LGA response : Consultation on changes to statutory guidance and regulations: Minimum Revenue Provision

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This response has been cleared by the lead members of the LGA’s Economy and Resources Board.

This consultation follows on from proposals originally made in 2021 to which we responded, and a further post consultation survey on revised proposed regulations that we also responded to. The proposals made in the current consultation have taken account of the comments we made in response to those earlier consultations and it is clear that the aim of the revised regulations and guidance is to avoid the potential problems with drafting in the original proposals that we and others in the sector highlighted. This is to be welcomed.

As is acknowledged in the consultation, the Minimum Revenue Provision (MRP) regulations and guidance will become a lot more complex as a result of the changes. There is a trend towards increasing complexity of regulation and guidance and local authorities will need support in interpreting and implementing them. Much of the current consultation is therefore to determine whether the revised regulations and guidance achieves the policy aims laid down in this consultation and the earlier ones in 2021 and 2022, so a lot of the questions are highly technical and about interpretation of technical terms. Whether the guidance and regulations achieve the aims will be decided by how they are interpreted by accounts preparers and by auditors. Special attention should therefore be paid to responses to the consultation from technical experts in local authorities who will be using the new documents.

The revised guidance and regulations are to apply from April 2024, from the financial year 2024/25. Although the proposals have been public for a long time now, the consultation will not be concluded (and the proposals not finalised or enacted) until long after local authorities have set their 2024/25 budgets. This is a problem as local authorities need to set their MRP policies as part of their budget setting process. They will therefore be setting the MRP policy without being certain on whether the proposals will be enacted as per the consultation or whether they will be enacted following further amendment. Given the timescale it would therefore make sense for the full implementation date to be put back to April 2025, but also allow voluntary early adoption in April 2024 by those local authorities that have set their 2024/25 budgets and policies accordingly.

Question 1

Do the revised Regulations meet government’s objectives as set out in this consultation? Please provide details to support your answer.

This would appear to be the case. However, as outlined in the general comments above, this is where interpretation by accounts preparers and auditors will be crucial. Notice should therefore be taken of responses from technical experts in local authorities who will be using the new documents directly. 

Question 2

In your view, do the most recent amendments to the Regulations as set out in this consultation document give rise to any unintended consequences or new risks? Please provide details to support your answer.

Assuming there are no problems with interpretation, it is our view that, as these revised proposals are in line with those made in the second consultation in 2022, they have been drafted to address the unintended consequences that would have arisen if the original proposals for 2021 had been implemented.

The original consultation in 2021 identified a potential revenue cost on local authority budgets in the year of implementation of £700 million. As we noted in our earlier response, this is a significant sum and one likely to impact unevenly across the sector. Many councils that will be affected have acted in good faith on the basis of the current regulations and believe they have followed prudent accounting practices. The implications for these councils are potentially devastating for local public services. We suggested that mitigation arrangements should be put in place, including a recommendation that the implementation only applies to new debt funded assets for which new debt was taken out after the new regulations come into effect. We also called for work to be undertaken to ensure this cost is fully understood, including identifying which authorities are affected and by how much before the changes are implemented.

Question 3

Do you agree with the additional guidance on what should be included in the MRP Statement? Please provide details to support your answer.

The proposed guidance (para 31) states that it does not provide “prescriptive requirements” on the content and format of the statement and then immediately lists six items that the statement should contain “as a minimum”. This is confusing. If the guidance specifies minimum requirements it should not state that it does not “provide prescriptive requirements” as it is not then clear whether those “minimum requirements” are “prescriptive” and have to be followed.

Question 4

Is the guidance sufficiently clear that MRP must be determined with respect to total CFR, less only those elements of CFR permitted by statute? Please provide details to support your answer.

The use of CFR (Capital Financing Requirement) is clearly stated. It is clear that the calculation of the CFR is as specified in the CIPFA Prudential code.

Question 5

Is it clear that authorities must not exclude any portion of CFR from the determination of the MRP charge on the basis that the CFR is associated with an investment asset? Please provide details to support your answer.

This is made clear in paragraph 37 of the guidance. 

Question 6

Is the list of circumstances where the MRP charge may be determined to be £nil sufficiently clear and complete? Please provide details to support your answer.

Question 7

Is the revised Guidance clear on how HRA CFR should be treated with respect to determining an MRP charge? Please provide details to support your answer. 

Question 8

Does the revised Guidance address concerns that changes to the Regulations might require additional MRP for the HRA CFR? Please provide details to support your answer. Question 9. Is the revised Guidance clear on how capital receipts may be used to reduce the CFR, and therefore the MRP charge?

• (a) MRP need not be made with respect to capital loans provided they are not commercial capital loans?
• (b) MRP must be made with respect to commercial capital loans?

Questions 6 to 11 all seek to check whether the wording in the guidance is sufficiently clear on what is required for various aspects of the MRP charge. These are all crucial to the success of the implementation of the new guidance and regulations. In particular the treatment of capital receipts in relation to MRP and the position of commercial loans need to be completely clear; in our response to the original consultation we had highlighted unintended consequences of the original proposals for these. The new proposals do seek to address these unintended consequences and in our opinion they are set out in a reasonable way and the requirements are clear. However, as noted in the comments made above, account should be taken of the views of technical experts in local authorities who will be using the guidance.

Question 12

Taking into account both the draft amendments to the Regulations and the revised Guidance, is it clear what constitutes a commercial loan? 

This should be made clearer by using the same terminology for commercial investments that is used in the CIPFA Prudential code, the CIPFA Treasury Management Code and in HM Treasury’s PWLB guidance. That would make it clear that the definitions align and help avoid confusion. 

Question 13

Does the revised Guidance sufficiently explain how repayments of a capital loan, which are capital receipts, may be used to directly offset the relevant MRP charge (as a statutory exception to the general rule that capital receipts cannot be used to offset MRP)? 

Question 14

Does the revised Guidance sufficiently explain: (a) the requirement to include in the MRP charge an amount for any expected credit loss or actual loss with respect to a capital loan? (b) the circumstances where the MRP charge may be lower than the recognised loss? 

These both appear to be clear, however, as noted in the comments made above, account should be taken of the views of technical experts in local authorities who will be using the guidance. 

Question 15

Please provide any further comments you have on the revised Guidance or amendments to the Regulations. 

Please see comments made in the introduction, above. In particular, the proposals will make the regulations and guidance more complex and local authorities will need supporting accordingly. The implementation date of 2024 is going to cause local authorities problems. While we appreciate that the revised proposals deal with the concerns with drafting that we raised in the first consultation in 2021, the potential additional revenue cost of £700 million has not been addressed. Question 16. Consider the changes to the Regulations and the Guidance. Will these result in a change to your MRP charges in future years? 

Question 17 

Where possible, please provide an estimate as to the increase or decrease in your authority’s MRP charge. Assume the revised changes come into effect from April 2024. Please provide an absolute value and percentage. 

Question 18

Will the changes result in an adverse impact on your authority’s financial sustainability or ability to deliver services? Please provide details. 

Questions 16, 17 and 18 are all questions for individual local authorities to answer. However, in terms of practical impact in 2024/25 we would draw attention to the comments made in the introduction (above) that the time available to implement is such that it will cause difficulties if implementation goes ahead in in 2024/25 and that a deferral to 2025/26 would help avoid problems.

Bevis Ingram, Senior Adviser Finance

Email: [email protected]

Consultation on changes to statutory guidance and regulations: Minimum Revenue Provision - Department for Levelling Up, Housing and Communities - Citizen Space