Parish and Town Council finance is governed by the Accounts and Audit Regulations 1996 as amended by the Accounts and Audit (Amendment) (England) Regulations 2001. Those wishing to explore the requirements of this legislation in greater detail may do so through the guidance produced by NALC and the SLCC contained in Governance and Accountability in Local Councils in England and Wales available from the Cheshire Association of Local Councils or through the Society of Local Council Clerks.
Legislation places upon Councils a requirement to take responsibility for:
Appointment of a Responsible Financial Officer (RFO)
- Appointment of Internal Auditor
- Setting a budget and agreeing the precept
- Monitoring the Council’s finances
- Setting up an internal system of checks and balances for such monitoring
- Agreeing the year end accounts
- Ensuring that it applies the principles of Best Value to Council expenditure and that the processes of agreeing financial matters are transparent and equitable.
Although in most Councils the RFO will be the Clerk, there is no requirement for the two posts to be held by the same person.
Councils are obliged by the Account and Audit legislation to have formal, written procedures in place with regard to Financial matters. Therefore, each Council should adopt a set of Financial Standing Orders (or Regulations) a model document of which is available to member councils through the Cheshire Association of Local Councils.
Loans & Borrowing
ALL ABOUT THE BORROWING APPROVAL SYSTEM A GUIDE TO LOCAL COUNCIL BORROWING IN ENGLAND
1. This guide replaces all previous guidance on borrowing by parish councils in England and reflects the legal framework in force as at 1 April 2011. The law that allows a parish council to borrow money is contained in paragraph 2 of Schedule 1 to the Local Government Act 2003 (“the 2003 Act”). Before such a council can borrow a sum of money, it must first receive an approval to borrow from the “appropriate person”: in England the Secretary of State by way of the Department for Communities and Local Government (DCLG), and in Wales, the Welsh Ministers. Evidence of the borrowing approval may be required at audit.
2. This guide sets out the criteria that the Secretary of State generally applies in deciding whether to give borrowing approval, and how parish councils should go about applying for approval. It applies only to England. Community and town councils in Wales should contact the Local Government Finance Division of the Welsh Assembly Government (telephone: 029 20 823227 or 029 20 825223) for details of the approval system applicable to them.
3. There is no national limit on the total annual amount of borrowing approvals that will be granted. Councils should only apply for borrowing approval when they are fully ready to take up the borrowing, for example, when planning permission has been obtained. Applications by councils for borrowing approval should be sent to the Cheshire Association of Local Councils whether or not the Council is in membership.
4. If, in the Association’s view:
· the application form is complete, with no obvious omissions or errors;
· and the application is made in good faith
the application will be forwarded to DCLG. Where the Association has any concerns it will raise the matter with the council. The council may, if it wishes, take up any disputed issue with DCLG. The review by the Association is intended to assist councils in submitting well-founded applications to DCLG. The Association will provide a brief factual report to DCLG.
What is a Borrowing Approval?
5. It is a formal approval issued by the Secretary of State to borrow money.
6. The Secretary of State’s decision on the borrowing application will be sent direct to the Clerk to the council. A copy of the decision letter will also be sent to the Chair of the council and the Association. Where approval to borrow is given, as well as containing the legal authority for the council to borrow money, the approval will state the maximum amount of money that can be borrowed, the purpose for which the money may be used, the period within which money must be borrowed, and the maximum period within which the borrowing must be repaid.
Who can apply for Borrowing Approval?
7. Any local council in England.
When is a Borrowing Approval not required?
8. Under paragraph 2(3)(a)(i) of Schedule 1 to the 2003 Act, no approval is required for borrowing by temporary loan or overdraft from a bank or otherwise of sums which the council may temporarily require to meet expenses pending the receipt of revenues receivable by it in respect of the period of account in which the expenses are chargeable. Paragraphs 2(3)(a)(ii) and 2(3)(b) set out other circumstances in which approval is not required (see paragraph 20 of this guide).
9. In all other circumstances, borrowing approval is required.
How is an application for borrowing approval made?
10. In the first instance, councils should complete the application form at Appendix A to this guidance. Contact should also be made with the Cheshire Association who will process the application form once it is completed. All questions in the form need to be answered and all information requested must be supplied with appropriate copies of the full draft minutes and reports. The making of the application must be approved by resolution of the full council (2003 Act, Schedule 1, paragraph 2(4)). The completed form should be sent in hard copy to the Cheshire Association (see paragraph 4 above).
What information must be provided?
11. The application form requires the following information:
· Name and contact details of Council and Clerk
· Name and contact details of Chair of Council
· Principal Authority area
· Purpose of borrowing
· Total cost of the project (see paragraph 14 below)
· Funding from Council’s own resources
· Funding from other sources
· Whether funding from other sources is confirmed
· Amount to be borrowed
· Proposed borrowing source
· Intended borrowing term
· Details of current loans outstanding
· Current level of precept
12. The form must be signed by the Chair of the council and the responsible financial officer (in most councils the Clerk is also the responsible financial officer, but the post is sometimes a separate appointment).
13. In addition the form must be accompanied by:-
· a copy of the council’s budget for next year (or for the current year if next year’s is not available)
· a copy of the written report considered by the council in reaching its decision to apply for borrowing approval (see paragraph 15(d) below)
· the full draft minutes of the meeting at which the resolution to make the application were passed.
14. Where the council intends to provide a grant to another body the references to “project” in this guide and in the application form apply to the assistance being provided by the council, not to the project towards which the assistance is given. For example, if a council wishes to borrow £50,000 to part finance a grant of £100,000 towards the construction by a local charity of a village hall costing £250,000, the application form should show £100,000 as the total cost of the project and £50,000 as the amount to be borrowed, and explain how the remaining £50,000 is to be financed by the council.
