Tiffany Cloynes 20 June 2017

Revenue generation by councils

A local authority has a good range of opportunities to generate revenue and needs to make full use of them to manage the pressure on resources. The options include using charging powers, setting up companies to trade commercially and making full use of the revenue potential of their land.

If a local authority is providing discretionary services or is in a position to start doing so, it should consider using the charging power in section 93 of the Local Government Act 2003. This gives local authorities the power to charge for services which they have a power but not a duty to provide. The level of income is restricted to the amount it costs to provide the services.

However, local authorities are not constrained as to how they calculate costs, so they can include the full cost of all aspects of service provision. This means that they can take the opportunity to invest in the infrastructure for services and recover the costs through charging.

Differential charging is permitted, so local authorities can use the power to bring in income from those who it believes are in the best position to pay, whilst providing services at a lower cost or no cost to people who need the services but are not so well placed to pay for them.

The charging power in section 93 of the Local Government Act 2003 is additional to powers which allow local authorities to charge for specific facilities, for example section 19 of the Local Government (Miscellaneous Provisions) Act 1976 which gives them power to provide recreational facilities and to charge for these.

The UK Government is currently consulting on proposals for the secretary of state to use powers to limit or repeal charging powers to prevent local authorities from charging for the use of parks for parkruns. It is also proposed to prevent them from using the general power of competence to charge for parkruns. The calling of a general election means that change in legislation is unlikely to happen soon but local authorities should be alert to any potential reduction in their charging powers.

Trading powers allow local authorities to trade commercially but there are strict requirements affecting the use of these. Section 95 of the Local Government Act 2003 and the Local Government (Best Value Authorities) (Power to Trade) (England) Order 2009 allow a local authority to do for commercial purposes anything which it has the power to do in carrying on any of its ordinary functions.

However, that power must be exercised through a company. Before exercising the trading power, a local authority must prepare and approve a business case which sets out the objectives of the business, the investment and other resources required to achieve the objectives, the risks the business might face, the financial results of the business and any other relevant outcomes. If the authority provides any resources to the company, such as accommodation, staff or services, it must recover the cost of these.

If a local authority in England wishes to do things for a commercial purpose which do not relate to its functions, the general power of competence in section 1 of the Localism Act 2011 gives it power to do anything that individuals generally may do but section 4 of that Act requires that the use of the power for a commercial purpose must be done through a company.

Local authorities in Wales do not yet have a general power of competence but consultation by the Welsh Government suggests one may be introduced in the future.

Effective management of assets can provide income generation opportunities for local authorities, both when they use them and when they dispose of them. It is important for local authorities to be clear about the purpose for which they hold land, as this will determine the power they use to dispose of it and whether any particular obligations or constraints apply.

For example, section 123 of the Local Government Act 1972 gives a local authority power to dispose of land held by it and a local authority using this power must obtain the best consideration that can reasonably be obtained unless the disposal is for a short tenancy or it has the consent of the secretary of state or, in Wales, the Welsh ministers.

One way for a local authority to make use of its assets is to participate in an asset-backed vehicle. This involves the authority and a private sector partner establishing a corporate entity into which the authority transfers land and the private sector partner invests funds to match the local authority’s contribution. This can help a local authority to make the most effective use of its properties, whilst also having potential for income generation.

Local authorities need to have strategies in place to ensure they identify and pursue revenue generation opportunities. These should set out the options, assess the risks, and develop business cases and business plans. The details will be particular to each local authority and each authority should make effective use of its strategy.

Sheffield City Council, for example, already has a successful asset-backed vehicle, Sheffield Housing Company; charges for a number of discretionary services and is increasingly looking at discretionary add-ons to mandatory services.

Sarah Bennett, service manager (commercial) in the council’s legal services department agrees that preparation is key. She says: ‘With budgets continuing to shrink the temptation is to rush to get the money coming in. However, in our experience it is worthwhile spending time getting the model right at the beginning. Engagement and buy-in from members and senior officers is vital, as is understanding the true cost of delivery. Ensure you include all attributable overheads.

'Even if a service is not itself contributing to corporate building/IT costs a proportion of the costs related to those buildings/IT systems is still relevant, as are costs associated with support services such as legal and finance.’

Tiffany Cloynes is partner and head of public services in England for Geldards LLP

This feature first appeared in Local Government News magazine. Click here to register for your free copy.

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