Charging and trading – a new dawn
For many local authorities the idea of charging for, and trading in, what they do is very appealing in a world dominated by budget cuts and financial constraints. Nathan Holden examines the impact of the Localism Act on charging and trading by local authorities
Although the words ‘charging’ and ‘trading’ are used in the same breath, they refer to two different activities. Charging means just that, the power to charge for providing a service, subject to one or two caveats. Trading, on the other hand, is quite different and is defined, in a roundabout way, as ‘doing something for a commercial purpose’.
The good old days
Local authorities have always had the power to charge and in effect trade (i.e. do something for a commercial purpose) where they had a specific power to do so. For example, the Civic Restaurants Act 1947 empowers local authorities to establish and run restaurants for the benefit of the public. In doing so they are required to use their best endeavours to ensure that the income they derive is sufficient to cover the cost of providing the service. There is no restriction on making a profit.
To take a more recent example, section 11(3) Local Government (Miscellaneous Provisions) Act 1976 empowers (by virtue of the Sale of Electricity by Local Authorities, England and Wales, Regulations 2010) local authorities to sell electricity derived from renewable sources. The power is not in any way restricted in terms of limiting what a local authority may charge and whether it is permitted to make a profit.
Finally, the Local Authorities (Goods and Services) Act 1970 permits local authorities to supply goods and materials and provide administrative and technical services to other public bodies on a commercial basis.
These powers are, of course, very useful, but even more useful are general powers to charge or trade. The ‘well-being power’ in section 2 of the Local Government Act 2000 gave local authorities a new power and function to promote the economic, social and environmental well-being of the inhabitants of their area. However, in keeping with convention, it prohibited using the power to raise money whether through local taxes or by any other means. Whether this was intended to restrain charging and trading is not clear, but in practice that is what happened.
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| The greater freedom to trade contained in the Act is not enough to encourage more local authorities to do so because the underlying reasons for not trading are still there |
This led – through the Local Government Act 2003 – to new general powers to charge and trade. The power to charge is unrestricted and applies in all cases where there is no specific power to charge for the provision of a service. All charging is essentially on a cost recovery basis, although there is always scope for a bit of creativity.
The power to trade, or act commercially, is more restrictive and must be carried out through a company. The justification for the latter was set out by Lord (Geoff) Rooker as the Local Government Bill passed through Parliament, when he said: “We consider it essential that the new power for local authorities to trade with private bodies and persons for profit should be exercised through a company structure. We are allowing local authorities to behave in a commercial way; it follows they should be subject to the regulation of commercial bodies, for example on taxation. This will help ensure a level playing field in the private sector.”
It was therefore a conscious decision to limit the type of corporate vehicles through which local authorities could trade. This is because in the context of companies, tax is paid on a company’s dividends. In contrast, in the context of limited liability partnerships (LLP), tax is paid by a partner/member based on their individual tax status. As local authorities pay no corporation tax, operating through an LLP, rather than a limited company, potentially offers local authorities an advantage over their private sector competitors.
In addition to the requirement to trade through a company, there are other specific requirements, including the obligation that trading must be linked to the performance of a function. Before trading a local authority is required to prepare a business case. In the course of trading there is a duty to recover the full costs incurred by the local authority in providing accommodation or services to the company.
So what has happened since?
Generally speaking, charging has been more enthusiastically taken up than trading. This is because it is easier to charge than it is to trade. In most cases the requirement to set up a company is one of the main factors that put local authorities off trading. Not only is there an upfront and on-going cost of running a company, there are other issues including: the need to potentially transfer staff, provide accommodation, IT/other equipment, not to mention the risk of the venture failing.
That said, there are some good examples of the successful use of the power to trade including: Norfolk County Council’s Norse Group that turns over in excess of £250m per annum providing services ranging from property advice to running care homes; Solutions SK, the Stockport Council-owned facilities to waste management operator; and Swindon Commercial Services providing installation, operation and management of solar panel services.
A new beginning – or plus ça change?
The Localism Act 2011 introduced the power of general competence – the power to do anything an individual may do. As general powers go, it is very broad in scope, except when it comes to charging and trading. Rather than being cast as new powers, charging and trading are expressed as limitations on the general power of competence. These limitations/powers are set out in sections 3 and 4 of the Act.
Section 3 mirrors section 93 of the Local Government Act 2003 and duplicates the existing power to charge for providing discretionary services on a cost recovery basis.
Incidentally, sections 93 and 95 of the Local Government Act 2003 remain in force alongside sections 3 and 4 of the Localism Act 2011.
Section 4 of the Localism Act 2011 is, however, different to section 95 of the Local Government Act 2003 in the following respects. Firstly, there is no requirement to trade through a function; this means that local authorities can trade in areas that are not connected to the performance of their functions in exercising the general power of competence. Secondly, there are no apparent geographical boundaries; this means that local authorities could engage in trading anywhere in the UK or beyond.
Our survey said
For the Localism Act Survey 2013, in answer to the question ‘Have the changes in the Localism Act in relation to trading and charging made a difference to your authority’s activities?’ the results were that: 12% said that their authority had taken significant advantage of the new powers; 29% that the new powers had not made a difference because they do not go far enough to support significant charging and trading; and 26% that they had significantly increased commercial activities, but had not needed the new powers to do so. Finally, almost a third (33%) said there was little appetite for further charging and trading at their authority.
Conclusions
The power to charge seems to be used quite widely but the power to trade less so. The Localism Act 2011 has barely had any impact on either charging on trading. The greater freedom to trade contained in the Act is not enough to encourage more local authorities to do so because the underlying reasons for not trading are still there – including, that is, the cost of setting up the arrangement and the risk of it failing.
There are also other practical reasons, in particular the view that trading should be left to the market and further that local authorities by participating in the local economy may potentially weaken rather than strengthen local businesses.
It would be interesting to know whether allowing local authorities to trade on a limited basis, that is, up to a turnover threshold (and potentially ring-fencing the accounts of the enterprise and paying tax on any profits) would encourage more councils to give it a go.
Nathan Holden is a partner and Head of the Local Government Group at Freeth Cartwright LLP. He can be contacted on 0845 077 9646 or by email at This email address is being protected from spambots. You need JavaScript enabled to view it..
