2003 Chapter 26

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THESE NOTES REFER TO THE LOCAL GOVERNMENT ACT 2003 (C.26) WHICH RECEIVED ROYAL ASSENT ON 18TH SEPTEMBER 2003

LOCAL GOVERNMENT ACT 2003

     EXPLANATORY NOTES

INTRODUCTION

1.     These explanatory notes relate to the Local Government Act 2003 which received Royal Assent on 18th September. They have been produced by the Office of the Deputy Prime Minister, with the Wales Office, in order to assist the reader in understanding the Act. They do not form part of the Act and have not been endorsed by Parliament.

2.     The notes are to be read in conjunction with the Act. They are not, and are not meant to be, a comprehensive description of the Act. So where a section or part of a section does not seem to require any explanation or comment, none is given.

3.     With certain exceptions, the Act extends only to England and Wales. Section 129 governs the extent of the Act's provisions.

SUMMARY

4.     The Act covers various aspects of local authorities and is in eight Parts:

• capital finance etc and accounts (Part 1)

• financial administration (Part 2)

• grants etc (Part 3)

• business improvement districts (Part 4)

• non-domestic rates (Part 5)

• council tax (Part 6)

• housing finance etc (Part 7)

• miscellaneous and general provisions (Part 8).

TERRITORIAL APPLICATION: WALES

5.     The Act has been drafted in liaison and agreement with the National Assembly for Wales and the Wales Office so that, where appropriate, it applies to both England and Wales.

6.     All provisions apply to both England and Wales with the following exceptions:

• section 34 (grants for parishes) applies to England only, while section 35 (grants for community councils) makes similar provision for Wales and applies to Wales only

• section 40 and Schedule 2, taken with paragraphs 5, 12 to 17 and 22 of Schedule 7, have effect to alter the system of local government finance reports in Wales only

• sections 61 to 65 with the related provisions in Schedule 7, introduce differences between the operation of non-domestic rates in England and their operation in Wales

• section 75 (council tax: second and empty homes) applies only to billing authorities in England as Welsh billing authorities already have similar powers under section 12 of the Local Government Finance Act 1992

• section 83(1) (council tax: major precepting authorities: combined fire authorities), and paragraph 1 of Schedule 7, apply only to fire authorities in England, while section 83(2) and (3) confer power on the National Assembly for Wales in relation to Welsh fire authorities

• section 92(1) amends section 24(3) of the Housing Act 1985 so as to cause it to apply only to Wales, and section 92(2) confers power on the National Assembly for Wales to make an order repealing section 24(3) of that Act as amended by section 92(1)

• sections 99 and 100 (performance categories for local authorities), except section 100(3), apply only to England

• sections 105 and 106 (and Schedules 4 and 5) provide for a Valuation Tribunal Service which will operate only in England

• section 112 makes provision about the Standards Board for England and so does not apply to Wales

• section 115 (voting rights for co-opted members of overview and scrutiny committees) applies only in England

COMMENTARY ON SECTIONS

PART 1: CAPITAL FINANCE ETC AND ACCOUNTS

Summary

7.     The new capital finance system (like the one it replaces) sets the legal framework within which local government may undertake capital expenditure and central Government may regulate that activity.

8.     The innovative feature of the new system, however, is that local authorities will be free to raise finance for capital expenditure - without Government consent - where they can afford to service the debt without Government support. There will be reserve powers for Government to set limits on borrowing and credit, but it is envisaged that these would be used only in exceptional circumstances.

Section 1: Power to borrow

9.     The present wide-ranging power of an authority to borrow for purposes relevant to its functions is preserved. But the new legislation goes further and clarifies that there is power to borrow for normal treasury management purposes - for example, to refinance existing debt.

Sections 2, 6 and 13: Control of borrowing

10.     The main borrowing control section 2(1) will be the duty not to breach the prudential and national limits set under sections 3 and 4.

11.     Authorities will be free to seek loans from any source, but will, as now, be prohibited from borrowing in foreign currencies without the consent of Treasury, since adverse exchange rate movements could leave them owing more than they had borrowed. Various provisions in the present legislation protecting lenders to authorities will be preserved. These include the long established 'safe harbour' (section 6): this ensures that debts can still be enforced even if it turns out that the authority borrowed unlawfully and means that potential lenders do not need to make detailed enquiries about authorities' borrowing powers. Section 13(3) maintains the vital principle that all of a local authority's revenues serve as security for its borrowing.

12.     The mortgaging of property will continue to be prohibited: section 13(1). It will also remain unlawful to 'securitise', that is, to sell future revenue streams such as housing rents for immediate lump-sums (this is implicit in section 13(1)).

