Power to charge and trade

Local authorities were given important and much sought after powers to charge for discretionary services and to trade in function-related activities through a company by sections 93 and 95 of the Local Government Act 2003.


Until the 2003 Act was passed, local authorities’ powers to charge for discretionary services had been an area of confusion. The issue was brought into sharp focus during the passage of the Local Government Act 2000, which, though granting a wide general power to local authorities to promote economic, social and environmental well-being, did not, on the face of it, provide a power to charge. This was seen as an anomaly that could undermine the well-being power.


The Audit Commission reported on charging in The Price is Right: Charges for Council Services (September 1999). It concluded that fees and charges are important - they raise £6 billion a year - but are not well managed and councils have little idea of what they want charges to deliver. Among its key recommendations the report proposed that the government undertake a fundamental review of the existing legal framework for charges to ensure that it is consistent and logical.

The government broadly accepted the commission’s view that, if local authorities had the power to provide discretionary services, they should have the power to charge for them if they so choose. The Green Paper, Modernising Local Government Finance, stated: ‘The slow progress and piecemeal approach of changes… are unsatisfactory and the government believes that in principle local authorities should be able to charge for discretionary services. The only question is then whether and by what means these powers should be controlled.’

The introduction of a general power to charge received universal support in Parliament, to the extent that it passed through the committee stage in the Commons without debate. Introducing the clause in the Lords, Lord Rooker stated: ‘The purpose of introducing a new general power to enable best value authorities to charge for discretionary services is to encourage them to enhance their existing services and develop new ones that will help to improve the service they provide to their community. We do not intend through the new power to provide a new source of income for authorities, but to allow them to cover their costs.’


The power applies to all best value authorities and is not subject to the comprehensive performance assessments carried out by the Audit Commission. The power is wide and appears limited only by the restrictions that the recipient must agree to the provision of the service; income does not exceed costs, taking one financial year with another; and it cannot be used to charge for services that an authority is under a duty to provide.


It appears that authorities may make a surplus provided it is re-invested in that service or used to keep costs down the following year. Lord Bassam of Brighton said: ‘Any over- or under-recovery, resulting in a surplus or deficit of income in relation to costs, would be addressed by an authority when setting its charges for future years, so that, over time, income equated to costs.’


The government has retained power to disapply the power to charge but said it was a reserve power only to be used in the event of a local authority abusing the general power to, for example, trade by the back door.


In exercising the power to charge, authorities must have regard to guidance issued by the Office of the Deputy Prime Minister (ODPM): General Power for Best Value Authorities to Charge for Discretionary Services – Guidance on the Power in the Local Government Act 2003 (November 2003).


This says: ‘Authorities must already have the power to provide the service. This includes discretionary services provided under well-being powers in the Local Government Act 2000’, and, ‘to be able to make use of the new power to charge for a discretionary service, authorities must have an existing power to provide that service. Under ordinary legal principles, an authority has power to do any thing reasonably incidental to its express powers.’ It also provides that ‘local authorities have wide powers to provide discretionary services including powers in the Local Government Act 2000… to do anything they consider is likely to achieve the promotion or improvement of the economic, social and environmental well-being of their area. For the purposes of the new power to charge in the 2003 Act, the prohibition is on raising money in relation to the power to promote well being is to be disregarded.’


Trading


The power to trade in section 95 is framed far more restrictively.


The power is exercised by the ODPM (in Wales, the National Assembly for Wales) who may authorise a best value authority (excluding police authorities) to trade through a company in a commercial manner. The latter provision ensures that the safeguards embodied in company law apply by reference to part V of the Local Government Act 1989, namely, companies in which local authorities have an interest. The secretary of state has the power to link authorisation to trade, unlike the power to charge, to results of an authority’s performance under the comprehensive performance assessment.


The power to trade for a commercial purpose may not be authorised in relation to activities that authorities are otherwise under a duty to provide to a person, nor activities that an authority is already authorised to do for a commercial purpose under an existing power (see section 95(2) (a) and (b)).


In relation to England, The secretary of state has made use of the powers provided by section 95 in the Local Government (Best Value Authorities) (Power to Trade) (England) Order 2004 SI 2004/1705, which sets out conditions for local authorities to comply with in order to trade:


  • The authority is categorised as ‘excellent’, ‘good’ or ‘fair’ in its comprehensive performance assessment.

  • The authority must prepare and approve a business case that sets out a comprehensive statement of: the objectives of the business; the investment and resources required; a risk assessment; and the expected financial returns and other outcomes.

  • The authority must recover the costs of anything supplied to the company including accommodation, goods, services, and staff.

Authorities are also required to have regard to guidance issued by the secretary of state, currently the General Power for Local Authorities to Trade in Function Related Activities Through a Company - guidance on the power in the Local Government Act 2003.

It provides detailed guidance on preparing a business case, business plan and risk analysis, together with advice on structure, governance framework, conflict of interest, person liability of directors, staff and personnel.


In general terms, authorities wishing to use the new powers to charge for discretionary services or to trade should consider carefully whether there is a need for the service; they already have the power to provide and charge for the service or trade in the function. However, if they do not have this specific power to provide this service then authorities could use their well-being powers having regard to their community plan or strategy.


Authorities should also be careful to develop proper businesses plans and carry out a risk assessment before providing services and charging for them or trading in that activity. The new powers allow authorities to engage in new and innovative activities as contemplated by the well-being powers, with the ability to recover the costs of doing so.


By William Okoya, Arden Chambers, London