The final requirements for determining minimum revenue provision (MRP) for local authorities in England have been laid out in parliament.
Amendments to the Local Authorities (Capital Finance and Accounting) (England) Regulations 2003 have been made, and specify additional requirements that local authorities must comply with – with most of the changes coming into effect on 1 April 2025.
MRP is an amount of money set aside each year by local authorities to ensure they can repay the principle of their debt, essentially stopping authorities from taking on more debt than they can afford to repay.
The amendments “explicitly prevent” the common practices by which some local authorities underpay MRP, according to an explanatory memorandum produced by the government.
These practices include using proceeds from asset sales to replace the revenue charge, and not making MRP on debt associated with investments, “in the belief the assets would accumulate or retain value and can be sold to repay debt”.
Local authorities were previously only required to determine a “prudent” charge in relation to MRP. But some local authorities “departed from the statutory guidance and interpreted the statutory requirements in a way which has led to underpayment of MRP and, in some cases, led to excessive borrowing that has contributed to financial failure”, the explanatory memorandum stated.
The amendments have therefore been made to “ensure that there is consistent and robust adherence to the duty to make MRP, and to mitigate the risks associated with failing to make prudent MRP”.
The amendments also include provisions to reduce the risks of unintended consequences where a local authority borrows and lends the money on to a third party as a capital loan.
David Green, director at independent treasury advisor Arlingclose, said local authorities would be pleased that the final rules have eventually been published, and that the changes are mostly delayed until 2025/26.
“They will also welcome a last-minute change of heart to exempt existing capital loans from the requirement to charge expected credit losses as MRP,” he said.
“The tighter regulations mean that local authorities now need to calculate their capital financing requirement carefully and ensure that MRP is made on every element of it, or risk breaking the law.
“While the changes will mean increased MRP charges for a small number of authorities, they put the prudential framework on a more robust basis, and should ensure that losses on investment property, for example, are not stored up for future generations to bear.”
‘Unmanageable financial pressures’
The government has updated its guidance on MRP to reflect the amendments. “The 2003 Regulations were further amended with full effect from April 2025 to expressly provide that in determining a prudent provision local authorities cannot exclude any amount of CFR from its calculation, unless by an exception set out in statute,” the guidance now states.
“Further, that capital receipts cannot be used to directly replace, in whole or part, the prudent charge to revenue. Specific exceptions were introduced for capital loans, alongside appropriate risk mitigations.”
Three government consultations have taken place on changes to MRP requirements, with the most recent concluding in February 2024. As a result of the final consultation, one substantive technical change was made, as outlined in a government response. This change relates to how MRP is charged with respect to loans made by local authorities before the amendments to the 2003 Regulations. The aim was to reduce the risk of significant cost pressures arising for some local authorities due to losses on historic loans, the government said.
All amendments to the 2003 Regulations will come into force from 1 April 2025, except requirements on charging MRP with respect to expected credit losses and impairments, which will apply to all new capital loans issued by local authorities from 7 May 2024.
The government’s consultation response noted that there would not be “substantive numbers” of local authorities that would have significant cost increases due to the amendments, “but inevitably some local authorities will, where they have been underpaying MRP”. Authorities in this position that may have “unmanageable financial pressures” were urged to contact the Department for Levelling Up, Housing and Communities.
The full legislation related to the amendments to the 2003 Regulations can be read here.
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