Section 3: Duty to determine affordable borrowing limit

13.     This provision forms the heart of the new 'prudential' borrowing system. It first imposes a broad duty for authorities to determine and keep under review the amount they can afford to borrow. The section then empowers the Secretary of State or the National Assembly for Wales to define that duty in more detail in regulations, which may in turn require authorities to have regard to specified codes of practice. The latter power will be used primarily to specify the Prudential Code being produced by the Chartered Institute of Public Finance and Accountancy (CIPFA), which will lay down the practical rules for deciding whether borrowing is affordable.

14.     It will be for each authority to set its own 'prudential' limit in accordance with these rules, subject only to the scrutiny of its external auditor (special arrangements apply to the Greater London Authority and its functional bodies). The authority will then be free to borrow up to that limit without Government consent. The authority will be free to vary the limit during the year, if there is good reason. Subsection (8) ensures that the consent of the full Council is needed for the setting of the limit and any subsequent variation. Breach of the limit is prohibited by section 2(1)(a).

15.     Requirements in existing legislation for authorities to balance their revenue budgets prevent the long-term financing of revenue expenditure by borrowing. However, the new system, like the present one, will confer limited capacity to borrow short-term for revenue needs in the interests of cash-flow management (see note on section 5 below).

Section 4: Imposition of borrowing limits

16.     The Government, or the National Assembly for Wales will have reserve power to impose 'longstop' limits for national economic reasons on all authorities' borrowing and these would override authorities' self-determined prudential limits (set under section 3). Such limits (implemented by regulations) would only be imposed if authorities' total borrowing, albeit locally prudent, was increasing to a level which threatened the country's overall economic interests.

17.     If an individual authority did not wish to undertake the full amount of borrowing permitted to it under a national limit, it would have power to transfer the spare 'headroom' to another authority, which would thereby have its borrowing capacity increased (subject to still complying with its own prudential limit).

18.     There would be a similar power to impose a borrowing limit (by direction in this case) on an individual authority, to prevent it acting imprudently and borrowing more than it could afford.

19.     Breach of the limits set under this section is prohibited by section 2(1)(b).

Section 5: Temporary borrowing

20.      The present system allows authorities also to borrow temporarily to meet their revenue costs, pending the receipt of income due to them (for example, while waiting for council tax payments). Under the new system, forseeable requirements for temporary revenue borrowing will be allowed for when borrowing limits are set by the authority under section 3 (or by the Government or National Assembly for Wales under section 4). Section 5 then allows extra flexibility in the event of unforeseen needs, by providing for the borrowing limits to increase by the amounts of any payments which are due to the authority in the year but have not yet been received.

Sections 7 and 8: Credit arrangements

21.     A main aim of the present capital finance system was to regulate the innovative property leasing and hire purchase deals which some authorities used before 1990 to evade the controls on borrowing then in force. Such transactions, known collectively as 'credit arrangements', have the same crucial effects as borrowing - they both increase public expenditure and create significant long-term revenue commitments at the local level.

22.     Credit arrangements (as defined in section 7) will continue to be treated like borrowing under the new system. Section 8 ensures that the affordability assessment under section 3 must take account not only of borrowing but also of credit arrangements. In addition, any national limit imposed under the reserve powers in section 4 would apply to both borrowing and credit.

23.     The definition of credit arrangements is much simpler than under the present system, relying on the accounting concept of long-term liabilities. The power to vary that definition by regulations would be used to provide that certain liabilities (such as those relating to pensions) are excluded from the definition.

Sections 9 to 11: Capital receipts

24.     Capital receipts are defined in section 9 broadly as now - i.e. as the proceeds of property sales. However, such sums will be treated as received when they become payable to the authority, rather than, as now, when actually paid. This change is simply part of the general approach of bringing definitions in line with accounting practice (see note below on sections 21 and 22) and will have no practical implications. There is power to vary this definition by regulations (section 9(3)) and it is likely that the repayment of certain loans made for capital expenditure will be, as now, defined as capital receipts.

25.     The present rules requiring part of housing capital receipts to be 'set aside' for debt redemption will disappear. These will be replaced by new arrangements, including 'pooling' of a proportion of housing receipts (section 11(2)(b)), so that spending power can be redistributed to those authorities in areas with a greater need for new housing investment. This will apply to all sales proceeds obtained in cash; and to most non-money proceeds (section 10) (but disposals in return for housing nomination rights will be exempted). The pooling power will apply only to housing receipts and only to those which are obtained after the legislation comes into force.

26.     Section 11 provides power to make regulations about the use of other capital receipts - that is, all non-housing receipts and any housing receipts which are not pooled. The intention is to ensure that such receipts will, as now, be usable only for new capital spending or for the repayment of debt.

