Finance — overviewBest value

The best value regime was introduced in the Local Government Act 1999. It created the statutory requirement for public bodies, known in this context as best value authorities (BVAs), to deliver best value.

With the introduction of the comprehensive performance assessment (CPA), and subsequently its replacement, the comprehensive area assessment (CAA), the best value duty no longer features so prominently in the regime of local government improvement.

The principal duty on BVAs under the regime is to secure continuous improvement in the way their functions are exercised, having regard to economy, efficiency and effectiveness. The main focus of the general best value duty is therefore continuous improvement, which is what sets the concept apart from the broader, more general understanding of value for money.

BVAs, in exercising their powers to contract out their provision of services, must deal with matters affecting potential staff transfers, including pension provision. In addition, BVAs must abide by the EU procurement rules.

Best value is measured according to key performance indicators and BVAs must conduct best value reviews and prepare performance plans for each financial year. Performance plans must be audited by the authority’s auditors. The Secretary of State has power to give directions in relation to a BVA, if satisfied that is not complying with the requirements of the Local Government Act 1999, Pt 1.

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). 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)

• 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

Council tax

On 1 April 1993 the council tax replaced the community charge (or, as it was more commonly known, the poll tax). 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.

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 under the Local Government Act 1999 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.

The Local Government Act 1972, s 151 requires every local authority to make arrangements for the proper administration of its financial affairs and secure that one of its officers has responsibility for the administration of those affairs.

The Local Government (Finance) Act 1988 placed duties on the s 151 Officer (the responsible financial officer, or RFO) to make a report if it appears to them that the council:

• has made or is likely to make a decision that involves or would involve it incurring expenditure that is unlawful

• has taken or is about to take a course of action that, if pursued to its conclusion, would be unlawful and likely to cause a loss or deficiency on the part of the council, or

• is about to enter an item of account the entry of which is unlawful

The practice of councils varies but generally you can expect to find:

• the timetable and arrangements for the preparation and approval of the financial plan, and the detailed estimates that underpin that

• the links with the council’s strategic and service plans

• monitoring by service managers and other operational staff

• regulation and monitoring by the RFO

• informal and formal reporting to the members of the council

• scrutiny arrangements

• review and reporting by internal and external auditors

Capital finance

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 aligned with the council's strategic priorities and to performance management

Treasury management

Local authorities have extensive powers to borrow money and to make investments. The Chartered Institute of Public Finance and Accountancy (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.

Local authority financial accounting

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 (usually referred to as the SORP, ie a statement of recommended practice). CIPFA/LASAAC has determined that it will transfer to international accounting standards with effect from 1 April 2010.