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Finance - overviewBest value
The best value regime was introduced in the Local Government Act 1999 (LGA 1999) and the legislation is still in force. LGA 1999, Pt I created the statutory requirement for public bodies, known in this context as best value authorities (BVAs) to deliver best value, and abolished the previous regime of compulsory competitive tendering.
In England, the coalition government has abolished much of the best value framework in relation to targets, guidance and duties. This includes revoking guidance on the two tier code and the whole statutory guidance. The DCLG published a new statutory guidance in September 2011 and sets out some reasonable expectations for authorities in England.
In Wales, the Best Value regime was replaced by the Wales Programme for Improvement (WPI) in 2002. The WPI is guidance on how local authorities can best discharge their duties in respect to best value. When the Local Government (Wales) Measure 2009 (LG(W)M 2009) was introduced, WPI evolved further.
National non-domestic rating
Since 1 April 1990 most non-domestic properties in England have been liable to nationally set non-domestic rates (NNDR), which are also known as business rates (or sometimes the unified business rate).
Liable properties include public buildings, pipelines and advertising hoardings, as well as businesses. However, some non-domestic properties, such as agricultural land and associated buildings, and churches, are exempt.
The key features of the system are:
businesses and other occupiers or owners of non-domestic properties (hereditaments) pay NNDR as their contribution towards the cost of local authority services
the government sets the annual tax rates, which are known as the non-domestic rating multiplier and the small business non-domestic multiplier (Local Government Act 2003, s 62; Non-Domestic Rating (Small Business Rate Relief) (England) Order 2004, SI 2004/3315). Increases from year to year are limited by statute to no more than the annual increase in the Retail Prices Index
the tax due for a liable property is arrived at by multiplying the rateable value for the property by the NNDR multiplier, adjusted for any reliefs or exemptions permitted by the billing authority
all non-domestic properties are revalued at five-yearly intervals. The current rating list has been operational since 1 April 2010
the Secretary of State has exercised the power to put in place transitional arrangements to phase in the effects of revaluations
billing authorities issue annual bills accompanied by specified information. Part-year liability is calculated on a daily basis. Since 5 November 2003 billing authorities have had the power to serve NNDR bills electronically (Council Tax and Non Domestic Rating (Electronic Communications) (England) Order 2003, SI 2003/2604)
the Valuation Office Agency collects contributions in lieu of NNDR in respect of Crown properties and central government collects the NNDR from some large infrastructure companies, eg the utilities
the proceeds of NNDR are pooled and redistributed to local authorities through the revenue support grant system by reference to the resident population in each area
The Local Government Finance Bill introduced to Parliament on 19 December 2011 proposes changes from 2012 to the way NNDR is distributed among local authorities.
On 1 April 1993 the council tax replaced the community charge (or, as it was more commonly known, the poll tax). It is applicable to England and Wales. Although it is the only domestic tax that is set by local government, council tax contributes only a small proportion (25% on average) of local government revenue. The majority of the local authority income comes from central government grants and from business rates, which are collected by local government and then passed to the centre and redistributed to local authorities.
Council tax contributes to the financing of local government services such as education, social care, police, fire and rescue, recycling, refuse collection and disposal, flood defences, leisure services etc. A significant proportion of local government services are statutory. The remainder are discretionary and are determined by the local council.
All properties are valued for council tax purposes using an assumed capital value and put into one of eight valuation bands based on their value on 1 April 1991, not their current value. The Valuation Office Agency is responsible for the valuation of all domestic properties in England and their allocation to one of the eight bands. The valuation band is used to determine how much council tax is levied.
The person liable to pay the council tax is normally the resident, but where no one is resident, the owner(s) of the property is/are liable. Spouses and partners who live together as owners or tenants are jointly and severally liable for paying the bill.
Council tax and housing benefits
Substantial amounts of benefits are awarded each year to individuals to relieve their obligation to pay council tax and housing rents. Housing and council tax benefits are both complex means-tested benefits that are administered by local authorities and paid to those on low income to help meet the relevant payments.
The coalition government will implement major changes through the Welfare Reform Act 2012 (WRA 2012) which received Royal Assent on 8 March 2012. WRA 2012 will bring about the biggest change to the welfare system for over 60 years. It introduces a wide range of reforms which seek to deliver the commitment made by the coalition government to make the benefits and tax credits systems fairer and simpler.
