy is ‘com[ing] off land value’ rather than property value, and the levy is calculated to have the least effect possible on residual land values while generating sufficient amounts of funding. In this way, it should have little effect on house prices, and minimal effect on the residual value of land. As new builds only account for 20-30% of house sales, over 70% of housing prices will be unaffected by the levy.
The JeCC doesn’t buy the argument that the levy won’t increase house prices. They argue that as development will mostly occur on brownfield rather than agricultural sites, that land supply will fall if land values are forced down by the levy as landowners become reluctant to release their land into the marketplace. The authorities reiterate that the levy has been calculated at a rate that should least affect the residual value of land, with the special circumstances of brownfield sites taken into account during the viability assessment. The assessment compared residual values with the viability threshold, which is the amount sufficient to give a landowner a sufficiently ‘competitive return’ to induce them to sell land for development. Of the 17 types of site analysed, all but one had a residual value higher than the viability threshold. The exception had a significant residual value, but one which was lower than the existing use value, putting it below the viability threshold. Thus, it is argued, this analysis proves that even taking brownfield sites into consideration, the charge will not significantly affect residual values of land to the point where landowners will be unwilling to sell to developers.
In summary, the authorities argue that the main risks (e.g. that land supply will fall, house prices will increase, and that increased costs of development will impede growth), have been factored into the viability assessment when determining the rate of the levy.
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