Consultation outcome

Consultation on changes to the capital framework: Minimum Revenue Provision

Updated 10 April 2024

This was published under the 2019 to 2022 Johnson Conservative government

Applies to England

Scope of the consultation

Topic of this consultation:

This consultation seeks views on proposed changes to regulations to better enforce the duty of local authorities to make prudent Minimum Revenue Provision each year.

Local authorities borrow and invest under the Prudential Framework (the Framework), which comprises legislation and 4 statutory codes that authorities must have regard to. Under this system, authorities have wide freedoms to borrow and invest without the need to seek the government’s consent, provided that borrowing is affordable. The intent of the Framework is to make sure local decisions are prudent, affordable and sustainable.

Where authorities borrow to finance capital spend, they are required under regulations to set aside money each year from their revenue account. This is referred to as Minimum Revenue Provision (MRP) and is to make sure they can afford to repay the principal of their debt.

Local authorities have flexibility in how they calculate MRP, providing it is ‘prudent’. Further guidance on how to calculate a prudent amount is given in the government’s Statutory guidance on Minimum Revenue Provision, which authorities must have regard to. Notwithstanding these flexibilities, authorities must meet the statutory requirement that the charge is prudent and is made to revenue. Where the duty is not adequately met, this can result in authorities borrowing more than they could otherwise afford, and pushing liabilities and risk into the future.

The government is aware that some authorities employ practices that are not fully compliant with the duty to make a prudent revenue provision, resulting in underpayment of MRP. This was reported in the National Audit Office’s report Local authority investment in commercial property (February 2020) and the subsequent report by the Public Accounts Committee in July 2020, which recommended the government take steps to address the issue.

The government set out in its policy paper Local authority capital finance framework: planned improvements, published on 28 July 2021, that it would look to strengthen the MRP duty. It has worked with the sector, Chartered Institute of Public Finance and Accounting (CIPFA) and other stakeholders to identify the problematic practices and is now proposing changes to regulations to make sure authority practices are consistent and fully compliant with the intent of the Framework.

Scope of this consultation:

The government is proposing to make changes to the Local Authorities (Capital Finance and Accounting) (England) Regulations 2003 (the 2003 Regulations) to address the issue that some authorities are not adequately complying with the duty to make Minimum Revenue Provision.

The behaviours the government is seeking to address are:

1. Local authorities using sales from assets (capital receipts) in place of a charge to revenue. Authorities may use capital receipts to reduce overall debt and thereby reduce MRP through the calculation. Capital receipts may not, however, be used in lieu of a prudent charge to revenue.

2. Local authorities are not charging MRP on debt related to certain assets. The evidence is that while some authorities are making MRP for commercial investments funded by borrowing, some are still not paying MRP in relation to borrowing associated with investment assets or capital loans. The statutory guidance is clear that financing for investment assets and capital loans requires provision to be made.

The government is proposing additional text to be added to the 2003 Regulations to make explicit that:

1. Capital receipts may not be used in place of the revenue charge. The intent is to prevent authorities avoiding, in whole or part, a prudent charge to revenue. It is not the intention to prevent authorities using capital receipts to reduce their overall debt position, which may have the effect of reducing the MRP made with respect to the remaining debt balance.

2. Prudent MRP must be determined with respect to the authority’s total capital financing requirement. The intent is to stop the intentional exclusion of debt from the MRP determination because it relates to an investment asset or capital loan. Authorities should still be able to charge MRP over the period in which their capital expenditure provides benefits, and begin charging MRP in the year following capital expenditure, in accordance with proper accounting practices set out in the government’s statutory guidance on Minimum Revenue Provision.

These changes are not intended to have any impact on the Housing Revenue Account, or on treasury management activities that do not score as capital spend. The government wants authorities to still be able to exercise judgement in determining a prudent amount and does not want to move back to a prescriptive method.