27.     The treatment of amounts already 'set-aside' under the present system will be specified in regulations made under section 21. The repeal of the current set-aside regime will not in itself create access to any additional resources for authorities. However, the set-aside rules were relaxed for debt-free authorities, giving them extra scope for capital expenditure; and a debt-free authority with unused spending capacity of that kind will still be permitted to spend those sums when the new system starts.

Section 12: Power to invest

28.     For the avoidance of doubt, section 12 makes clear that authorities have power to invest, not only for any purpose relevant to their functions but also for the purpose of the prudential management of their financial affairs.

29.      The power of the Secretary of State or National Assembly for Wales to issue guidance (section 15) is likely to be used to encourage authorities to invest prudently, thus preserving the safeguards of the present system but allowing greater flexibility and more local discretion.

Section 14: Information

30.     This requirement to provide information is simpler than the one in the present capital finance legislation. In practice, it will mainly mean, as now, that authorities have to complete regular statistical returns to the Secretary of State or National Assembly for Wales.

Section 15: Guidance

31.     Authorities will have to have regard to any guidance either issued specifically by the Secretary of State or National Assembly for Wales or identified in regulations. Guidance is likely to be needed, for example, on investments, enabling Government or the Assembly to steer authorities towards prudent options, while avoiding the rigidities of the present controls embodied in regulations (see note on section 12 above).

Section 17: External funds

32.     The main effect here is to ensure that transactions by local government pension funds will, as now, be outside the capital controls. Separate regulatory systems apply.

Section 18: Local authority companies

33.     The present system ensures that authorities cannot evade the capital controls by operating through companies they own or influence. That broad principle will be preserved under the new system, both for the purposes of the prudential limit and any limit imposed under reserve powers (sections 3 and 4). This section confers the powers necessary to achieve that end and relies upon concepts used in the present system in Part 5 of the Local Government and Housing Act 1989.

Section 19 and Schedule 1: Application to parish and community councils

34.     The borrowing of parish and town councils in England (plus charter trustees and, in Wales, community councils) is still controlled under the system in the Local Government Act 1972 which was repealed for principal authorities in 1990. This relies upon case-by-case appraisal of applications for borrowing consent. The effect of this section is to replace the old provisions with new ones which appear in Schedule 1 to the present Act. There is some tidying up but the broad arrangements are unchanged.

Sections 21, 22 and 16: Accounting practices, "Revenue Account", "Capital Expenditure"

35.     The new system will as far as possible take standard local authority accounting practices and concepts as its starting point, thereby avoiding the need for special definitions in the legislation.

36.     The legislation will provide a framework for identifying the accounting codes which are to constitute 'proper practices' (section 21(2)). The codes so identified will have that status for the purposes of the capital finance system and other existing legislation.

37.     Some special accounting treatments may be needed for the purposes of the capital system and there will be power for the Secretary of State or National Assembly for Wales to specify accounting practices by regulation (section 21(1)).

38.     Section 16 deals specifically with the definition of 'capital expenditure'. Again, the normal accounting definition will apply, but there is power to amend this, for individual authorities (by direction) or more generally (by regulations). That power to widen the definition will be used very sparingly, but regulations are likely, as now, to classify computer software development costs as capital expenditure. Directions will again be given only in exceptional circumstances, which could, as now, include cases where authorities are faced with significant redundancy costs.

Section 23: 'Local authority'

39.     The list of bodies to be covered by the new system (section 23(1)) will be largely the same as under the present system. As now, there will be power to bring levying and precepting bodies into the system later by regulations (section 23(2)).

Section 24: Wales

40.     Part 1 of the Act refers only to the Secretary of State and not also to the National Assembly for Wales. The effect of this section is that functions conferred under Part 1 on the Secretary of State are, in Wales, to be functions of the Assembly (and not functions of the Secretary of State). In section 19 and Schedule 1 this result is achieved by reliance on the concept of "the appropriate person" (defined in section 124).

PART 2: FINANCIAL ADMINISTRATION

Summary

41.     Sections 25 to 29 impose new duties on local authorities about how they set and monitor their budgets. They are designed to help ensure that authorities make prudent allowance for risk and uncertainties in their budgets, and regularly monitor their finances during the year. Largely they leave discretion with the authorities about the allowances to be made and action to be taken. But section 26 is a reserve power for the Government or National Assembly for Wales to lay down the minimum reserves that local authorities must allow for when they set their budgets.

42.     The objective of section 30 is to facilitate remedial action when an authority's expenditure is forecast to exceed its resources and its chief finance officer has made a formal report to that effect.

Section 25: Budget calculations: report on robustness of estimates etc

43.     Local authorities decide every year how much they are going to raise from council tax. They base their decision on a budget that sets out estimates of what they plan to spend on each of their services. Because they decide on the council tax before the year begins and can't increase it during the year, they have to consider risks and uncertainties that might force them to spend more on their services than they planned. Allowance is made for these risks by:

• making prudent allowance in the estimates for each of the services, and in addition

• ensuring that there are adequate reserves to draw on if the service estimates turn out to be insufficient.

