Consultation outcome

​​Government response to the consultation on changes to statutory guidance and regulations: Minimum Revenue Provision​

Updated 10 April 2024

Executive summary

The government is committed to ensuring that the local government capital system is sufficiently robust at constraining risk while still supporting local investment. As part of its broader strategy to strengthen the capital system, the Department for Levelling Up, Housing and Communities (“DLUHC”) has conducted a series of consultations on amendments to the Local Authorities (Capital Finance and Accounting) (England) Regulations 2003 (the “2003 Regulations”) and the statutory guidance (the “MRP guidance”) that sets out local authorities’ statutory duty to set aside money each year for the repayment of debt, known as Minimum Revenue Provision (“MRP”). 

This has been in direct response to some local authorities employing practices to underpay MRP, which in some instances has contributed to severe and pervasive financial failures requiring government support, with lasting consequence to local service provision. These are: 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. Government initially sought to address these practices through changes to the MRP guidance, which local authorities must have regard to, but this was not wholly effective, and it has proved necessary to strengthen the duty through amendments to the 2003 Regulations.

The duty to make MRP is an essential safeguard of the capital system. Local authorities have wide freedoms to borrow and invest within a framework designed to ensure capital decisions are prudent, affordable, and sustainable. The duty to make MRP is to ensure the affordability of debt by limiting it to levels that can be supported by a local authority’s revenue streams and aligns the costs of financing capital expenditure with those who benefit from it, thus preventing the deferment of financial liabilities to future taxpayers. For this reason, one of the four risk metrics used to underpin the new powers in Levelling Up and Regeneration Act (LURA) 2023 relates to whether councils are making sufficient MRP. These powers permit government to take direct action where authorities undertake risky borrowing and investment practices.

Alongside establishing powers that permit direct action, government has worked with the sector and key stakeholders to iteratively develop amended regulations and MRP guidance to strengthen the MRP duty while avoiding unintended consequences that could stymie much needed local investment or priorities such as housing provision. The first consultation (November 2021 to February 2022) proposed changes to the 2003 Regulations to prevent the common practices by which local authorities avoid MRP: using the proceeds from asset sales (‘capital receipts’) in place of the revenue charge; and, not making MRP on debt used to finance the acquisition of assets that are investments. Although there was general support for the amendments, the sector raised concerns that there could be unintended consequences, specifically with respect to where local authorities provide capital loans to support housing delivery. 

The government listened carefully to sector concerns and made amendments to allow capital loans to be excluded from the duty to make MRP, provided certain conditions are met. The revised proposals were consulted on (June 2022 to July 2022), and responses indicated that concerns had been largely addressed, but the amendments to the 2003 Regulations had become significantly more complex. In response, government agreed to revise and consult on the MRP guidance to ensure the changes and requirements were fully understood.  

The final consultation (the “consultation”) on the amended 2003 Regulations and revised MRP guidance was conducted from December 2023 to February 2024. The responses were overall positive, with the majority agreeing that the proposed changes are clear and achieve the intended objectives. The respondents did raise concerns over a few remaining risks and unintended consequences. Most of these, however, related to concerns that the proposed amendments would inadvertently prevent existing practices (though not the practices associated with underpaying MRP that are the subject of the statutory amendments). Government has made adjustments where it was not its intent to stop such practices. 

Based on the consultation, there has been one substantive technical amendment. Under the proposed changes to the 2003 Regulations, where a local authority has provided a loan to another entity, if at any time the local authority recognises a ‘credit loss’ whereby part or all that loan will not be repaid, then it must include an MRP charge equal to that loss in full, in the year it occurs (less any permitted reductions). Respondents raised concerns that this could have unintended consequences where existing loans, which may have been made some years ago, incur losses in future leading to unmanageable costs. In response, the requirement will be amended to only apply to new loans made by a local authority from when the relevant revisions to the 2003 Regulations take effect.

The government has considered the responses to the consultation carefully and, notwithstanding the final amendments as described, will proceed with the changes to the 2003 Regulations and guidance to strengthen the MRP duty and prevent those practices that lead to underpayment. The changes will come into force from 1 April 2025, except the requirements with respect to charging MRP with respect to expected credit losses and impairments will apply to all new capital loans issued by local authorities from 7 May 2024, that being the date the relevant regulations come into effect.

The consultation responses do not indicate that substantive numbers of local authorities will have significant cost increases due to these changes, but inevitably some local authorities will, where they have been underpaying MRP. Local authorities should contact DLUHC Officials to discuss if they believe they have unmanageable financial pressures.

1. Introduction

Since 2004, local authorities borrow and invest under the Prudential Framework (the “Framework”), which comprises the statutory duties that must be adhered to and the statutory guidance that local authorities must ‘have regard’ to. Under the 2003 Regulations, local authorities must set aside an amount of money as a charge to the revenue account, to ensure their debt liabilities can be repaid. The charge is referred to in statute as MRP. 

The 2003 Regulations, introduced in 2004, originally set out a prescriptive calculation to determine the MRP charge with little flexibility for local authorities. This changed significantly from 2008, when the 2003 Regulations with respect to MRP were greatly simplified to the broad requirement that local authorities must determine a “prudent” charge (SI 2008/414). Although legislation does not provide detail on the calculation of the MRP charge, it is supported by the MRP guidance, produced and published by DLUHC. The MRP guidance sets out additional detail and four methods (the “Options 1-4”) for appropriately calculating the MRP charge. Under the MRP guidance, MRP is calculated with respect to the capital financing requirement (“CFR”) which represents total capital debt.