The government is seeking views on the proposed changes to the 2003 Regulations to:

1. Make sure that the proposed changes are clear and will appropriately meet the government’s objectives.
2. Identify potential unintended consequences that could negatively impact the delivery of services or local and national priorities.
3. Understand the financial impact to the sector.
4. Determine the appropriate timing for the changes to be implemented.

A draft of the proposed changes to the 2003 Regulations is included in Annex A to permit comments on the detail of the wording.

Some authorities will need to amend their practices under the prosed changes and that this may increase the annual cost to revenue. The proposal is that the changes will first come into force for the financial year beginning 1 April 2023; it is not the government’s intention that these changes are applied retrospectively. This should give time for authorities to prepare, however, the government would like to fully understand the financial implications for the sector.

Geographical scope:

These proposals relate to England only.

Impact assessment:

N/A

Basic Information

Body/bodies responsible for the consultation:

Department for Levelling Up, Housing and Communities.

Duration:

This consultation will last for 10 weeks from 30 November 2021 until 8 February 2022.

Enquiries:

For any enquiries about the consultation please contact: [email protected].

How to respond:

You may respond by completing an online survey.

Alternatively you can email your response to the questions in this consultation to: [email protected].

If you are responding in writing, please make it clear which questions you are responding to.

When you reply it would be very useful if you confirm whether you are replying as an individual or submitting an official response on behalf of an organisation and include:

• your name
• your position (if applicable)
• the name of organisation (if applicable)
• an address (including postcode)
• an email address
• a contact telephone number

1. Executive summary

1. Since 2004, local authorities in England borrow and invest under the Prudential Framework (the Framework). It provides wide freedoms for authorities to borrow and invest without seeking the government’s consent, allowing authorities to determine their own capital strategies and fund expenditure. The objectives of the Framework are to drive sound investment and borrowing decisions in a way that is compliant with authorities’ statutory duties, reduces risk, and represents best value.

2. The government regulates the system through legislation, supplemented by 4 statutory codes. The Department for Levelling Up, Housing and Communities (DLUHC) is responsible for preparing 2 of these codes: the Guidance on Local Authority Investments and the Guidance on Minimum Revenue Provision. The Chartered Institute for Public Accountancy and Finance (CIPFA) produces the Prudential Code for Capital Finance in Local Authorities and Treasury Management in the Public Services Code of Practice.

3. Most authorities respect the Framework, but a minority have taken on excessive risk to financial sustainability through imprudent capital practices. In 2018, the government made changes to its guidance to strengthen the assessment and monitoring of risk by authorities, and to improve transparency and disclosure through the requirement for an annual investment strategy. The new guidance also set out requirements for capacity and skills for members and any statutory officers involved in investment decisions. Following issuance of the updated guidance, the government made clear that more action would be taken if needed. Since then, reports by the National Audit Office (NAO) and the Committee of Public Accounts (PAC), as well as the government’s own monitoring, show that a small number of councils are still undertaking practices resulting in underpayment of MRP.

4. This work identified 2 main issues: that some authorities use capital receipts in lieu of all or part of the revenue charge; and some authorities exclude debt associated with investment assets from the MRP determination. The government’s view is that both practices are not permitted under the Framework.

5. On 28 July 2021, the government published details of its programme of work to strengthen the capital system. Included in the publication was a commitment to review the legislation for authorities to set aside revenue each year to make sure that they can repay the principle of their debt.

6. The government is now consulting on changes to the Local Authorities (Capital Finance and Accountancy) (England) Regulations 2003 (the 2003 Regulations) to remove the scope for applying these practices. The intention is not to change policy, but to clearly set out in legislation the practices that authorities should already be following. Authorities that are already fully compliant with MRP duties should be unaffected.

7. The government will work with the sector and relevant stakeholders through this consultation to make sure that the objectives are met while avoiding any unintended consequences. It is particularly important that the government understands any risks to financial sustainability that may arise as a result of the proposed changes.

