DLUHC changes rules on flexible use of capital receipts

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The levelling up secretary has written to all council leaders to amend the rules concerning the flexible use of capital receipts to fund transformation projects.

In his letter, Greg Clark outlined an amended direction, which clarifies that capital receipts used for transformation projects “must only be from disposals where the authority does not still retain some direct or indirect control of the assets”.

The flexible use of capital receipts was introduced in 2016 to enable local authorities to use the value of assets to fund transformation projects that produce long-term savings or reduce the costs of service delivery.

However, instead of selling property to a third party to generate capital receipts, some councils have created subsidiary companies and sold the property to them instead.

The amended rules from the Department for Levelling Up, Housing and Communities (DLUHC) mean that councils can no longer use the income generated from asset sales to subsidiary companies to fund transformation projects.

Clark said in his letter that although most councils have used “flexibilities sensibly”, some authorities have sought ways in direct conflict with its “spirit and intent”.

He said: “Every council has a duty to use the tax they receive from hardworking people in a responsible way. It’s not right that some councils have been using unorthodox accounting practices which put taxpayer cash at risk.

“That’s why we’ve tightened the rules which some authorities have been attempting to bypass.”

Every council has a duty to use the tax they receive from hardworking people in a responsible way. It’s not right that some councils have been using unorthodox accounting practices which put taxpayer cash at risk.

Beach hut battle

The amended rules come as Bournemouth, Christchurch and Poole (BCP) Council has been in correspondence with DLUHC over a Special Purpose Vehicle (SPV) proposal to sell its beach hut portfolio to a subsidiary company.

Drew Mellor, BCP Council leader, said: “Correspondence from DLUHC on 16 June clarified that our SPV proposal was within the regulations at the time, and that DLUHC were considering consulting on changing these regulations.

“This meant that we needed to consider different scenarios where the planned SPV could go ahead in some form, while also exploring other options for funding with DLUHC.

“DLUHC have now updated the regulations for the flexible use of receipts and that means that one of those options – the use of an SPV to commercialise our beach hut assets and use the receipt to fund transformation – is no longer open to us.”

Mellor stressed that the government should encourage and support local authorities to produce long-term savings and reduce costs of service delivery. He noted that the council has submitted an application to DLUHC for a capitalisation direction of £75.9m to fund its transformation programme over three years.

“I am confident that this programme will put our finances in a good and genuinely sustainable position,” Mellor added.

It is very hard for local authorities to plan for the future if they follow the rules and then the rules get changed whilst they are implementing them.

Budget gaps

Stephen Kitching, consultancy director at treasury advisor Arlingclose, highlighted that DLUHC’s amendment to the rule will leave some councils, like BCP, that have planned to fund the transformation through the flexible use of capital receipts, with budget gaps.

He told Room151: “It is very hard for local authorities to plan for the future if they follow the rules and then the rules get changed whilst they are implementing them.”

David Green, strategic director at Arlingclose, told Room151 that the amended direction “is further evidence that DLUHC is cracking down on local authorities that may be staying within the letter of the law, but are going beyond their spirit of the framework.”

DLUHC said that the amended direction can only be deviated from, on an exceptional basis, with permission from the secretary of state.

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