Local authorities in England, Wales and Northern Ireland have the option to use capital receipts to reduce their Capital Financing Requirement (CFR), which will lead to reduction in the future Minimum Revenue Provision (MRP) charge. This is an alternative use of capital receipts to funding in year new capital expenditure, keeping the capital receipt in a reserve for future use or for a relatively narrow range of other permitted uses.
As authorities are required to make MRP on the CFR any reduction in the CFR will lead to less MRP needing to be made. However, although the transaction reduces the CFR, it is important to understand that it is not an instant in-year reduction to MRP. What is less clear is how much less MRP can be made, and over how many future years.
Although the MRP legislation and guidance does touch on the issue (by differing degrees depending on which jurisdiction you are in) it does not in most cases spell out exactly what to do. As with many things prudent, sensible judgements will be required.
With specific exemptions around capital loans and lease receivables, capital receipts should not be applied to reduce the MRP charge in the year they are received. They should also not all be applied in one year to reduce the MRP charge by a large amount all at once.
It will usually be the case that a capital receipt applied from the sale of an asset that is known to be in the CFR will be used to eradicate or reduce the future MRP that would have been made related to that asset. Where it is more difficult is how to reduce MRP when you have applied a capital receipt from an asset that is not in the CFR, or may relate to the pre-2008 CFR where MRP will rarely be linked to a specific asset. There is more than one approach to use in this scenario and some options can result in higher shorter term savings than others! As well as prudence, any policy should be consistently applied: picking one method for one capital receipt and a different method for another is likely to prompt questions from auditors.
Whichever method you choose it is also strongly advised that you include how to apply capital receipts to reduce MRP as part of your MRP policy that is approved by members. Particularly if you expect to apply large capital receipts in this way in future. Significant MRP decisions should not be made by officers alone.
If you would like further advice on MRP or how to set your MRP policy please contact the Arlingclose team at info@arlingclose.com or on 08448 808 200.
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