Powers for charging and trading: When you need a company

Judith Barnes, Bevan Brittan

There are a number of urban myths that circulate around activities which involve charging and trading, such as that you always need to form a company if you want to trade and generate profit. While in some circumstances that is correct, in others it could not be further from the truth.

Some of the confusion stems from the fact that the general power of competence in the Localism Act 2011 enables local authorities to do ‘anything that individuals generally may do’, including things ‘unlike anything’ local authorities or other public bodies may do. Understandably, many people think that the general power of competence is therefore a power of first resort. However, the general power of competence does not enable a local authority to get around any restrictions, limitations or prohibitions in other powers, and there are constraints on charging and trading under sections 3 and 4 of the Act. For this reason it is important to understand what other powers there may be before jumping straight to the Localism Act.

There are many other powers that allow local authorities to charge and trade, some of which enable profits to be made, without setting up a commercial trading company. Ultimately, charging and trading are not mutually exclusive and one person’s charging may be another person’s trading in the same function, and even in the same authority depending on why and how it is done.

One example of where alternative powers exist is the Local Authorities (Goods and Services) Act 1970, which enables local authorities and a whole range of other organisations designated as public bodies to:

  • supply goods or materials;
  • provide administrative, professional or technical services;
  • use vehicles, plant or apparatus and appropriate staff; and
  • undertake works of maintenance.

Organisations designated as public bodies include other local authorities, the governing bodies of educational establishments (including academies), some health bodies, housing associations, community associations and the Environment Agency.

Section 1(3) of the Act states that ‘any agreement…. may contain such terms as to payment or otherwise as the parties consider appropriate.’ This has been interpreted by the courts in the case of British Education Supplies v Yorkshire Purchasing Organisation (1988) ELR 195 to mean that a profit can be generated. The downside is that the commissioning authority may need to go through a procurement process, depending upon their constitution or EU rules.

Other specific powers include:

  • the power to sell electricity derived from renewable sources under an order pursuant to section 11 of the Local Government (Miscellaneous Provisions) Act 1976;
  • catering under the Civic Restaurants Act 1947;
  • powers to buy, sell and develop land;
  • recreational activities and related support under section 19 of the Local Government (Miscellaneous Provisions) Act 1976; and
  • the ability to second staff under Section 113 of the Local Government Act 1972 on such terms (including as to payment) as may be agreed, for example as a consultant.

In addition to the above, the Local Government Act 2003 introduced powers which enable local authorities to charge and trade in function-related activities provided the authority is not under a duty to provide the function. Under section 93, an authority can charge to recover its costs ‘taking one year with another’ where someone agrees to receive the service. This may be a good starting point for trading where there is no explicit power to charge or trade in the function, as using the charging power can recoup overheads of the service, including central overheads like the corporate and democratic core, not just the marginal extra costs of providing the service.

Where activities take off, it may be that the council wishes to establish a commercial trading company under Section 95 of the Local Government Act 2003. This enables a local authority to trade in function-related activities, where they are not under a duty to provide the function and there is no other explicit power under which they can trade. So, if there are powers to trade with other public bodies, for example under the Goods and Services Act, you are directed to use that power rather than set up a commercial trading company under the 2003 Act.

A commercial trading company is required where the primary motive is trading to make money. Where the council has other powers and the motives are, for example, regeneration and community benefit, there is no obligation to set up a commercial trading company even if it is likely that such activities will generate a financial return. The section 95 powers should be used where the council wishes to act like the private sector and, generally speaking, most of its customers will be private sector customers. The legislation requires the establishment of a company (limited by shares or guarantee) or a community benefit society to provide a level playing field with the private sector. Under the Local Authorities (Best Value Authorities) (Power to Trade) (England) Order 2009 the council must also approve a business case before it sets up the company and must not provide subsidy to the trading company.

Similar powers to sections 93 and 95 are reflected in sections 3 and 4 of the Localism Act 2011. Where an authority wants to do something that it does not already have powers to undertake, but an individual would have powers to do, then it may charge and trade in those activities on a similar basis to sections 93 and 95. Again, the primary motive to establish a commercial trading company under section 4 is the desire to make a commercial return as the primary driver of the activity.

In summary, it is horses for courses. The council needs to be clear what the purposes are of its charging or trading activities and then needs to find the relevant power and exercise that power properly. There may be a number of options in the circumstances, for example, the regeneration of an area could be done:

  • under land and development powers by the council itself;
  • using regeneration powers under section 1 of the Localism Act 2011 with environmental and community benefits as key drivers as well as improving assets;
  • through a commercial trading company as a private sector developer, either wholly owned or as a joint venture; or
  • as a joint venture with the private sector through a limited liability partnership or company.

We would always recommend that the council clarifies what it wants to achieve and then explores the various options for delivering those objectives to determine which powers are most appropriate in the circumstances and which procedures and options for structure might need to be considered.

We like to think of this as a hierarchy of powers:

  • utilise specific powers first, for example section 1 of the Local Authorities (Goods and Services) Act 1970 or section 11 of the Local Government (Miscellaneous Provisions) Act 1976 or section 113 of the Local Government Act 1972 where appropriate and where there are no limitations on fees;
  • then move to general powers, such as charging under section 93 in relation to function-related activity;
  • then consider using the general power of competence, especially where the council does not have any existing powers, or to complement or expand existing powers (provided there are no explicit restrictions and limitations); and
  • finally, consider trading powers under section 95 of the 2003 Act where the trading is in function-related activities or the general power of competence (where the council does not have any existing powers), provided that undertaking the work is ‘all about the money’, such as a commercial purpose, rather than for any other reasons relevant to the circumstances.

Just because something provides a return to the council or generates an income does not mean that a commercial trading company is required. There may be other appropriate powers.

Judith Barnes
Bevan Brittan LLP
0370 194 5477