What are the criteria for borrowing approval?
15. The Secretary of State will generally apply the following criteria in deciding whether to give borrowing approval:
a) the borrowing should be for a purpose that would be capital expenditure as defined in section 16 of the 2003 Act. Appendix B to this guide explains what is covered by the section 16 definition;
b) the cost of the project should not be less than £5 multiplied by the number of local government electors for the area of the council on the first day of December immediately previous to the application;
c) any unallocated balances (including, where appropriate, capital receipts), beyond those required for the prudent financial management of the council, should be used in the project for which borrowing is required;
d) the council should have a realistic budget (this must be affordable, taking account of its effect on the council’s precept) for the servicing and repayment of the debt. The Secretary of State will expect to see that the affordability of the loan charges and any other revenue costs arising from the project is demonstrated in the written report to the council recommending the borrowing application. A copy of the report should be submitted with the application form. The report should provide:
· an estimate of the annual costs, and an indication whether they will be covered by reductions in other expenditure, or by additional income from the precept or other sources
· in the case of increases in the precept, an estimate of the amount of the increase
· evidence that any risks and uncertainties affecting the financing of the project have been taken into account in assessing its affordability
· details of any significant financial developments that might affect the ability of the council to finance the costs in future years, so far as can reasonably be foreseen.
When should a council apply?
16. All councils are encouraged to let their County Associations know of their borrowing requirements as soon as possible. However, councils should not apply for borrowing approval until all negotiations have been completed and all other consents (eg planning) have been obtained. If an applicant council is successful, processing of the borrowing approval should generally take about 15 working days from the date of its receipt by DCLG. The borrowing approval will authorise the council to take out a loan within a period of twelve months starting with the date of issue of the borrowing approval.
How much can a council borrow?
17. The amount that an individual council will be authorised to borrow will normally be limited to a maximum of £500,000 in any single financial year for any single purpose. If a council wishes to borrow more than this then early contact with the county association and DCLG is encouraged.
Where can councils go for funds?
18. Councils may not, without the consent of HM Treasury, borrow otherwise than in sterling (section 2(3) of the 2003 Act). In practice, most councils are likely to obtain funds from the Public Works Loan Board or the clearing banks. When councils apply for funds, the Public Works Loan Board will insist that they have sight of the original borrowing approval. Loans may also be taken out from individuals or private or voluntary sector organisations. Councils are advised to seek appropriate advice.
19. Councils are reminded that the decision to borrow must be taken by the full council (2003 Act, Schedule 1 paragraph 2(4)). This is a separate decision from the decision to apply for borrowing approval. Lenders will generally offer a variety of loan structures such as fixed or variable repayment rates of interest, discount or premiums for early repayment in certain circumstances.
Timing of borrowing
20. A council may borrow by temporary loan or overdraft pending the raising of the loan permitted by a borrowing approval (2003 Act, Schedule 1, paragraph 2(3)(a)(ii)). A council must be in possession of the borrowing approval when the temporary loan is taken out, but no second approval is required. The temporary loan must be for the purposes intended to be met by the approved borrowing. This means that progress on a project need not be delayed until the longer-term borrowing is arranged. A council can also raise a further loan to repay the original loan without the need for another approval, so long as the new borrowing takes place within the fixed period (2003 Act, Schedule 1, paragraph 2(3)(b)). For the meaning of “fixed period” see paragraph 22 of this guide.
Security for the lender
21. All borrowing by a council, together with interest on it, is charged indifferently on all the revenues of the council (2003 Act, section 13(3)). A council cannot mortgage or charge any of its property as security for money borrowed or which it otherwise owes; any security given in breach of this provision is unenforceable (2003 Act, section 13(1) and (2)).
Period of loan
22. Councils must determine the period within which the money borrowed will be repaid, and they are required to make charges to revenue account sufficient to repay the principal within that period and meet the interest charges on the borrowing (2003 Act, Schedule 1, paragraphs 3 and 5). The period determined is known as the “fixed period”, and the council’s determination requires the consent of the Secretary of State. The borrowing approval letter will normally include consent to any period determined by the council, provided it is no greater than a maximum period specified in the letter. The maximum period will begin on the date on which the money is borrowed, and will generally be either:
· 50 years, for the acquisition of, or works on or to, land, buildings, roads or structures, or the making of grants for such purposes; or
· 10 years, in all other cases.
23. Councils are asked to consider carefully whether it would be appropriate to borrow for the permitted maximum or for a shorter period. Generally the borrowing period should be no greater than the period for which the expenditure is forecast to provide benefits to the council (or the body being assisted). Thus if a piece of equipment is only thought likely to last for five years, it would be more appropriate to borrow for five years than for the ten years that the borrowing approval might permit.
When a borrowing approval is no longer required
24. If a council finds it no longer needs the borrowing approval issued to it, it must inform DCLG.
25. If a council finds that it does not need to borrow the full amount as specified in the approval letter, DCLG should be informed of the actual loan amount as soon as is reasonably practical.
– Seek appropriate advice and guidance early
– Programme prudent use of balances as well as borrowing
– Budgets or revised budgets should be considered before applying for borrowing approval
– The borrowing term should not exceed the life of the asset
– Even if the council secures an interest free loan, it will still require borrowing approval
– Original borrowing approval letter should be kept in safe custody
Issued March 2011
 References to parish councils include those designated as town councils, village councils, community councils, neighbourhood councils and city councils in England.