2. Background

8. The Department for Levelling Up, Housing and Communities (DLUHC) has policy responsibility for the Prudential Framework (the Framework) which gives local authorities the freedom to finance capital expenditure through means of borrowing without the need for the government’s consent. The Local Government Act 2003 (the 2003 Act) controls borrowing by requiring each authority to set and keep under review an affordable limit for borrowing. An authority may not borrow if it would result in a breach of the limit that it has set.

9. In complying with this duty, the 2003 Regulations require authorities to have regard to the Prudential Code for Capital Finance in Local Authorities (the Code), produced by CIPFA. The Code provides a framework for local authority capital finance to make sure capital plans, including borrowing and other forms of debt, are prudent, affordable, and sustainable. It sets out good practice and prudential indicators which authorities are expected to use to support and record local decision making. The Code is based on principles rather than being prescriptive and does not specify specific formulas for arriving at the affordable borrowing limit.

10. Authorities can only borrow against future revenue streams, as legislation prohibits borrowing against capital assets, such as land or buildings. The cost of debt comprises both interest payments on borrowing and the duty to set aside funds each year to make sure the principle of the authority’s debt can be repaid, referred to as Minimum Revenue Provision (MRP). The duty to make MRP is set out in the 2003 Regulations. Regulation 27 specifies the need to make the charge and regulation 28 sets out the requirement that the amount of the charge is ‘prudent’.

11. It is an important feature of MRP that it is made with respect to an authority’s outstanding debt rather than its outstanding loans. Local authority debt is measured by the capital financing requirement (CFR), which is broadly the difference between an authority’s capital expenditure and its available capital resources and, therefore, represents the amount the authority will need to borrow. As authorities often have cash reserves that can be used to pay for capital expenditure, they may not need to externally borrow immediately. This is referred to as ‘internal borrowing’, and it can account for why an authority’s debt, or CFR, is greater than its external borrowing.

12. In practice, MRP is a cost to authorities because they need to set aside funds each year from their budget, which cannot then be spent on anything else. This cost is met from an authority’s revenue account and is within scope of the balanced budget requirement. In deciding under the prudential rules whether any proposed debt is affordable, the authority must take account of both the interest charge and the MRP.

13. Legislation states the amount of MRP must be prudent. Further detail is contained within DLUHC’s Statutory Guidance on Minimum Revenue Provision (the MRP Guidance) which applies only to major authorities^{[footnote 1]}, which sets out a definition of a prudent charge and good practice which authorities are expected to follow. It also includes 4 methodologies for calculating MRP, though authorities may apply alternative methods if more appropriate. The MRP Guidance requires authorities to set out their MRP policy to full council at the start of each year.

14. The MRP charge is typically linked to the life of assets financed through debt, rather than the period of a particular loan. It is possible for a loan period to exceed the asset life. An authority may accumulate the full amount of MRP before the loan falls due for repayment. The authority could choose to repay the loan at that point but may be deterred by any premium charged for early repayment and prefer to leave the accumulated cash invested until the maturity date of the loan.

15. The MRP duty is to make provision for debt repayment. Nothing in the 2003 legislation imposes any requirements about repayment. That is left to the discretion of the authority, taking account of the contractual terms of the loan agreement and principles of good treasury management.

16. Under current guidance, the MRP charge normally starts to be made in the financial year following the one in which the capital expenditure is incurred. But in the case of the provision of an asset under construction, MRP does not have to be charged until the asset comes into service. The government recognises the benefits of this and is not proposing any changes to this practice.