The duty to make MRP is an important component of the Framework. When it works effectively, it serves to prevent local authorities taking on more debt than they can afford to repay. Some local authorities, however, apply practices that result in the underpayment of MRP. Where a local authority does not make sufficient provision, this can lead to unaffordable levels of debt and contribute to financial failure. In several recent cases of severe financial failure that have required statutory intervention by the government, underpayment of MRP was a contributing factor.

To address these issues, the government has worked with the sector and other key stakeholders through a series of consultations on amendments to the 2003 Regulations and the MRP guidance. These amendments are intended 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. Since November 2021, there have been three iterative consultations as government has worked with the sector to refine the proposals to avoid unintended consequences to financial stability and service delivery.

This document summarises the responses to the consultation that was open from 21 December 2023 to 16 February 2024, and sets out the government’s response. For clarity, a summary of all amendments made as a result of the final consultation are set out in the Annex. The revised MRP guidance is published at Capital finance: guidance on minimum revenue provision, and the final amendments to the 2003 Regulations are set out in the statutory instrument (SI 2024/478).

This document should be read alongside the third consultation, which fully sets out the background, detail and rationale for the changes to the 2003 Regulations and guidance. Unless otherwise stated, references in in Parts 2 to 4 of this document to the “Regulations” and “guidance” refer to the amended versions that were most recently consulted on (amended Regulations and revised guidance).

2. Engagement with the consultation

This part sets out a high-level summary of the engagement with the consultation and the number and categories of respondents. A summary of the responses by question and the government’s response on specific matters raised is provided in Part 3.

The consultation ran from 21 December 2023 to 16 February 2024. Within that period, there were 75 respondents, including 61 local authorities. Respondents also included local government audit firms, CIPFA, the Local Government Association (LGA) and private firms (local government advisors and consultants).

Table 1: Number of responses by organisation type

A total of 75 respondents took part in the consultation. The majority of these were local authorities.

Category of respondent	Number of respondents	Percentage of total
Local authorities	61	81%
Private firms	5	7%
Audit firms	4	5%
Sector representative bodies	2	3%
Private individuals	2	3%
Other organisations	1	1%
Total	75	100%

The consultation asked a total of 18 questions. These can be considered to have collected evidence on:

• whether the effect of the Regulations and guidance will meet government’s objectives;
• whether risks of unintended consequences have been sufficiently addressed;
• whether the guidance is sufficiently clear and comprehensive for the needs of users;
• the financial impact of the Regulations and guidance.

3. Summary of responses

This section summarises the responses to the consultation and provides further detail on government’s response to specific matters raised. As this is a summary, it does not attempt to capture all views that were shared as part of the response to the consultation. All views, however, have been carefully considered.

Question 1-14, 16 and 18 included a multiple-choice component where respondents could select ‘yes’, ‘no’ or ‘partially’ as relevant to the question.  Each question also asked for a narrative answer where respondents could provide further details.

Q.1: Do the revised Regulations meet government’s objectives as set out in this consultation? Please provide details to support your answer.

Table 2: Responses by organisation type

Type of organisation	Yes	Partially	No
Local authority	45	16	0
Audit firm	2	2	0
Private individual	2	0	0
Other	1	0	0
Private firm	1	3	1
Sector representative body	0	2	0
TOTAL	51	23	1
Percentage of total	68%	31%	1%

Of the 75 responses, the majority of respondents (68%) were of the view that the Regulations and guidance as drafted would meet government’s objectives. Local authorities expressed relatively more positive sentiment, with 74% indicating agreement compared to 68% of all respondents. 

Of those respondents that answered ‘partially’ or ‘no’ to this question, some views were critical of the overall approach and specific objectives themselves. While many responses acknowledge that the amendments meet the government’s objectives to some extent, some respondents objected to the greater level of prescription introduced, and what they view as a reduction to the flexibility for local authorities to self-determine the MRP charge.

Some respondents asked for greater clarity with respect to specific issues. These included the charging of MRP for expected credit loss (ECL) and impairments with respect to capital loans recognised in financial years before the Regulations come into effect, and comments on whether the definition of ‘commercial loans’ was sufficient.  These matters are considered in more detail in response to later questions. 

Some concerns were also expressed that the Regulations and guidance are now significantly more complex, and this could be ‘exploited’ to use practices that under-provide for MRP.

Government response

The government recognises that the Regulations and guidance are more detailed and prescriptive. The necessity for these amendments has been the subject of earlier consultations. As previously set out, some local authorities have applied practices that lead to the underpayment of MRP. The scale of the issues this can lead to has been demonstrated in several cases of severe financial failure. The government has previously made efforts to encourage better compliance with the MRP duty through revisions to the MRP guidance, updated from April 2019, but this has not had sufficient effect, necessitating more prescriptive statutory requirements. The government has, however, been clear that the intent is to strengthen the duty to make prudent MRP rather than change policy and considers that that local authorities that have been appropriately complying with the duty should not be affected.

The government notes the concern that the MRP duty has become more complex and that some local authorities may still look for practices to underpay MRP. The Levelling Up and Regeneration Act 2023 provides government with additional powers to take direct action where local authorities take excessive risk with borrowing and investment, based on a set of risk metrics. These include a risk metric to assess whether local authorities are making sufficient provision to repay debt (i.e. MRP). Local authorities should ensure that they comply with the duties as set out in Regulations and the guidance and adhere to the objectives and principles set out.

Q.2: In your view, do the most recent amendments to the Regulations as set out in this consultation document give rise to any unintended consequences or new risks?