44.     This section requires an authority's chief finance officer to make a report to the authority when it is considering its budget and council tax. The report must deal with the robustness of the estimates and the adequacy of the reserves allowed for in the budget proposals, so members will have authoritative advice available to them when they make their decisions. The section requires members to have regard to the report in making their decisions.

Sections 26 and 27: Minimum reserves

45.     Section 26 gives the Secretary of State power to determine minimum reserves for local authorities in England by regulation. The National Assembly for Wales is given a corresponding power in relation to local authorities in Wales. The minimum applies to the budget process: authorities would have to ensure that their budget made allowance for reserves at least equal to the minimum. Nothing in the section would prevent these reserves being used during the year, even if as a result they fell below the minimum. However, if it was forecast that this was likely to happen, section 27 requires the chief finance officer to report to the authority, at the time the following year's budget and council tax is being considered, to explain the reasons and any action considered necessary to prevent a repetition.

Sections 28 and 29: Budget monitoring: general; Budget monitoring: Greater London Authority

46.     Local authorities need to monitor their income and expenditure against their budget, and be ready to take action if overspends or shortfalls in income emerge. These sections make this a statutory duty. If monitoring establishes that the budgetary situation has deteriorated, authorities are required to take such action as they consider necessary. This might include, for instance, action to reduce spending in the rest of the year, or to increase income, or the authority might decide to take no action but to finance the shortfall from reserves.

47.     Distinct budget procedures apply to the Greater London Authority and its functional bodies, and so separate provision for these organisations is made in section 29. The monitoring duty is placed on the functional bodies and (for its own budget only) on the GLA. But, because the GLA is responsible for setting the budgets of the functional bodies, when one of these bodies identifies a budget deterioration the section requires it to report the fact and the action it proposes to take in response to the Mayor and the Chair of the London Assembly.

Section 30: Authorisation of agreements during the prohibition period

48.     Under section 114 of the Local Government Finance Act 1988 a local authority chief finance officer is under a duty to report to the authority in certain circumstances. One of these circumstances is when it appears to the officer that the expenditure of the authority in a financial year is likely to exceed the resources available to meet the expenditure.

49.     Under section 115 of the Act such a report has to be considered by the full council within 21 days of its issue. During the period from the issue of the report until the day after the council meeting the authority is prohibited from entering into any new agreements involving expenditure by the authority.

50.     This section amends section 115 to allow the chief finance officer to except certain agreements from this prohibition. The exception applies to agreements which the officer considers likely to deal with the situation that led to the report being made or prevent it happening again. To benefit from the exception an agreement has to be authorised in writing by the chief finance officer, who must state why it is considered the agreement is eligible for exemption.

PART 3: GRANTS ETC

Chapter 1: Expenditure Grant

Sections 31 to 33: Expenditure grant

51.     This new wide-ranging power will enable any Minister to make a grant for any purpose, capital or revenue, to any local authority. It will also enable the National Assembly for Wales to make a grant to any local authority in Wales. Save for in Wales, Treasury consent will be needed in all cases to the making of the grants. The power should largely eliminate the need in future legislation for any further specific grant-making powers. It is designed to allow authorities more flexibility in the use of resources than some existing specific powers, which constrain their use. It is also expected to provide a more convenient means of delivering a number of grants currently made under existing powers. The new power will be used, for example, to make grants in connection with service improvements by local authorities which have entered into local Public Service Agreements with the Government.

52.     Grants may be made under this power to a class or category of authority. For example, grants could be made to authorities by reference to performance categories as set out in an order made under section 99(4). The conditions applied to individual grants may be differentiated by reference to these categories or may be different for an individual authority.

Chapter 2: Other Grants etc

Sections 34 and 35: Best value grant: parishes, Best value grant: communities

53.     In the 2001 Local Government White Paper, the Government announced that, when legislation permitted, it would pay a grant of £30,000 per year to each 'best value' parish in England. It stated that the grant would be intended to cover audit costs and the corporate costs of carrying out work relating to best value, such as the preparation of performance plans and management of reviews. It stated also that the costs of separate best value inspections would continue to be supported through the Audit Commission.

54.     The National Assembly for Wales has commissioned a research study into the role and responsibilities of community councils in Wales. This may result in some community councils taking part in the Wales Programme for Improvement which is an in-depth assessment by each authority of its own fitness to achieve continuous improvement across all of its functions. The requirements of the Wales Programme for Improvement are set out in The Local Government (Whole Authority Analyses and Improvement Plans)(Wales) Order 2002, SI 2002 No. 886 (W.101). The basis for this in primary legislation is sections 3 to 6 of the Local Government Act 1999.