For councils under the £6.5million threshold there are two approaches that can be taken when completing the Accounting Statements section of the AGAR - Receipts & Payments or Income & Expenditure.

Receipts & Payments is a simple form of accounting, sometimes known as cash accounting, which records receipts and payments at the point they are received or paid. This is regardless of when they relate to.

Income & Expenditure is sometimes known as accruals accounting and records transactions on the date to which they relate, rather than when they were received/paid.

Councils are required to work on an Income & Expenditure basis when their gross income, or gross expenditure, exceeds £200,000 for 3 consecutive years. However, councils can also voluntarily opt to complete Year End in Income & Expenditure if under this threshold - this often is done as a result of the Clerk/RFO or a Councillor having a background in finance.

There are two distinct differences between Receipts & Payments and Income & Expenditure to be aware of when completing the Accounting Statements for the AGAR. 

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Treatment of VAT

For councils reporting on a Receipts & Payments basis, the amount of VAT charged to customers and the VAT refunds received from HMRC will be included in Line 3 (Total Other Receipts). The amount of VAT paid to suppliers, and any VAT paid to HMRC if VAT registered, will be included in Line 6 (Total Other Payments).

For councils reporting on an Income & Expenditure basis, figures in the annual return will be net of VAT. The only VAT shown in the annual return will be VAT to be written off as irrecoverable, which is usually due to a partial exemption. 

The closing VAT position for the year, i.e. what was due to be claimed from (or paid to) HMRC as at 31st March is shown on the balance sheet as an overall balance, and will form an adjustment between Line 7 (Total Funds) and Line 8 (Total Bank Position), as HMRC is treated as any other debtor/creditor.

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Year End Adjustments

Under Receipts and Payments, the figures reported come directly from the cash book with no consideration as to when they relate. For example, if an invoice for a village hall booking taking place in the new year was paid on the 31st March, it would be correct for a council using Receipts & Payments to record the receipt as received in the previous year despite that not being the year to which it related. 

When working in Income & Expenditure, adjustments are made at the end of the year to take account of timings. The Clerk/RFO must consider what items should have been paid for as at the year end (creditors/accruals), what has been paid for in advance (prepayments), and with regards to income what was owing (debtors) or what income has been received in advance. These adjustments along with the VAT figure as above make up the difference between Box 7 and Box 8. 

Under Receipts & Payments, Boxes 7 and 8 will show the same figure, i.e. the total cash position is the same as the total councils funds as nothing has been adjusted for.  

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Top tip: It is important to remember that if moving between approaches when completing the Accounting Statements for the AGAR, whether mandatory or not, the prior year must be restated so that both years use the same approach.

If there is any uncertainty as to which approach your council uses, particularly if you are a new Clerk/RFO who has inherited less than adequate financial records, the best way to check is to take a look at the AGAR for the previous year.  If the figures in Box 7 and 8 on the Accounting Statements are the same then the council is almost certainly working in Receipts and Payments. If the values are different then Income and Expenditure is being used.

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