Table 3: Responses by organisation type

Type of organisation	Yes	Partially	No
Local authority	36	9	16
Private firm	5	0	0
Audit firm	3	1	0
Other	1	0	0
Sector representative body	1	1	0
Private individual	0	1	1
Total	46	12	17
Percentage of total	61%	16%	23%

Of the 61 local authorities that responded, 16 (26%) were of the view that the amendments do not give rise to new risks or unintended consequences. However, most respondents (61%) indicated that there were still risks and unintended consequences associated with the new Regulations as drafted. Most concerns set out in the narrative responses relate to common issues:

• Adjustment A. A number of respondents raised concerns that local authorities may no longer be able account for ‘adjustment A’ when determining MRP, which could give rise to increases to the charge. Adjustment A was introduced in 2004 by the original regulation 28 as a component of the detailed calculation: it is an amount that is subtracted from the CFR when determining the MRP charge. It was intended to ensure a local authority’s MRP charge did not increase when the new Framework was introduced. When regulation 28 was simplified from 2008 (SI 2008/414), adjustment A was no longer included in Regulations. Since then, however, the various versions of the MRP guidance have set out that an allowable option to calculate MRP is to use the original calculation prescribed (Option 1 in the guidance). In so doing, it set out that adjustment A should be included at the value attributed to it by the local authority in the financial year 2004-05, unless corrected for errors. Although the guidance retains the references to adjustment A from the previous version, a number of respondents remained concerned adjustment A could not longer be applied.

• Housing Revenue Account (HRA). Concerns were raised by a small number of respondents that, as HRA CFR is not exempted in the Regulations, local authorities would be required to make additional MRP with respect to their HRA CFR. This issue is addressed in response to Q.7 and 8.

• Options for calculating MRP for supported borrowing. The guidance (paragraph 60) included a new line to specify that Options 3 and 4 are “not expected to be appropriate” for supported capital expenditure. This was intended to add additional clarity. Several local authorities raised concerns that, as they were using Option 3, changing the method to Option 1 or 2 would increase costs.  This issue is addressed in response to Q.15.

• Treatment of ECL and impairment on capital loans. Several respondents asked for clarity on how to treat ECL or impairments that had been recognised in financial periods before the Regulations come into effect. This issue is addressed in response to Q.14.

• The use of capital receipts with respect to MRP charged for ECL and impairments. Responses highlighted that the Regulations, as worded, potentially allow local authorities to use capital receipts which are loan repayments to offset an MRP charge relating to an ECL or impairment recognised on that capital loan. Respondents questioned whether this was intended and if the guidance could clarify the position.

Government response

Matters relating to adjustment A, the HRA, supported capital expenditure and ECL are considered further under the specific questions later in the document.

On the use of capital receipts (which are loan repayments) to be used in lieu of MRP charges with respect to ECLs or impairments, it is not the intention that this is permitted.  Amendments have been made to regulation 28(7)(a) and further detail provided in the final version of the guidance (paragraph 69). Details of amendments are set out in the Annex.

Q.3: Do you agree with the additional guidance on what should be included in the MRP Statement?  Please provide details to support your answer.

Table 4: Responses by organisation type

Type of organisation	Yes	Partially	No
Local authority	41	19	1
Audit firm	2	2	0
Private firm	2	3	0
Private individual	2	0	0
Other	1	0	0
Sector representative body	0	1	1
TOTAL	48	25	2
Percentage of total	64%	33%	3%

The majority of respondents (97%) agreed or partially agreed with the proposed additions in the guidance (paragraph 31) that sets out further detail on the content of a local authority’s MRP Statement. There was general agreement that the guidance as drafted is clear, and there was support for the objective of improving transparency and accountability such that the decision that the full council (or equivalent) is making when approving the MRP Statement is better informed.

Of those respondents that did not agree with the additions in the guidance for the MRP Statement or otherwise raised concerns, the main issues identified were:

• That the guidance is too prescriptive: Some respondents were concerned that the prescriptive nature may lead to increased scrutiny from auditors, possibly leading to increased audit costs and concerns among members. There were also concerns that it could result in more complex and lengthier MRP statements, potentially complicating the understanding for non-expert members. Some responses suggested there should be flexibility to adapt MRP statements to local circumstances. This included allowing authorities to omit non-applicable disclosure requirements and make the guidance more relevant to their specific financial situations.

• Implementation timeline: That the timing of the guidance’s application from 1 April 2024 would be problematic, given that many local authorities will have already prepared their MRP statements for the 2024/25 period before the consultation was launched.

• Additional requirements: Some respondents felt the guidance should go further and require additional information above that already included. Suggestions for other information varied between respondents.

Government response

The government notes the concerns that the guidance is too prescriptive. The additional detail on the content of the MRP Statement is, in part, in response to evidence that some local authorities’ MRP Statements have lacked sufficient information and detail needed for transparency of past decision-making. The intent is for the additional detail to support users in considering what an MRP Statement should contain. It is not intended that all local authorities should rigidly follow the guidance at the expense of recognising local circumstances. Nor is it intended to be restrictive, should local authorities consider it appropriate to include different or additional information.

Reflecting the balance in responses between concerns of over-prescription and those responses that suggested the requirement be expanded, the guidance will not be further amended. Local authorities should carefully consider the content of the MRP Statement in line with the principles set out in the guidance.

The timeline for introducing the amended Regulations and guidance is considered under Q.15.

Q.4: Is the guidance sufficiently clear that MRP must be determined with respect to total CFR, less only those elements of CFR permitted by statute?

Table 5: Responses by organisation type

Type of organisation	Yes	Partially	No
Local authority	32	11	18
Audit firm	4	0	0
Private firm	2	1	2
Private individual	2	0	0
Other	1	0	0
Sector representative body	1	1	0
TOTAL	42	13	20
Percentage of total	56%	17%	27%

Overall, most respondents (73%) agreed or partially agreed that the guidance is sufficiently clear that MRP must be determined with respect to total CFR, less only those elements of CFR permitted by statute.

