Local government finance can seem daunting, but it is an essential aspect of running an effective parish or town council. Clerks and Responsible Financial Officers (RFOs) play a critical role in ensuring financial transparency, efficient service provision, and proper management of public funds. In this blog post, we’ll explore the key takeaways from our recent webinar, “Stepping into Local Government Finance: Accounting Basics for Clerks & RFOs,” presented by me (Hannah Driver), with a focus on the Cashbook and the Annual Governance and Accountability Return (AGAR).

WEBINAR AND SLIDES

💁 My webinar is available into two parts, the main talk is available on youtube here (32mins). You can view and download my slides here.

Introduction to Local Council Accounting

Understanding the structure and responsibilities of local councils is the first step. A parish or town council is an elected body that makes decisions on behalf of its community, managing various local matters. Key considerations include:

• Transparency: Ensuring that financial operations are open and understandable to the public.
• Efficient Service Provision: Using resources wisely to deliver services.
• Setting of Precept: Determining the local tax to fund council operations.
• Management of Reserves: Maintaining funds to cover future needs and emergencies.

The Role and Responsibilities of the RFO

Every local authority must appoint an RFO, responsible for managing the council’s financial affairs. Key duties include:

• Following Proper Financial Procedures: Adhering to regulations and guidelines set out by governing bodies like the Joint Practitioners' Advisory Group (JPAG).
• Internal Controls and Audit Systems: Implementing measures to prevent errors and fraud, such as regular internal audits and segregation of duties.
• Reporting to the Council: Providing regular updates on spending and financial status, including detailed reports and financial statements.
• Completing the AGAR: Preparing the Annual Governance and Accountability Return for the financial year, which includes statements of accounts and governance assertions.

Maintaining Good Financial Procedures with the Cashbook

The cashbook is the cornerstone of council accounting. It records all financial transactions and provides a clear audit trail. To keep it effective:

• Regular Recording: Document all payments and receipts promptly to maintain an up-to-date cashbook. Ensure to split out VAT for accurate tracking.
• Audit Trail: Ensure a complete and accurate record of financial transactions, including supporting documents like invoices and receipts. This trail is crucial for transparency and accountability.
• Bank Reconciliations: Regularly reconcile bank statements to the cashbook to verify the accuracy of recorded transactions and identify discrepancies. Ideally, these reconciliations should be performed monthly.

A well-structured cashbook should align with the council’s budget and allow for easy analysis and reporting. Here are some key considerations:

• Structure Based on Budget/Precept Breakdown: Allocate payments and receipts to budget codes for clear tracking.
• Group Codes for Reporting: Group similar budget codes, such as those for a village hall, to facilitate reporting.
• Enhanced Detail: Consider adding additional codes to analyse data further and record more information to make it easier to reference.

Is your accounting system fit for purpose? Ensure it meets your council’s needs and consider if additional training is necessary.

Handling VAT

Councils must manage VAT carefully, whether they are VAT registered or not. Key points include:

• VAT Registered Councils: Submit regular VAT returns, adhere to Making Tax Digital (MTD) requirements, and use appropriate software to ensure accurate and timely submissions.
• Non VAT Registered Councils: Claim back VAT using Form 126, ideally aligning with the financial year-end for simplicity and to ensure compliance with HMRC guidelines.

Year-End Procedures and the AGAR

The AGAR is a critical document, summarising the council’s financial activities. Sections include:

• Internal Audit Report: Summary of audit findings and recommendations.
• Annual Governance Statement: Confirmation of internal controls and governance procedures.
• Accounting Statements: Financial data derived from the cashbook or Income & Expenditure records, ensuring accuracy and completeness.

Detailed Breakdown of the AGAR Sections:

• Section 1: Annual Governance Statement
  • This section confirms the council's internal controls and governance arrangements.
• Section 2: Accounting Statements
  • Line 1: Balances Brought Forward: Ensure this matches Line 7 of the previous year.
  • Line 2: Precept or Rates & Levies: Record the precept amount for councils; rates/levies apply to drainage boards.
  • Line 3: Total Other Receipts: Include all other receipts, excluding bank transfers and exclude VAT if using Income & Expenditure
  • Line 4: Staff Costs: Follow guidance on what expenses to include.
  • Line 5: Loan Interest/Capital Repayments: Separate from other payments.
  • Line 6: All Other Payments: Include all payments except staff costs and loan repayments, excluding VAT if using Income & Expenditure.
  • Line 7: Balances Carried Forward: This should be equal to (Line 1 + Line 2 + Line 3) - (Line 4 + Line 5 + Line 6).
  • Line 8: Total Value of Cash and Short-Term Investments: Should match the bank reconciliation as of March 31st.
  • Line 9: Fixed Assets plus Long-Term Investments: Update for new assets/disposals; ensure consistent reporting.
  • Line 10: Borrowings: Update the amount owed at year-end, typically from Public Works Loan Board (PWLB) loans.

Managing Assets

An accurate asset register is vital for insurance, maintenance, and financial reporting. It is a comprehensive record of the council’s tangible assets and provides supporting information for Box 9 on the Accounting Statements (AGAR). Here are the key aspects to consider:

• Record of Assets for Insurance Purposes: Ensuring all assets are insured appropriately.
• Facilitates Management of Assets: Helps in managing the location, maintenance, and renewals of assets.
• Specific Rules for Councils: For instance, councils should not depreciate assets but should maintain an accurate record of their value.

