The 7 questions to ask when creating a Local Authority Trading Company
The consideration of the long-term goal for the LATCO is vital to its success and being clear on this question is key. For example, why is the LATCO being created? Does the council merely wish to ring fence an activity that is currently being undertaken as a council department perhaps to give greater focus […]
The consideration of the long-term goal for the LATCO is vital to its success and being clear on this question is key.
For example, why is the LATCO being created?
Does the council merely wish to ring fence an activity that is currently being undertaken as a council department perhaps to give greater focus on the cost of the activity or is there an objective to expand the services of the LATCO to surrounding areas and/or into the commercial marketplace.
Detailed below are the questions you should be asking to help form your decisions at the start of the LATCO creation process.
- What is the long-term goal for the LATCO?
Is this about cost clarity / saving or a wish to generate a future investment return?
- What are the boundaries?
Will the LATCO only operate within the boundaries of the previous council department or for example will it seek to extend its geographical boundaries or areas of service?
- How will the new LATCO be funded?
LATCOs are very diverse in their activities doing everything from street sweeping, social care all the way through to property investment portfolio’s. The diverse nature of their activities means that there can be no one size fits all for the funding structure. However, the funding structure is where a lot of LATCOs can get into unexpected difficulties particularly with unfamiliar tax regulations.
There are often parallels between LATCOs and privately owned companies for example investment in and provision of residential accommodation. In essence those councils carrying on these activities with a LATCO are acting as ‘Buy to Let’ landlords and are therefore directly comparable with any number of existing commercial companies. In this area therefore there is a well-trodden norm in terms of how such investments might be funded. In the private sector one might expect a mix of mortgage and equity capital from the owners of perhaps two thirds to one third.
This is an important consideration when thinking about how much of the councils funding should be in the form of share capital and how much as interest bearing loans. There are a number of specific tax regulations that apply in this situation and areas such as thin capitalisation and transfer pricing need to be considered.
- Are the VAT implications of the planned activity fully understood?
The LATCO will be in a different VAT position to a council department. The council benefits from a statutory exemption as far as VAT is concerned which the LATCO will not enjoy. Therefore, you need to consider, for example, how will staff who work within the LATCO be remunerated? Will they be employees of the LATCO or remain with the council and be the subject of a cost recharge between the LATCO and the council? A charge from the council will almost certainly be subject to VAT and if the LATCO is carrying on in trade which does not permit VAT registration for example residential property lettings the VAT will add 20% to those costs.
- Will the LATCO mix activities?
Beware of mixing activities in the same LATCO, for example the construction and subsequent rental of residential accommodation or activities with very different risk profiles
- Have you understood the impact of the Teckal regulations?
Thorough understanding of applicable directives are important to avoid any potential problems.
- Where will the LATCO generate income from?
If the LATCO is going to work wholly for the council then has consideration been given as to whether the structure could be made compliant with the mutual trading tax exemptions?
Ultimately care is needed in respect of considering not just what the new entity will be doing today but also the aspirations for its future, it is vital in constructing a new LATCO that those involved have a long-term view. It is unlikely that the LATCO will be a success if it has a short lifespan, will there be cost for its creation as well as a wealth of teething troubles with regulations, accounting rules and insurance procedures which will take some time and cost to settle down.
The most successful LATCOs are those that are created not for short-term gain but for long-term benefit with timeframe in excess of five years which have the positive ongoing support and commitment of the parent council irrespective of any changes in the political colour of the council.