Where respondents disagreed or otherwise raised concerns, the common themes were:

• Treatment of adjustment A: As set out in the analysis of Q.2, several respondents requested that the Regulations explicitly recognise adjustment A as an allowable statutory exception, and that this is also made clear in the guidance, to eliminate confusion and ensure consistent interpretation across local authorities and auditors.

• Housing Revenue Account (HRA): Several respondents asked for HRA CFR to be exempted from the requirement to charge MRP in the Regulations.

The government response to these concerns is included with the response to Q.5 below.

Q.5: Is it clear that authorities must not exclude any portion of CFR from the determination of the MRP charge on the basis that the CFR is associated with an investment asset?

Table 6: Responses by organisation type

Type of organisation	Yes	Partially	No
Local authority	58	2	1
Audit firm	4	0	0
Private firm	4	0	1
Private individual	2	0	0
Sector representative body	2	0	0
Other	1	0	0
TOTAL	71	2	2
Percentage of total	95%	3%	3%

There was widespread agreement that the Regulations and guidance are clear that a local authority cannot exclude an amount of CFR from the calculation to determine the MRP charge because it relates to an investment asset. 

Only a small number of respondents (6%) were not in full agreement. There were no substantive or common issues raised by those who answered ‘partially’ or ‘no’.

Government response to Q4-5

Government recognises the concerns expressed by respondents over the treatment of adjustment A. Although the guidance includes the same references to adjustment A as are included in previous published versions, local authorities are still concerned that adjustment A may no longer be permissible, and this would result in an increase in MRP costs for a number of local authorities. Therefore, the final guidance includes an additional, explicit reference (paragraph 47).

Government does not consider it necessary to make a specific provision in the Regulations for adjustment A, on the basis that successive versions of the MRP guidance since 2008 have explicitly permitted its inclusion, and this has been consistent with the statutory requirement for a ‘prudent provision’. It is government’s view that the amended Regulations should not affect the treatment of adjustment A.

The concerns with respect to HRA are considered in the analysis of Q.7 and 8.

Q.6: Is the list of circumstances where the MRP charge may be determined to be £nil sufficiently clear and complete? Please provide details to support your answer.

Table 7 Responses by organisation type

Type of organisation	Yes	Partially
Local authority	56	5
Audit firm	4	0
Private firm	3	2
Other	1	0
Private individual	1	1
Sector representative body	0	2
TOTAL	65	10
Percentage of total	87%	13%

The majority of responses found the guidance clear and complete concerning the calculation of MRP charges and the circumstances under which an MRP charge may be £nil. There was broad agreement that the list of scenarios allowing for a £nil MRP charge is sufficiently detailed and covers the essential circumstances that local authorities might encounter.

Where respondents answered “partially” or otherwise raised concerns, the common themes were:

• Housing Revenue Account (HRA): A small number of responses suggested a potential lack of consistency between the Regulations and the guidance concerning the treatment of CFR relating to the HRA. Specifically, that although the guidance allows that under certain circumstances the MRP with respect to the HRA CFR may be £nil, the Regulations would prevent this.  This is considered in the response to Q.7 and 8.

• Clarity on use of loan repayments: A point of clarification was raised with respect to paragraph 45 (iii) of the guidance. That is, whether a loan repayment that is a capital receipt can only be used to reduce the MRP charge made with respect to the specific loan for which the repayment is received. The suggestion was that the proposed wording of the guidance would allow the total, general MRP to be reduced by a capital receipt that was a loan repayment.

• Incorporating more detail in the Regulations: There was a suggestion that paragraphs 44 and 45 of the guidance be incorporated into Regulations.

Government response

An amendment has been made to the final guidance (paragraph 69) to make explicitly clear that a loan repayment which is a capital receipt can only be used to reduce the MRP charge that relates to that loan. The Regulations are already clear in this respect.

The government does not consider it necessary to add paragraphs 44 and 45 of the guidance into the Regulations. The purpose of the guidance is to provide additional information to support the Regulations, and the consultation responses strongly indicate this is clear.

The concerns with respect to HRA are considered in the analysis of Q.7 and Q.8. However, for clarity, it is government’s view that the guidance with respect to determining the MRP charge for the HRA is entirely compliant with the Regulations.

Q.7: Is the revised guidance clear on how HRA CFR should be treated with respect to determining an MRP charge?

 Table 8: Responses by organisation type

Type of organisation	Yes	Partially	No
Local authority	50	11	0
Audit firm	3	1	0
Private firm	3	1	1
Other	1	0	0
Private individual	1	1	0
Sector representative body	1	1	0
TOTAL	59	15	1
Percentage of total	79%	20%	1%

The majority of the responses indicate that the guidance is clear. Many of the respondents that answered “partially” did so as the responding councils did not have an HRA.

The only substantive issues raised were:

• Alignment with Regulations: A small number of respondents queried whether the Regulations and guidance were aligned. Suggestions included amended the Regulations to exempt HRA CFR from the duty to make MRP.

• Non-depreciable HRA assets: One respondent noted that local authorities may have non-depreciable HRA assets, which would therefore not have a depreciation charge to revenue with respect to those assets.

The government response is included below alongside Q.8.

Q8. Do the revised guidance address concerns that changes to the Regulations might require additional MRP for the HRA CFR?

