The Department for Levelling Up, Housing and Communities (DLUHC) has published its second consultation on the Building Safety Levy, which is part of a package of measures proposed by the Government to ensure that the burden of paying to fix historical building safety defects does not fall on leaseholders.
The scope of the levy has been significantly expanded since it was initially proposed: it will now apply to all new residential developments in England that require building control approval, irrespective of their height.
We describe below the background and legislative basis of the levy, and consider some of the key proposals for the technical detail and implementation of the levy, which are revealed in the consultation paper.
The Government's proposal for a levy was first announced in February 2021, at which point it was envisaged that this would only apply to higher-risk buildings (HRBs). The first public consultation on the Building Safety Levy, which closed in October 2021, also envisaged that the levy would apply only to HRBs. No formal Government response to that consultation has ever been published. The current consultation states that it is building on the 2021 consultation, but that given the changes from the previous proposed scheme, Government deemed it necessary to engage in a further consultation.
Proposed design of the levy, process and enforcement
The consultation document sets out and seeks views on the suggested levy design, including the process for collection of the levy, the rates, and how sanctions and enforcement of the levy will function.
What type of buildings will be covered by the levy?
The most noteworthy change is the extension of the scope of the levy, which will now cover all residential buildings requiring building control approval. This is reflected in Section 58 of the Building Safety Act 2022 (BSA) which received Royal Assent on 28 April 2022. This defines a "relevant building" for the purposes of the levy as a building in England containing "one or more dwellings" or "other accommodation", and expressly states that "accommodation" here "includes temporary accommodation, for example in a hotel or hospital".
Accordingly, as confirmed in the consultation document, the levy may be applied to "any new development considered as "residential", that is any development with a room purpose built for a person to sleep in."
There are various proposed exclusions from the levy, including affordable homes, small developments of under 10 units, NHS hospitals, medical centres and GP practices, as well as supported housing, residential care homes, refuges, criminal justice accommodation and military establishments. The approach to the Build to Rent, purpose-built student accommodation and older people's housing sectors has not yet been determined.
Since the definition of "relevant building" in section 58 of the BSA 2022 expressly includes hotels and hospitals, but hotels do not appear in the list of proposed exclusions, it appears that new hotel builds are likely to be subject to the levy.
Who has to pay the levy?
The levy will be applicable to and must be paid by the 'Client' (i.e. the named person/organisation for whom the project is carried out) on all new residential developments in England that require building control approval. This would also encompass mixed use developments – and although this is not stated in the consultation paper, it is presumed at this stage that the levy will only apply to the residential element.
Who will collect the levy and how will it be assessed?
The consultation suggests that, as "guardians of the building control regime", local authorities (LA) are "best placed to act as the levy collection agency". It is not clear how this will work in circumstances where the Health and Safety Executive (HSE) will act as the Building Safety Regulator (BSR) rather than the LA, i.e. under the new more stringent building control regime that will apply to higher-risk buildings. Paying the levy "will be a compulsory requirement of the Building Control process" and this will be set out in Regulations which will "make it clear that unless the levy is paid, the client cannot move on to the next stage of the building process".
The levy amount is to be self-assessed by the client prior to giving notice of commencement based on the levy rate in that area, the size of the project and any differential rate that is applicable (see below). The proposal is for levy payments to be made in two stages: 60% at the "notice to commence" stage and 40% to be due prior to final certification. This will allow for adjustment of the levy amount based on the final as-built project: whilst the client's self-assessment is based on what they intend to build, it is recognised that project size may change during construction.
How will the levy be calculated?
The consultation document sets out two options by which the levy may be calculated:
- On a 'per unit' basis – which it is suggested "may drive a behavioural change encouraging developers to build fewer but larger homes leading to a net impact of reducing supply"; or
- On a 'per square metre' basis, regardless of the number of homes being built.
In either case, the proposal is to set a lower limit (e.g. below 10 units in total) under which the levy would not apply, in order to avoid disproportionate administrative costs and protect small developers.
Whilst no information is provided as to possible levy rates at this stage, the consultation notes the need to support the Government's 'Levelling Up Agenda,' which recognises geographical inequalities across England. In support of this agenda the proposal is to set differential levy rates based on two factors:
- Average house prices in local authority areas, or in each of the regions; and
- Brownfield (i.e. typically contaminated, under-utilised, or abandoned sites) vs. Greenfield developments.
How will the levy interact with other taxes and charges?
The levy is intended to operate alongside (and separate) to the Government's proposed UK-wide residential property developer tax (RPDT) and the Community Infrastructure Levy (CIL). The consultation document notes that the government is "considering the cumulative impact" of these measures and that this may be taken into consideration in setting levy rates.
Earlier in the year the Government had suggested that the building safety levy offers "scope for higher rates for those [developers] who do not participate in finding a workable solution" to the cladding crisis, through participation in the developer pledge. However, although the consultation references this pledge from major homebuilders, it does not make an express link between the pledge and the operation of the levy. Responsible developers who have signed up to the pledge will therefore be keen to see how, if at all, this may affect their liability to the Building Safety Levy.
How will payment be enforced?
It is unclear at this stage whether there will be any financial penalties for non-payment of the levy – the consultation states that the government is considering a "range of approaches" to sanctions although the primary sanction envisaged at this stage is halting the progress of a development. It appears that this would be effected either via a stop notice, issued by the local authority to prevent progression of the development if the initial 60% levy payment is not made at the "notice to commence" stage, or by withholding final certification if the Client fails to make the second part of the payment.
The consultation paper gives no indication as to when the levy will come into force. The consultation closes on 7 February 2023 – thereafter, the details of the levy will be specified in secondary legislation, and the levy is expected to come into force at some point in 2023. There will however be transitional arrangements for the first year of operation. The consultation states that it is anticipated that "projects that are already at commencement stage on the date the levy goes live will not be subject to the levy and that there will be a grace period for any project that has already entered the building control process on the date the levy comes into operation".
Whilst the introduction of the Building Safety Levy was arguably one of the key components of the new design/construction regime introduced by the BSA, it is only now with this consultation that we are beginning to see how it might work in practice. Whilst some guidance and clarity is provided (e.g. the applicability to new residential developments, subject to any applicable exclusions), it remains unclear what the final payment regime might be in terms of basis of calculation or rate applicable, or indeed how engagement with the developer pledge might be dealt with.
As such, it remains the case that the "devil will be in the detail" when the final regulations are drafted and for the time being the industry would be well advised to watch this space.
If you have any questions about this article, please get in touch with Sue Ryan, Gemma Whittaker or Sean Garbutt.