Peter Ware, Partner in the Local Authority Projects and Procurement team, Browne Jacobson LLP:
In this post, Peter Ware looks at:
- Local authority powers to generate income.
- The impact that the Localism Bill could potentially have on charging and trading.
Every local authority that we speak to at the moment seems to be embarking on some form of “trading” activity. Having spent some considerable time working for a local authority, I can well understand the sense of bemusement that legal teams face when they try and explain the difference between charging and trading to their instructing officers. Perhaps understandably officers who are carrying out the activity for which they are seeking financial recompense, are largely unconcerned by the niceties of the legal position. However as legal advisers, it remains clearly important for us to understand and advise on the various powers under which local authority departments can embark on this commercial “trading” activity. As I think we can see from the early nineties case law involving local authorities, challenges to local authority powers often come on the back of national recessionary periods and so now might be the time to get it right.
As some of you will no doubt recall there has been a long and perhaps controversial history in relation to local authority powers to charge and trade. The low point, from a local authority perspective at least, occurred in the House of Lords in 1991 where their Lordships held that Richmond London Borough Council could not levy a £25 charge for pre-planning application advice for development proposals put forward by a developer. The decision set the tone that there could be no right to charge for the provision of public services unless there was fairly specific legislative basis for it. This position in relation to public to private trading remained until 2003 when the charging and trading powers of the Local Government Act were introduced.
What legislation covers local authority charging and trading?
At this juncture I suspect it may be worth a very brief restatement of the principal legislative powers that the local authorities have to charge and trade. Clearly there are more esoteric powers including Schedule 2 of the controlled waste regs 1992 which allow reasonable charges for (amongst other things) collecting dead domestic pets and for collecting waste from a royal palace (thanks to Rob Hann for that nugget), but I’ll save a discussion on dead hamsters and royal rubbish for my next blog, should of course I get asked to write another.
Most local authorities’ officers and legal advisers are well versed in relation to the use of the Local Authority (Goods and Services) Act 1970. A pretty substantial power which allows authorities to trade in goods and services providing that trade is with a public body which is scheduled to that act or which is otherwise designated by the Secretary of State (as being a public body for these purposes). The courts have looked upon this power pretty favourably and in particularly the Yorkshire Purchasing Organisation case in 1998 confirmed that the Act empowered Local Authorities to trade for profit, purchase supplies necessary for trading as well as undertake speculative trading (in appropriate circumstances). However it still needed to be construed on the basis that the activity was specifically permitted either as a result of being conducive or necessarily incidental to the performance of those 1970 act powers.
Moving on to the Local Government Act 2003, the underlying rationale of Section 93 was to allow Local Authorities to recover the costs of providing discretionary services; it should not be used as a power to make a profit from charging for them. It is generally understood that to determine whether you can use this power you need to make a calculation of costs on the basis that, from one year to the next, the income from the charges for the services should not exceed the cost of providing them. This is used for a whole range of different types of services from pre planning application advice to the discretionary element of street naming and numbering services.
Trading through a company
The section 95 power is designed to allow a local authority to actually trade in function related activities with a view to profit. The legislation provides a number of hurdles to get over but the principle issue is that in order to exercise this power a local authority must establish a company to do it. In relation to both powers they cannot be used where the local authority has another power to trade (such as for example the 1970 Act powers) and this is something that is sometimes overlooked.
The powers to charge and trade introduced in 2003 heralded a brave new world with trading expected to establish “a dynamic and entrepreneurial public sector that will increase diversity of choice in the delivery of public services”. Sound familiar? This statement could have easily been made by the current government in describing its aspirations for the public sector and local authorities in general. However, in reality the trading powers especially have been infrequently used by local authorities, with the commercial risk of failure, threats to local authority reputation and the diversion of capacity away from core areas being cited as reasons why Local authorities have not established such companies. Although in reality I suspect it was largely because there was just not the pressure to deliver revenue in the way that there is on Local Authorities in the current climate.
As a colleague of mine pointed out that in embracing entrepreneurialism we would do well to remember that many entrepreneurs fail time and time again and that only a few truly succeed. So if we are to encourage entrepreneurism such embrace should perhaps be more of a careful cuddle. Perhaps more authorities need to follow the lead set by Sunderland who recently screened thousands of their employees for entrepreneurial talent!