Table 9: Responses by organisation type

Type of organisation	Yes	Partially	No
Local authority	42	14	5
Audit firm	3	0	1
Private firm	3	0	2
Private individual	2	0	0
Other	1	0	0
Sector representative body	0	2	0
TOTAL	51	16	8
Percentage	68%	21%	11%

Overall, the responses were positive with most local authorities agreeing that risks that had been raised through previous consultations had been effectively addressed.  Specifically, where authorities were concerned, they would be required to charge additional MRP with respect to their HRA CFR due to the original proposed changes to the Regulations.

The only substantive concern was the perception that the guidance is ‘overruling’ the Regulations, as HRA CFR is not explicitly excluded in statue (consistent with responses to Q.7).

Government response to Q7-8

The government notes that the responses are mainly positive, and that there is widespread agreement that the guidance addresses initial concerns.

The Regulations will not be amended to specifically exclude HRA CFR as it is the government’s view that the Regulations and the guidance are consistent and that the majority of respondents are clear that the duty to make MRP in accordance with regulation 27 applies but that a prudent amount may be £nil. It is the intent that HRA CFR remains within the scope of the MRP duty and local authorities need to carefully consider the affordability of their HRA associated debt, and this will include consideration of where depreciation is not charged on assets.

Q.9: Is the revised guidance clear on how capital receipts may be used to reduce the CFR, and therefore the MRP charge?

Table 10: Responses by organisation type

Type of organisation	Yes	Partially	No
Local authority	50	11	0
Audit firm	3	1	0
Private firm	2	2	1
Private individual	2	0	0
Other	1	0	0
Sector representative body	0	2	0
TOTAL	58	16	1
Percentage of total	77%	21%	1%

There was widespread agreement that the guidance is clear. Where respondents answered “partially”, the common themes were to request worked examples and for the detail in regulation 28(5) to be added to the guidance.

The government response is included below alongside Q.10.

Q10. Is the revised guidance clear that capital receipts cannot be used to replace, in whole or part, the charge that is required to be made to revenue?

Table 11: Responses by organisation type

Type of organisation	Yes	Partially
Local authority	59	2
Private firm	5	0
Audit firm	4	0
Private individual	2	0
Other	1	0
Sector representative body	1	1
TOTAL	72	3
Percentage of total	96%	4%

There was widespread agreement that the guidance is clear.  No common issues were identified in the responses.

Government response to Q9-10

The responses strongly indicate that the guidance and Regulations are clear. Additional text has been added to the final guidance (paragraph 69) that repeats regulation 28(5) for additional clarity. Examples will not be added to the guidance at this time, but government will consider how else to support users of the guidance to ensure the MRP duty is fully understood.

Q11. Is the revised guidance clear that:

a. MRP need not be made with respect to capital loans provided they are not commercial capital loans?

b. MRP must be made with respect to commercial capital loans?

Table 12: Responses by organisation type

Type of organisation	Yes	Partially	No
Local authority	55	4	2
Private firm	4	1	0
Audit firm	3	1	0
Other	1	0	0
Private individual	1	1	0
Sector representative body	1	1	0
TOTAL	65	8	2
Percentage	87%	11%	3%

There was overall strong agreement that the guidance as drafted is clear. Where respondents answered “partially” this was due to requests for minor clarifications in the guidance.

Government response

Government notes that most respondents understood the guidance. Some minor amendments have been made to the guidance where additional clarity was requested.

Q12. Taking into account both the draft amendments to the Regulations and the revised guidance, is it clear what constitutes a commercial loan?

Table 13: Responses by organisation type

Type of organisation	Yes	Partially	No
Local authority	42	15	4
Private firm	2	2	1
Private individual	1	1	0
Sector representative body	1	0	1
Audit firm	0	3	1
Other	0	0	1
TOTAL	46	21	8
Percentage of total	61%	28%	11%

Although most respondents agree that what constitutes a commercial loan is clear, some common issues were raised.  The substantive issues were:

• Consistency with the Prudential Code: Some respondents highlighted that the Regulations refer to loans made primarily for “financial return” as the definition of a commercial loan, which is in alignment with the Prudential Code definition of investments for commercial purposes, whereas the guidance uses “primarily for profit” to define commercial loans. There was an ask for consistent language to be used.

• General exclusion of loans for housing purposes: Some respondents asked for the guidance to explicitly set out that all capital loans for the purposes of housing provision are de facto non-commercial.

• The subjectivity of determining a commercial loan: Several respondents highlighted that the determination of whether a capital loan is ‘commercial’ will still rely on a certain amount of judgement.

Government response

The government notes that the definition of ‘commercial loan’ requires some judgement. This is consistent with the principles-based nature of the guidance, as with the Prudential Code and other statutory guidance that supports the Framework. Definitions are also consistent with the lending terms of the Public Works Loan Board (PWLB), that prevent local authorities accessing the PWLB if they invest ‘primarily for financial return’. The government considers that the principle is sufficiently clear and consistent across the Prudential Code, the PWLB lending terms, and the guidance.

With respect to capital loans for housing provision, it is not correct to consider that all capital loans for housing are ‘non-commercial’ as housing investment can still be primarily for financial return. This is also true of the lending terms of the PWLB: although housing provision is an accepted category of permissible investment, local authorities should still not be making investments in housing (directly or through companies) that are primarily for financial return and are of no direct benefit to its area and local residents.

Q.13: Does the revised guidance sufficiently explain how repayments of a capital loan, which are capital receipts, may be used to directly offset the relevant MRP charge (as a statutory exception to the general rule that capital receipts cannot be used to offset MRP)?

Table 14: Responses by organisation type

Type of organisation	Yes	Partially	No
Local authority	55	5	1
Private firm	4	0	1
Audit firm	2	2	0
Private individual	2	0	0
Other	1	0	0
Sector representative body	1	1	0
TOTAL	65	8	2
Percentage of total	87%	11%	3%

Most respondents agreed that the guidance was clear. Of those that answered ‘partially’ or ‘no’ the following issues were highlighted:

• Offsetting general MRP with a capital receipt: A request for clarification on whether a capital receipt can be used to offset MRP charged with respect to capital expenditure other than the capital loan relating to the receipt.