17. The government is clear that all authorities should comply with the duty to make MRP. Failure to do so, through undercharging of MRP, creates risk to the authority, the finance system, and to local and national taxpayers. Underprovision can result in an authority being unable to repay a proportion of its debt, passing the liability into the future, which will need to be met from capital receipts or accelerated MRP payments. Further, if a prudent charge is not made, then this can also allow the authority to take on greater levels of debt than would otherwise be affordable. The duty to make MRP is an important mechanism in the Framework to constrain risk and ensure affordability of capital

3. Issues identified with current practices

18. Over the past 2 years, 2 issues have been identified which have led to underpayment of MRP:

• Some local authorities exclude a proportion of their debt from the MRP determination. The government’s Post implementation review of changes to the local authority capital finance framework (April 2020), and the NAO’s report on local authority commercial investments (February 2020) both reported that some MRP policies deviated from statutory guidance by not charging MRP on assets where the asset would provide a capital receipt in future, sufficient to repay the debt. Examples included: investment assets; capital loans; and operational assets.
  
  Subsequently, the government accepted and undertook to implement the recommendation included in the PAC report (July 2020) that “the Department should undertake a review of the MRP guidance and consider whether its statutory basis should be strengthened.”^{[footnote 2]}
  
  
• Some local authorities use capital receipts in place of the charge to the revenue account. Evidence for this practice came to light as a result of the government’s investigation, in 2019, into a local authority that had used capital receipts to reduce its MRP charge.
  
  Following this the government stated that “in keeping with the Department’s policy responsibility for the Prudential System and stewardship role of the local government finance system, it will consider in discussion with the Chartered Institute of Public Finance (CIPFA) whether clarification of the framework is now needed to make sure local authorities’ practices meet its intent and objectives.”^{[footnote 3]}

19. The government does not consider these practices to be consistent with current policy.

20. To address these issues, the government set out in its 28 July publication that it would look to strengthen the relevant legislation, recognising that changes to guidance alone are not likely to be sufficient. The government is not proposing any changes that would affect the treatment of any revenue charges with respect to:

• the Housing Revenue Account debt and any associated charges; and
• treasury management investments, which are not typically capital expenditure and do not increase the need to borrow

21. The government recognises that changes to legislation must be carefully worded to make sure that the objectives are met, while avoiding unintended consequences.

4. Excluding specific debt from MRP determination

22. Some authorities are intentionally excluding debt associated with certain kinds of assets, typically investment assets. The government understands that the rationale is that where assets retain their capital value, the asset can be sold to meet any loan liability in future. In other cases, the authority’s strategy is to make MRP only to the extent to which the asset value falls below the original cost. The need for a provision for the debt through MRP is thereby reduced or removed.

23. It is the government’s view that it is not prudent to adopt an approach in which no or a reduced MRP is made. Paragraph 45 of the current MRP Guidance explicitly states that authorities should make provision for debt taken on to fund acquisition of investment properties. The government’s concern is that where MRP is not made with respect to the financing of investment assets, this potentially creates a risk of capital losses or income shortfalls in the future.

Proposed government response

24. To address the issue, the government proposes to amend the 2003 Regulations to set out that in determining a prudent MRP charge the authority may not exclude any part of the CFR (see Annex A). In practice, this means an authority cannot employ a policy of intentionally omitting debt from its MRP for any reason.

25. This does not mean there cannot be timing differences between an authority incurring debt and making an MRP charge where the authority is, in accordance with proper accounting practices, timing the MRP charges to coincide with the expected benefits of an asset.

Q1. Do you agree with the government’s proposal to amend the 2003 Regulations to prevent the omission of debt from the MRP calculation?

Q2. Does the draft statutory instrument achieve the government’s objectives as outlined in this document? Are there any unintended consequences arising from the statutory instrument?

Q3. Is it clear from the wording of the statutory instrument, as drafted, that authorities may still postpone the MRP charge as per paragraphs 40 and 41 of the MRP guidance?

Q4. Are these changes consistent with the current MRP guidance? If not, what is unclear or inconsistent in the guidance?

5. Application of capital receipts

26. Regulation 23 of the 2003 Regulations sets out what capital receipts can be used for, the 2 main purposes being to meet capital expenditure and to repay the principal of any amount borrowed.