What do “charging” and “trading” really mean?
The officers at local authorities I have spoken to are clearly ramping up their revenue generation activity with the message coming down that “trading” is good and to get on with it. But in reality regardless of whether this activity is badged as trading, trading in the local government legal sense it largely isn’t. They are not endeavouring to trade with a public body for the purposes of the 1970 act nor are they going as far as establishing a company. What it probably is is charging and therein lies a sticky problem how are the costs established and what is the “service” that those costs attach to?
How do you determine your charges?
Often officers will adamantly say we work on a cost recovery basis and then when you drill down a little you find out that in no way is this the case. Things like full employee on-costs, office accommodation costs and central corporate costs are often never accounted for. Conversely we have seen situations where unreasonable central costs are lumped into calculations. It is therefore critical to work closely with finance colleagues to establish true cost centres for each service. Which then takes us on to what is the service for the puposes of establishing the cost centre? What it clearly can’t be is the entire department but what part makes the service is up for debate and will have to be thought about carefully. I would suggest that this is important not just for the purposes of ensuring sufficient vires but also from a straight forward service viability perspective. Senior officers will rightly want to know whether the service is viable and the manager will want to be able to show this fairly by pointing to overheads and costs recovered.
Clearly, an increasing number of local authorities will be looking to trade and where I say trade I really mean trade this time, with the establishment of trading companies to potentially deliver profits back to the authority or authorities. An example of such a trading company established recently, would be Essex Cares Limited in the Adult Social Care Services field which, I understand, a number of other local authorities are endeavouring to emulate. Lots of things to remember here, not least the added financial and administrative burdens that come with establishing a company. In particular a trading company will potentially have to account for VAT and Corporation Tax, which charging within a local authority will not have to. Although a slight note of caution there over VAT as even under the charging regime within a local authority you may need to consider the VAT position carefully.
Under any of the charging or trading routes one of the things I would say to officers is that the charging (and trading) activity should only ever compliment the core service, too often it can be seen as the aim in itself. There is always a danger that the eye is taken off the ball and in the drive to deliver revenue the service is lost in which circumstances no one wants to buy it any more anyway. Get the basics right and, as they say, the rest will follow.
What impact will the Localism Bill have on charging and trading?
I suppose that any discussion of the current charging and trading powers would not be complete without a brief mention of the potential effect of the Localism Bill. What I think is clear is that it is not going to have a negative effect on charging and trading, but how much it truly adds is up for debate. Clearly to the extent that the general power of competence extends what a Local Authority can do then they will be able to do those additional things for a “commercial purpose”. However, clause 4 of the bill does not, as perhaps one would expect, explain what doing something for a “commercial purpose” is. The clause provides that that such commercial activity must still be carried out through a company and so these provisions seems to be subject to similar limitations that are currently set out in section 95. Therefore I would argue, this does not represent a fundamental change as to how trading (although it is not trading, it is providing a service for a commercial purpose), as we currently know it, will need to operate once the bill becomes law.
Ministers suggest that one of the reasons the section 95 power has not been used is the uncertainty around the well-being power, especially following the decision Brent LBC v Risk Management Partners Limited and London Authorities Mutual Limited and Harrow London Borough Council. Under the general power of competence authorities shall not have to consider how their proposed action promotes well-being and could therefore embolden local authorities. If they are right, this new power may further increase the number of authorities establishing such companies hopefully reassuring those who have been wary of the statutory position up until this point. We wait with baited breath.
On the charging front clause 3 continues to delineate “charging” and “trading” and in particular, as currently under section 93, clause 3(3) expressly prohibits charges exceeding the cost of provision. So I would say this is a positive move but not quite revolutionary.
All in all nothing said here is rocket science but key themes will need to be understood by instructing officers before they embark on trading, no charging, no trading …oh you know what I mean.
For more information on charging and trading generally, see:
- Practice note, Local government: charging for discretionary services.
- Practice note, Local government: exercising the power to trade commercially.
Peter Ware (ptware@brownejacobson.com) is a Partner in the Local Authority Projects and Procurement team at Browne Jacobson LLP (http://www.brownejacobson.com).