• Offsetting MRP made with respect to the ECL or impairment: A request for clarification on whether the option to offset MRP charges with capital loan repayments is available where the charge relates to an ECL or impairment. This was also raised in the responses to Q.14.

• Reducing the MRP charge for commercial loans with capital receipts: A request for clarity on whether the option to reduce the MRP charge under regulation 28(5) also applies to commercial loans (for which local authorities must charge MRP).

• Recognition of capital receipts: A respondent highlighted that section 9(4) of the Local Government Act 2003 sets out that a capital receipt is treated as received “where a sum becomes payable to a local authority before it is actually received by the authority, it shall be treated for the purposes of this section as received by the authority when it becomes payable to it.” That is, it may be treated as received before any cash payment has been made.

Government response

With respect to the use of capital receipts used in accordance with regulation 28(5) to offset an MRP charge that is not related to the loan repayment; and, to offset an MRP charge made under regulation 28(2) with respect to expected or actual credit loss:

• A local authority can only use a capital receipt to directly offset the MRP charge made with respect to the specific loan for which the repayment was received. The capital receipt cannot be used to offset any other element of the MRP charge.

• A capital receipt cannot be used to directly offset the MRP charge made with respect to an ECL or impairment that is required under regulation 28(2).

The final guidance has been amended to make these points clear (paragraph 69) and regulation 28(7)(a) has been amended to address the ECL issue described.

Local authorities that have capital expenditure which relates to commercial capital loans must make MRP. However, the option to reduce the MRP charge by the loan repayment under regulation 28(5) applies as it does for non-commercial loans. The final guidance has been amended (paragraph 72) to make this clearer.

The government considers that the flexibility afforded under regulation 28(5) should only be usable where the loan repayment which is a capital receipt has been made and received by the local authority. Regulation 28(7)(b) has been added to reflect this, and final guidance has been amended (paragraph 69) to make this clear.

Q14. Does the revised guidance sufficiently explain:

a. the requirement to include in the MRP charge an amount for any ECL or actual loss with respect to a capital loan?

b. the circumstances where the MRP charge may be lower than the recognised loss?

Table 15: Responses by organisation type

Type of organisation	Yes	Partially	No
Audit firm	3	1	0
Local authority	49	7	5
Other	0	1	0
Private firm	3	0	2
Private individual	2	0	0
Sector representative body	0	2	0
TOTAL	57	11	7
Percentage of total	76%	15%	9%

Most respondents agreed that the guidance is clear, particularly concerning the intent of the Regulations, the circumstances where the MRP charge may be lower than the recognised loss, and the procedures for calculating MRP for ECL and impairments on capital loans.

Where respondents partially agreed or disagreed, the main issues raised were:

• Treatment of losses recognised in prior periods: There were recurring concerns about how the guidance applies to loans made before the Regulations come into effect (for the purposes of the consultation this was assumed to be April 2024), and whether there is a requirement for a ‘catch-up’ MRP charge for ECLs and impairments recognised in earlier years.

• Complexity: The responses highlight concerns about the complexity of linking the MRP charge to ECL and impairments on capital loans and whether this would be widely understood.

• Additional clarity: Some respondents asked that the guidance be explicit that the ECL recognised in a financial year should be included in the MRP charge for that year, and not spread over future years. That this is clear in the Regulations, but the guidance could be strengthened by making this intention clearer.

Government response

Government notes that the guidance is clear for most respondents but recognises that both the Regulations and guidance are now more complex. This is as a consequence of both strengthening the MRP duty to prevent risky practices adopted by some local authorities while also addressing concerns raised over unintended consequences.  

Government has carefully considered the issues in response to this question with respect to charging MRP with respect to credit losses alongside concerns raised in response to Q.15 and Q.16 to Q.18 which capture information on the possible financial impact of the changes. 

Following due consideration, the government has further amended the Regulations (regulation 28(2)(a)) such that the requirement to charge an amount of MRP with respect to ECL and impairments on capital loans shall only apply to capital loans issued by a local authority from 7 May 2024 (this being the commencement date of regulations 28(2) and (3)). The final guidance has been amended (paragraph 75) to set this out. A further amendment has been made to regulation 27(4)(c) such that the option to not charge MRP with respect to a non-commercial capital loan is removed for any such loan where an ECL or impairment has been recognised in the current financial year or any prior financial year.

Therefore, on commencement of the amended Regulations: an MRP charge equivalent to the aggregate of prior period ECLs and impairments will not be required to be made all in one year; existing loans are not subject to regulation 28(2); MRP must be made with respect to all loans where a loss or impairment has been recognised. This reduces the risk that a local authority will have an unmanageable MRP charge in a single year due to the need to include a recognised loss on a capital loan, where that loan pre-dates the amendments to the 2003 Regulations.  However, as MRP must be made with respect to such loans, prudent provision will still need to be made ensuring a local authority does not hold debt it cannot repay where the capital loan will not, or is not expected to, be repaid in full.

Additional text has also been added to the final guidance (paragraph 75) to make explicitly clear that where an ECL or impairment is recognised for a capital loan, that the MRP charge is made with respect to that loan, in accordance with regulation 28(2), and must charged in full in the same year that the loss is recognise. There is no option to spread that charge over future years. 

Q.15:  Please provide any further comments you have on the revised guidance or amendments to the Regulations.

