Tax Increment Financing has attracted a lot of comment and debate in recent months. TIF is, of course, one of a number of tools which the coalition government proposes to make available to assist local authorities with regeneration. TIF schemes enable authorities to borrow to fund infrastructure to kick-start new development, with the consequential increase in business rates being used to repay the bonds. It therefore provides a degree of 'additionality' created by extra development and (less immediately and directly) by increased property values.
Despite much local authority interest, and high-profile promises, we have yet to see the detail of the proposed legislation. There are various models under consideration. None is likely to be the same as those widely used in the US because of the UK's single tax system, and a cultural reticence to experiment with it. Perhaps the biggest hurdle to the use of TIFs is the fact that the model most discussed is one that extends local authority borrowing powers, not the developer-led 'pay as you go' popular in the US. Recent experience in the US has shown that successful TIFs need to appeal to the private as well as public sector, and that might be the only way in which it is likely to work here.
But even the developer-led model has its critics. There are a number of other points to bear in mind in developing a TIF model.
First, other initiatives might be more attractive. The Growth White Paper in October promoted the idea of business rates retention and business increase bonus. Much has also been made of the new homes bonus. Politically, these are more likely to be promoted as 'rewarding' the communities in which development takes place than TIFs. The announcement in this year's budget about the resurrection of Enterprise Zones, and the consultation paper, recognises the role of TIFs, although there are questions about the compatibility of developer-funded TIFs and the 'localisation' of NDR revenues.
Second, there is prudential borrowing. Those authorities that already use prudential borrowing might in the face of spending cuts be tempted or forced to use up their credits for what are viewed as essential services (waste, supported housing etc). TIF might be seen as too marginal a requirement. A private sector model would largely overcome this problem.
Third, development needs to be welcomed and flexible. This may require cultural change (at least within CLG) and has two aspects. The first is that delays in securing planning permission, and a culture of opposition and challenges to permissions, will not make the environment for TIFs any easier. As a way of partially addressing this risk, where a scheme is to be supported by TIF, both it and the necessary infrastructure need to be part of the local plan. Also, given the lifespan of TIFs, there needs to be explicit recognition that the underlying scheme should, within the constraints of defined parameters, be able to change.
Finally, the relationship between TIF and the Community Infrastructure Levy needs to be carefully considered. There is no legal bar to the infrastructure which is to be funded by TIF appearing on a planning authority's CIL charging schedule, but there might well be political pressure to keep them separate.
That is not to say that TIF won't find a place in England and Wales. It already has in Scotland. The challenge is to ensure that the potential pitfalls, and the availability of other funding sources, do not kill it before it even gets off the ground.
David Cox is a partner at the law firm SNR Denton UK