Key Information for Asset Register:

• Date of Acquisition: When the asset was acquired.
• Cost of Acquisition: The purchase price.
• Nominal Value for Gifted or Community Assets: Recorded as £1.
• Location: Where the asset is located.
• Useful Life: The expected duration the asset will be of use.

Regular updates and thorough records are essential. Ensure all additions and disposals are documented and consider adding useful information such as maintenance schedules and responsible persons.

Managing Reserves

Reserves are crucial for the financial health and stability of a council. They provide a safety net for unexpected events and ensure that future projects can be funded. There are three main types of reserves that councils need to manage:

General Reserves:

• Purpose: To cover unexpected events or cash flow problems.
• Guidelines: Should be equivalent to between 3 and 12 months of expenditure, with smaller councils typically holding 12 months and larger councils holding 3 months.

Earmarked Reserves:

• Purpose: Held for specific purposes or projects. These are funds set aside for known future expenses, such as major repairs or new infrastructure projects.
• Management: Should be clearly defined and regularly reviewed to ensure they are justified and sufficient for their intended purpose.

Capital Reserves:

• Purpose: Specifically for capital projects, such as the purchase or enhancement of fixed assets and the repayment of loans.
• Proceeds of Disposals: If the council sells any assets, the proceeds (over £10k) should be allocated to capital reserves.
• No Upper Limit: There is no upper limit for earmarked or capital reserves, but they must be clearly defined and may need explaining at year-end.

Regular Review and Justification

Reserves should be reviewed and justified at least annually. This involves:

• Evaluating Current Levels: Ensure that the reserve levels are appropriate for the council’s needs.
• Planning for Future Needs: Anticipate future projects and potential emergencies.
• Transparency: Clearly document the purpose and use of each reserve to maintain transparency with stakeholders and auditors.

Helpful Resources

Several resources are available to support clerks and RFOs:

• JPAG Practitioners Guide: proper practices for governance and accounts. The bible for completing the AGAR!
• Internal Auditor: advice on good practices and compliance
• External Auditor: useful info on their website re what needs to be completed at Year End
• VAT 749: HMRC Guidance on VAT for Local Authorities
• SLCC: support and advice for Clerks
• NALC: represents the interests of Town and Parish Councils
• Local ALCs: County Associations of Local Councils
• Facebook Group ‘The Clerks’ Corner’: A wealth of information and support from other clerks

Find Out More

For more detailed guidance and tools to help you manage your council’s finances, visit Scribe Accounts. You can also request a free demo of our accounting software to see how it can simplify your financial management.

Thank you for reading! Stay tuned for more tips and insights on local government finance. Don’t forget to subscribe to our blog for the latest updates.

Finally, watch my webinar

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Q&A

‍Question: What do I need to do with regard to the Quarterly Budget?

Answer: You need to check your financial regulations and do what your council tells you to do.

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Question: How do I claim VAT back when invoices don’t split the VAT element out?

Answer: If it's 20% VAT, divide the gross figure by 6 to get the VAT amount you can claim. For 5% VAT, divide the gross figure by 21.

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Question: How do I reconcile Barclaycard payments?

Answer: Record the transactions on the date they are paid off. You can either record it as one entry or break it down into individual entries and then reconcile those with the payments.

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Question: How do you switch from one accounting type to another if the previous and current year must use the same method?

Answer: You submit your current year using your original method. For the next year, you restate the previous year’s accounts using the new method, so both years match.

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Question: How do I determine the appropriate amount to go into reserves and what they should be used for?

Answer: Your council should have resolutions to determine the starting position of what is in reserves. Then review and justify those reserves, ensuring they are appropriate for ongoing and future needs.

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Question: Can we claim VAT back on grants we give to a local Sports Association?

Answer: No, you cannot claim VAT back unless the goods or services are bought for council use.

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Question: Can I claim VAT back if councillors purchase items for the council and provide a VAT receipt, even if the council's name is not on it?

Answer: Yes, you can claim back VAT on smaller sundry items. For larger items or regular purchases, get an invoice that includes the council’s name.

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Question: Can we claim VAT back on items bought by a councillor for a council event, where the receipt is not in the council's name?

‍Answer: Yes, for small purchases with receipts. For larger items, ideally get an invoice addressed to the council.

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Question: We are a new council and expect to go over the 200,000 threshold for three consecutive years. Do I need to restate the accounts when switching accounting methods?‍

Answer: Yes, if you switch to income and expenditure accounting, you need to restate the previous year’s accounts using the new method for consistency. You can also use receipts and payments throughout the year and convert at the end.

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Question: Regarding VAT claims for the past 4 years without prior records.

Answer: Claims should be made for the complete calendar month. Start from the current date and go back 4 years.

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Question: VAT reclaim for a community center exceeding the £7,500 limit (exempt supplies) due to substantial work.

Answer: If you go over £7,500, you cannot reclaim any VAT. Consider opting to tax the building, making it VAT applicable, so you can reclaim VAT but will need to charge VAT on hire fees.

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‍Question: How to manage contingencies in budgeting and whether to separate project contingencies.‍

Answer: Separate contingency lines are recommended for clear tracking and accurate reflection of costs. For projects, incorporate specific contingencies and review costs annually.

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Question: Duration for opting to tax.

‍Answer: The option to tax lasts for 20 years.

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