The responses to this question raised issues that have been addressed under the specific questions:

• Supported capital expenditure: Some respondents re-iterated concerns that the guidance should not limit the application of options for calculating the MRP charge for supported capital expenditure, and that this represents a change in policy.

• Adjustment A: That the Regulations should specifically allow adjustment A to be used to reduce the CFR on which MRP is charged in accordance with historic practice. This has been addressed in the government response to Q.4 and 5.

• MRP charged with respect to ECL and impairments: Concerns were raised that the requirement to include the full in-year loss as part of the MRP charge could create large one-off charges to the general fund which an effected local authority would not be able to manage.

• Timing: Several respondents asked that the implementation of the Regulations and guidance should not apply from April 2024. The rationale was that, although the proposals have been public for a long time, the proposals would not be finalised or enacted until long after local authorities had set their 2024/25 budgets. Some respondents asked for the full implementation date to be April 2025, with voluntary adoption from April 2024.

Government response

As set out earlier in this document, government agrees to specifically allow the historic treatment of adjustment A to continue and has amended the guidance to make this clear. Government will also revert to the prevailing guidance with respect to supported capital expenditure, given the widespread concern of the sector and potential for immediate financial pressures, but recognises that some respondents were in favour of greater clarity on the use of different options for calculating MRP on supported capital expenditure. Government will keep this under review.

Amendments to the Regulations and the guidance have been made to address issues with respect to MRP charged for ECLs and impairments (see Q.14.)

Government recognises that implementation of the Regulations and guidance from April 2024 may cause some local authorities issues as MRP policies and budgets have been set and approved for 2024/25. Government has previously stated that the changes should not affect local authorities that were fully compliant with the MRP duty. However, it is also recognised that some local authorities will need to revise their approach to MRP in response to the changes, and this may also have a financial impact. Further, the Regulations and guidance are now significantly more complex compared to previous iterations, and both local authorities and auditors may require additional time fully consider the implications and reach a consistent understanding. Auditors may require further guidance on their duties with respect to auditing the MRP charge and local authority compliance with both statute and guidance, and government will need to engage with the National Audit Office (NAO) to consider further.

In recognition of the issues raised, government intends to lay the Regulations and publish the guidance in April 2024, however, most of the new requirements will take effect from April 2025. The exception is that any new capital loans provided by local authorities from 7 May 2024 will be subject to the requirement to include in the MRP charge an amount equal to the ECL or impairment recognised from that date onwards.

Local authorities are encouraged to follow the revised guidance and comply with the new Regulations as if they are in force on a voluntary basis. Government will also undertake to work with the NAO to consider further guidance on the approach to auditing MRP.

Financial impact of proposed Regulation and guidance changes

Questions 16 to 18 of the consultation were intended to collect financial data to understand the potential impact the changes would have on local authority finances and, consequently, on service delivery or sustainability.

The government response for Q.16-18 is set after Q.18.

Q.16: Consider the changes to the Regulations and the guidance. Will these result in a change to your MRP charges in future years?

Table 16: Responses from local authorities

	Yes	Unsure	No
Number of responses	20	16	25
Percentage of total	33%	26%	41%

Government notes that the most common response from local authorities was that the changes to Regulations and guidance would have no impact to their MRP charge.

Of those local authorities that answered ‘unsure’, in most cases this was because they would need time to model the possible effect or because they wanted further clarity on issues, such as the treatment of adjustment A, before providing a view.

Of those local authorities that answered ‘yes’, the most common reasons were:

• Use of capital receipts: A small number of local authorities said that they would have to change their approach to use of capital receipts or not making MRP with respect to the financing of investment assets (i.e. the objective of the changes) resulting in making additional MRP.

• Adjustment A: There was a widespread concern that there would be an increase in the MRP charge if local authorities were not able to continue to use adjustment A.

• Supported capital expenditure: A common issue was that there would be an increase in the MRP charge if local authorities were required to change the methodology for calculating MRP with respect to supported capital expenditure.

• The MRP charge with respect to ECL and impairments: That if Regulations required local authorities to include historic ECLs and impairments on capital loans in year one of the amended Regulations, this would represent a significant charge for some local authorities. There were also concerns raised regarding the potential for large, one-off MRP charges relating to future ECLs and impairments relating to existing capital loans.

Q.17: Where possible, please provide an estimate as to the increase or decrease in your authority’s MRP charge. Assume the revised changes come into effect from April 2024. Please provide an absolute value and percentage

Of the 20 local authorities that said that they expected the changes to Regulations and Guidance to affect their MRP charges in future years, 14 provided an estimate for change in the MRP charge, although 5 local authorities recorded the value as zero. Of the rest, all changes were increases. The total for these remaining nine local authorities was £34 million for 2024/25. This figure must be approached with caution, however, as some authorities included values in their answers based on assuming that they would be required to change the approach to adjustment A and supported capital expenditure.

Q18 Will the changes result in an adverse impact on your authority’s financial sustainability or ability to deliver services? 

Table 17: Responses from local authorities

	Yes	Unsure	No
Number of responses	12	19	30
Percentage of total	20%	31%	49%

Of the 31 local authorities that answered ‘yes’ or ‘unsure’, 19 of these referenced the issues with adjustment A, supported capital expenditure and ECL matters as discussed above.

These issues account for 9 of the authorities that responded ‘yes’. Of the remaining 3, the reasons related to increases in MRP relate specifically to the objectives of the changes, that is, being unable to use capital receipts to replace MRP and not being able to exclude CFR from the MRP determination.

Government response to Q16-18

The responses to these questions have provided useful evidence on the potential impact of the changes on the sector, however, many of the concerns with respect to the treatment of adjustment A, supported capital expenditure and MRP with respect to ECLs will have been addressed through the amendments made to the Regulations and guidance as a result of this consultation.