27. The government understands that some local authorities have interpreted regulation 23 to mean that capital receipts may replace some or all of the prudent MRP charge, by using the capital receipt to reduce debt, then reducing the MRP charge by an equivalent amount. The effect is the same as treating a capital receipt as revenue and using it to fund the MRP charge. In some cases, such an approach has led to local authorities making only a nominal MRP charge to their revenue accounts. The government is clear that this is not permitted under the Framework.

28. The government recognises that local authorities can apply capital receipts to reduce borrowing as per the 2003 Regulations. The only acceptable means by which this may be used to reduce the MRP charge is to use the capital receipts to reduce the CFR that forms the basis of the calculation for the MRP charge. The charge to revenue would then be made with respect to the outstanding debt.

Proposed government response

29. The government proposes to amend the 2003 Regulations to specifically set out that capital receipts may not be used to replace or reduce the MRP charge except by reducing the CFR, and then calculating a prudent MRP charge on the outstanding CFR (see Annex A). The intent is to make sure that a prudent charge to revenue is made each financial year.

Q5. Do you agree with the government’s proposal to amend the 2003 Regulations to prevent the use of capital receipts to be used in place of a revenue charge?

Q6. Does the draft statutory instrument achieve the government’s objectives as outlined in this document? Are there any unintended consequences arising from making this change?

Q7. Is it clear from the wording of the statutory instrument, as drafted, that authorities may set capital receipts against borrowing?

Q8. Are these changes consistent with the current MRP guidance? If not, what is unclear or inconsistent in the guidance?

6. Impact on financial position and accounting

30. The government is aware that the proposed changes will inevitably have a financial impact on some authorities. Where an authority has been excluding debt related to investment assets or using capital receipts in lieu of a prudent revenue charge, the effect will have been to reduce the charge. The proposed changes will, therefore, result in an increased MRP charge for those authorities in future. Authorities that have been applying the MRP duty correctly will be unaffected.

31. Data on MRP is provided annually through the Revenue Outturn forms. While it is not possible to replicate the calculations that authorities use to determine their MRP charge, DLUHC has undertaken analysis to compare MRP values reported by authorities with its own estimates. Based on the analysis, the gross underpayment of MRP for the sector in 2019/20 is around £0.7 billon. The government would like to work with the sector to develop a robust assessment of both the wider impact to the sector and the potential to create pressures for individual authorities.

32. The government proposes that these changes are applied prospectively from when the statutory instrument comes into effect. It does not expect authorities to recalculate and restate prior period MRP charges as a direct result of these changes. Nonetheless, the government recognises that authorities and their auditors will need to make a judgement with respect to proper accounting practices, and the need to correct any past errors identified in accordance with International Accounting Standard 8 as interpreted by CIPFA’s Code of Practice on Local Authority Accounting.

33. The government will engage with authorities, auditors, and other relevant stakeholders as part of this consultation to make sure that the financial consequences of the proposed statutory changes are fully understood, and that any risks are mitigated if it is appropriate and necessary to do so.

Q9. Where these changes will have a financial impact on your authority, what is the estimated increase/(decrease) in annual revenue cost (for illustrative purposes, assume the changes take effect from 2022/23)?

Q10. Where these changes affect the amount of MRP charged by your authority what, if any, effect will there on financial sustainability?

Q11. Aside from financial sustainability, what other impacts will the changes have? For example, changes to capital plans, debt management or current investments. Include a costed impact if appropriate.

7. Implementation timetable

34. The government is proposing introducing the changes to the 2003 Regulations from April 2023 onwards. We are mindful that the changes may have an impact on the budgets of some local authorities.

Q12. Do you agree that the government should implement the amendments to the legislation to come into effect from the 2023/24 financial year?

Q.13. If not, are there any specific proposals for deferring implementation to a later financial year? What would be the implications of not doing so?

About this consultation

This consultation document and consultation process have been planned to adhere to the Consultation Principles issued by the Cabinet Office.

