The Building Safety Act 2022 empowered the Government to impose a levy to provide a source of revenue for the funding of remedial works to rectify historic building safety defects in residential buildings, as covered in our previous post. First announced by the Department for Levelling Up, Housing and Communities (DLUHC) in February 2021, the Building Safety Levy (Levy) aims to raise over £3bn for such remedial works and, once in force, would apply where developers of residential buildings in England seek building control approval.
Since commencing an initial consultation on 22 November 2022 which ran until 7 February 2023, the industry has awaited a detailed response from the DLUHC to iron out key characteristics of the Levy. On 23 January 2024, DLUHC published its response on the outcome of its Levy consultation to provide the industry with a further steer on the direction of travel whilst simultaneously launching a second consultation on further proposals for the design and implementation of the Levy.
DLUHC’s response
We have summarised below some key takeaways from DLUHC’s response to its Levy consultation. These provide further clarity on the design and implementation of the Levy and indicate DLUHC’s drive to ensure industry’s responses are reflected in the structure of the Levy:
1. Payment: as discussed in our earlier post, it was previously proposed that a two-step payment process would be implemented, with 60% of the Levy payable at the “notice to commence” work stage and 40% prior to building control final completion. Within the consultation responses, a small majority of stakeholders disagreed with the two-stage payment process on the basis it would be “unnecessarily complex” and could result in cashflow issues for developers and small or medium sized enterprises.
In response, DLUHC agreed that collection of the Levy “should be as simple and transparent as possible, in order to minimise ambiguity and reduce the possibility of mistakes”. Following this, it is now intended that a single levy payment will be introduced, resulting in a simpler payment process. The Levy will be payable prior to issue of a completion certificate or the final certificate being accepted for the development, with developers having flexibility as to when the payment is made.
2. Enforcement: it is intended that failure to pay the Levy will result in final certification for the development being withheld or rejected on the basis that this “represents a compelling repercussion, as developers who have failed to pay the levy will struggle to sell their home”. The response notes that further details on the enforcement regime will be set out in guidance in due course.
3. Implementation: in alignment with the majority of stakeholder’s responses on the topic, it is anticipated that the Levy will be charged on a per square metre basis (as opposed to a per unit basis). This method is already used for administration of the Community Infrastructure Levy (CIL), which will help to alleviate the administrative burden for local authorities (LAs) (the proposed collection agents for Levy) already collecting CIL. The proposed methodology for this calculation forms part of the second consultation.
4. Levy rates: Levy rates will vary depending on the LA area “to reflect local land values and house prices at a more granular level than could be achieved through setting a regional rate”. Whilst acknowledging comments that the housing market within an LA area can differ, DLUHC commented that accounting for such granularity would bring too much complexity into the calculation. For brownfield sites, these will be charged at 50% of the greenfield rate within the LA area. The reduced rate is intended to be reflective of the greater development costs involved in such sites and to prevent brownfield developments becoming unviable.
5. Reviews points: 90% of respondent’s agreed that there should be a regular review point of the Levy. In agreement with this position, DLUHC have proposed that the Levy will be reviewed every 3 years, with the first review planned to take place in the Levy’s second full year of operation, so that adjustments can be made if necessary. Doing so will provide DLUHC with “an evidence base on which to assess how the levy is working in practice and the performance of all parties who will be involved and to adjust our guidance and potentially the sanctions regime if we think there are weaknesses or failures”.
6. Exemptions: DLUHC’s response provides further details on which developments will be exempt from the Levy. These include:
- developments of fewer than 10 units (providing protection for SMEs whilst still enabling revenue to be raised via the Levy to fund remediation issues);
- affordable housing (noting our below comment where a development features a portion of affordable housing);
- non-social homes built by not-for-profit registered providers;
- NHS hospitals, NHS medical homes and NHS GP practices;
- care homes and nursing homes;
- children’s homes;
- domestic abuse facilities;
- criminal justice accommodation;
- accommodation for armed forces; and
- improvements to owner occupied homes and refurbishment (to avoid the risk of the Levy disincentivising improvement to existing housing stock).
In addition, developments that have started the building control process (i.e. submitted a full plans application, initial notice or gateway 2 application) prior to the Levy launch date will not be subject to the Levy.
It should be noted that DLUHC’s intention is that the following developments will be subject to the Levy:
- developments that only provide a proportion of affordable housing;
- build-to-rent developments (BTRs);
- private retirement housing;
- purpose-built student accommodation; and
- conversions/change of use to residential use.
Views on further exemptions are invited as part of the second consultation.
The second consultation
DLUHC have now launched a further consultation, which seeks views on the following areas:
- methodology for calculating Levy rates;
- collection process, including the definition of “previously developed land” (i.e. brownfield sites);
- dispute resolution process between LAs and developers; and
- further exemptions to the Levy, such as hotels and private hospitals.
The second consultation will close on 20 February 2024. More details on the consultation and how to contribute can be found here.
Burges Salmon comment
It is apparent from the outcome of the first consultation that the potential adverse impact of the Levy on the housing market (and incentivisation to build) as well as cash flow within the industry were key areas of concern for respondents. The list of exemptions and refinements to the proposed design and implementation of the Levy goes some way to mitigate these issues, however certain developments such as BTRs, which play an increasingly important role in addressing housing supply issues in England, and purpose-built student accommodation will not currently benefit from an exemption on the basis that this could give those sectors a competitive advantage over the build for sale sector.
With key aspects of the design and implementation of the Levy still to be deliberated on following the closure of the second consultation, we will continue to monitor this space. If you would like any advice in relation to the building safety regime, our cross-sector, multi-discipline team have expert knowledge of this developing area of law and would be happy to support. Please contact Tom Weld for more information.
Whilst the Levy will affect developers of residential properties seeking building control approval in England, it should be noted that the Scottish government is seeking to introduce an equivalent levy in Scotland. A consultation regarding the devolution of powers for a Scottish levy is currently seeking views and will close on 19 February 2024.
This article was written by Kayla Urbanski and Joanna Rogers.