It is expected that some local authorities will need to make additional MRP as a consequence of these changes, as this was an intended objective. Government notes, however, that the responses do not indicate that the Regulations and guidance will result in widespread financial difficulties across the sector, although some local authorities may have specific challenges.

Glossary

1. “2003 Regulations” means the Local Authorities (Capital Finance and Accounting) (England) Regulations 2003.
2. “Accounting Code” means the Code of practice on local authority accounting in the United Kingdom, published by CIPFA and established as proper practices in accordance with regulation 31(a) of the 2003 Regulations.
3. “Capital financing requirement or CFR” has the same meaning as defined in the Prudential Code. In effect, this is the total amount of capital expenditure which a local authority has financed from debt.
4. “Capital loan” means the giving of a loan which is treated as capital expenditure in accordance with regulation 25(1)(b).
5. “Credit arrangements” has the meaning given in section 7 of the 2003 Act.
6. “Debt” means borrowing (internal and external) and credit arrangements. The appropriate measure for debt for the purposes of this document is the capital financing requirement.
7. “Expected credit loss or ECL” has the same meaning as defined in the Accounting Code.
8. “Housing Revenue Account or HRA” has the meaning given in section 74(1) of the Local Government Housing Act 1989.
9. “Impairment” has the same meaning as defined in the Accounting Code.
10. “Local authority” has the meaning given in section 23 of the Local Government Act 2003.
11. “Minimum revenue provision or MRP” has the meaning given in regulation 27(1) of the 2003 Regulations.
12. “Proper practices” has the meaning as given in Section 21(2) of the 2003 Act.
13. “Prudential Code” means the statutory code of practice, published by CIPFA, referred to in regulation 2 of the 2003 Regulations.
14. “Prudential Framework” is the legislative framework and relevant statutory guidance that sets the powers, duties, and practices by which local authorities borrow and invest.
15. “Supported capital expenditure” means the total amount of capital expenditure which a local authority had been notified by one or more government departments was to be taken into account in the calculation of the revenue grant due to the local authority in respect of it its use of borrowing and credit. It excludes any capital expenditure that is supported by capital grant.

Annex: Schedule of amendments

Amendments to Regulations

1. Citation, commencement and extent: Amended such that the regulations will take effect from 1 April 2025, except for regulation 28(2) and (3) that sets out the requirements for the MRP charge with respect to expected credit loss or impairments.

2. Regulation 27(4)(c). Amended such that the option to choose not to charge minimum revenue provision in respect of the financing by debt of a non-commercial capital loan cannot be used for any loan where an expected credit loss or impairment has been recognised in the current or any prior financial year.

3. Regulation 28(2)(a). Amended such that the requirement to make an MRP charge with respect to expected credit loss or impairments under regulation 28(2) only applies to a loan made by a local authority from the date that regulation 28(2) commences.

4. Regulation 28(7)(a). Amended to specify that where an LA may use a capital receipt to offset an MRP charge under 28(5), this cannot apply to any MRP charge that is required to be made under 28(2) (the amount with respect to expected credit loss or impairment). 

5. Regulation 28(7)(b). Amended such that the option to replace the MRP charge by an amount that is a capital receipt under regulation 28(5) can only be used where the loan repayment (capital receipt) has been received by the local authority.

Amendments to guidance

Substantive amendments arising in response to the consultation:

1. Paragraph 46(iii). Amended to make clear that where a loan repayment is used to reduce the MRP charge (in accordance with regulation 28(5)), it can only be used to reduce the MRP charge relating to the loan for which the payment is received.

2. Paragraph 47. Added to make clear that local authorities that have applied adjustment A may continue to do so.

3. Paragraph 52. Amended to make clear that where a local authority changes its method of MRP calculations as a consequence of the revised Guidance, that this cannot give rise to an overpayment of MRP in previous years. 

4. Paragraph 62. Amended to remove the sentence that Options 3 and 4 are not expected to be appropriate capital expenditure to make Guidance consistent with previous versions.

5. Paragraph 69. Amended to:

• Make clear that capital receipts (which are loan repayments) cannot be used in lieu of MRP charges made with respect to ECLs or impairments that are required under regulation 28(2);

• Make clear that a loan repayment which is a capital receipt can only be used to reduce the MRP charge that relates to that loan;

• Include specific detail from regulation 28(5) for additional clarity;

• Make clear that the flexibility afforded under regulation 28(5) should only be usable where the loan repayment which is a capital receipt has been received by the local authority.

6. Paragraph 72. Amended to make explicit that local authorities that have capital expenditure which relates to commercial capital loans must make MRP. However, the option to reduce the MRP charge by the loan repayment under regulation 28(5) applies as it does for non-commercial loans. 

7. Paragraph 75. Amended to reflect new regulation 28(2), that the requirement to include in the MRP charge an amount equal to any ECL or impairment (subject to permitted reductions) only applies to capital loans made by a local authority from the date of the commencement of regulation 28(2), and not to any loan made prior to that date. Further detail has also been added to make clear:

• That there is no requirement to make a single-year MRP charge with respect to historic expected credit losses or impairments recognised in previous financial years; and

• That where regulation 28(2) does apply (i.e. to new capital loans), the MRP charge with respect to the ECL or impairments must be charged in full in the same year that the loss is recognise. There is no option to spread that charge over future years.

8. Paragraph 76. Amended to reflect new regulation 27(4)(c) and make clear that MRP must be made with respect to any capital loan that has a recognised expected credit loss or impairment in the current or any previous financial year. The MRP charge may be spread over future years where regulation 28(2) does not apply.