Representative groups are asked to give a summary of the people and organisations they represent, and where relevant who else they have consulted in reaching their conclusions when they respond.

Information provided in response to this consultation may be published or disclosed in accordance with the access to information regimes (these are primarily the Freedom of Information Act 2000 (FOIA), the Environmental Information Regulations 2004 and UK data protection legislation. In certain circumstances this may therefore include personal data when required by law.

If you want the information that you provide to be treated as confidential, please be aware that, as a public authority, the Department is bound by the information access regimes and may therefore be obliged to disclose all or some of the information you provide. In view of this it would be helpful if you could explain to us why you regard the information you have provided as confidential. If we receive a request for disclosure of the information we will take full account of your explanation, but we cannot give an assurance that confidentiality can be maintained in all circumstances. An automatic confidentiality disclaimer generated by your IT system will not, of itself, be regarded as binding on the Department.

The Department for Levelling Up, Housing and Communities will at all times process your personal data in accordance with UK data protection legislation and in the majority of circumstances this will mean that your personal data will not be disclosed to third parties. A full privacy notice is included below.

Individual responses will not be acknowledged unless specifically requested.

Your opinions are valuable to us. Thank you for taking the time to read this document and respond.

Are you satisfied that this consultation has followed the Consultation Principles? If not or you have any other observations about how we can improve the process please contact us via the complaints procedure.

Personal data

The following is to explain your rights and give you the information you are be entitled to under UK data protection legislation.

Note that this section only refers to personal data (your name, contact details and any other information that relates to you or another identified or identifiable individual personally) not the content otherwise of your response to the consultation.

1. The identity of the data controller and contact details of our Data Protection Officer

The Department for Levelling Up, Housing and Communities (DLUHC) is the data controller. The Data Protection Officer can be contacted at [email protected] or by writing to the following address:

Data Protection Officer
Department for Levelling Up, Housing and Communities
Fry Building
2 Marsham Street
London
SW1P 4DF

2. Why we are collecting your personal data

Your personal data is being collected as an essential part of the consultation process, so that we can contact you regarding your response and for statistical purposes. We may also use it to contact you about related matters.

3. Our legal basis for processing your personal data

The collection of your personal data is lawful under article 6(1)(e) of the UK General Data Protection Regulation as it is necessary for the performance by DLUHC of a task in the public interest/in the exercise of official authority vested in the data controller. Section 8(d) of the Data Protection Act 2018 states that this will include processing of personal data that is necessary for the exercise of a function of the Crown, a Minister of the Crown or a government department i.e. in this case a consultation.

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5. For how long we will keep your personal data, or criteria used to determine the retention period.

Your personal data will be held for 2 years from the closure of the consultation.

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The data we are collecting is your personal data, and you have considerable say over what happens to it. You have the right:

a. to see what data we have about you
b. to ask us to stop using your data, but keep it on record
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Please contact us at the following address if you wish to exercise the rights listed above, except the right to lodge a complaint with the ICO: [email protected] or:

Knowledge and Information Access Team
Department for Levelling Up, Housing and Communities
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9. Your personal data will be stored in a secure government IT system

We use a third-party system, Citizen Space, to collect consultation responses. In the first instance your personal data will be stored on their secure UK-based server. Your personal data will be transferred to our secure government IT system as soon as possible, and it will be stored there for 2 years before it is deleted.

1. The definition of major authorities includes the following types of body: a County Council in England; a District Council; a London borough council, the Greater London Authority, the Council of the Isles of Scilly, a Police and Crime Commission for a police area in England, The Commissioner of Police of the Metropolis, a Fire and Rescue Authority in England, a Combined Authority, the Broads Authority, and a National Park Authority for a National Park in England. ↩

2. Public Accounts Committee, Local authority investment in commercial property, July 2020. ↩

3. Peterborough capital receipts episode prompts prudential framework review. ↩