Revenue budget monitoring
Local authorities, in line with most public sector organisations, must manage their affairs within defined budgets. Financial management is integral to a council's corporate governance arrangements. Therefore, senior management and leading members across the council as a whole must assure themselves that its financial performance is in line with its plans and that the internal accountability arrangements are clear and follow best practice.
Councils also have a duty to make arrangements to secure continuous improvement in the way in which functions are exercised, having regard to a combination of economy, efficiency and effectiveness. Budgeting and budget monitoring are therefore important and vital elements of a council’s strategic and corporate planning arrangements. They are also key components of every council’s financial and performance management systems. The council’s financial rules, which are part of the corporate governance framework (and constitution), will set out the amount of flexibility that budget holders can work within.
Capital finance differs from revenue finance as revenue expenditure has to be met from current income whereas capital expenditure can be met by borrowing or capital receipts and the costs can be spread over the period in which the benefits of the expenditure are expected to accrue.
The Prudential system is a comparatively simple framework that encourages investment in the capital assets that local government needs to improve services and relies on accounting concepts, plus professional and self-regulation. It allows local authorities to raise finance for capital expenditure, without government consent, where they can afford to service the debt without extra government support.
The main considerations for a local authority in planning future levels of capital spend are:
capital spend must be considered in light of its future revenue implications of both running costs and the costs of borrowing
capital budget allocation should relate to the wider asset management planning, which should be founded in the delivery of local priorities and services
capital allocations should be integrated into service planning, ie alignment with council strategic priorities, relating financial investment to the planning of service outcomes and to performance management (these considerations also mirror those set out in the Chartered Institute of Public Finance and Accountancy (CIPFA)s Prudential Code)
Private Finance Initiative
The Private Finance Initiative (PFI) is a form of public-private partnership (PPP) by which local authorities (and other public sector bodies) can gain access to new or improved capital assets (mostly, but not always, buildings). Unlike traditional procurement, the public sector does not buy the assets, but rather pays for their use together with associated services (for example, security, cleaning etc).
On the 15 November 2011 the government’s intention to reform the PFI was announced by the Chancellor. The government intends to conduct a broad based engagement process and is now inviting all interested parties to respond to a call for evidence on the reform of PFI and to bring forward proposals for a new approach to using the private sector in the delivery of public assets and services. The call for evidence ended on 10 February 2012 and the results of this research are awaited.
Local authorities have extensive powers to borrow money and to make investments. CIPFA has produced a Code on Treasury for over 10 years and its requirements are incorporated into the Prudential Code.
For the purposes of the code and accompanying guidance notes, CIPFA has adopted the following as its definition of treasury management activities:
'The management of the organisation’s cash flows, its banking, money market and capital market transactions; the effective control of the risks associated with those activities; and the pursuit of optimum performance consistent with those risks.'
Audits and auditors
Local authority audits in England and Wales are unique in the way they operate. They are more legalistic than the audits of companies and they extend beyond the focus on the annual accounts that is typical of the private sector audit.
The external auditors of local authorities in England and Wales are appointed by the Audit Commission. Local authorities are consulted on which auditor is to be appointed, but the final selection is by the Audit Commission itself. The principal legislation governing the work of the Audit Commission is the Audit Commission Act 1998.
Auditors perform an annual audit of financial statements. They also have wider responsibilities under the Audit Commission’s Code of Audit Practice 2010 for local government bodies to review and report on whether an audited body has made proper arrangements for securing value for money in its use of resources.
Local authority auditors continue to have powers that are wider than found elsewhere:
to give electors the opportunity to raise questions about the accounts, and consider and decide on objections received in relation to the accounts
to apply to the court for a declaration that an item of account is contrary to law
to consider whether to issue an advisory notice and, if appropriate, to do so, or to make an application for judicial review
Local authorities are expected to maintain adequate and effective systems of internal audit of their accounting records and of their systems of internal control in accordance with the proper practices in relation to such.
In England and Wales the local authorities are expected to produce their financial accounts in accordance with proper practices. The principal proper practice is detailed in the Code of Practice on Local Authority Accounting for the United Kingdom. CIPFA/LASAAC follows the international accounting standards as of 1 April 2010.
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