Borrowing for Parish Councils

A Borrowing Approval is not required for borrowing by temporary loan or overdraft from a bank or otherwise of sums which the council may temporarily require to meet expenses pending the receipt of revenues receivable by it in respect of the period of account in which the expenses are chargeable. In all other circumstances, borrowing approval is required.

If your council wishes to borrow, the application form and guidance notes must be obtained from CDALC. The making of the application must be approved by resolution of the full council (2003 Act, Schedule 1, paragraph 2(4)). The completed form and any supporting documentation should then be returned in hard copy format to CDALC who will check and process the application before sending it to the Department for Communities and Local Government for their approval. All questions in the form need to be answered and all information requested must be supplied with appropriate copies of the full draft minutes and reports.The form must be signed by the Chair of the council and the responsible financial officer.

Information to be provided includes

• Name and contact details of Council and Clerk
• Name and contact details of Chair of Council
• District/Unitary Council area
• Purpose of borrowing
• Total cost of the project
• Funding from Council’s own resources
• Funding from other sources
• Whether funding from other sources is confirmed
• Amount to be borrowed
• Proposed borrowing source
• Intended borrowing term
• Details of current loans outstanding
• Current level of precept
• Number of electorate
• Value and purpose of all funds held
• Confirmation of the agreement of full council

In addition the form must be accompanied by:-

• a copy of the council’s budget for next year (or for the current year if next year’s is not available)
• a copy of the written report considered by the council in reaching its decision to apply for borrowing approval
• the full draft minutes of the meeting at which the resolution to make the application were passed.

A council can borrow to part finance a grant towards the construction by a local charity of a village hall.

The Secretary of State will generally apply the following criteria in deciding whether to give borrowing approval:

a) the borrowing should be for a purpose that would be capital expenditure.

b) the cost of the project should not be less than £5 multiplied by the number of local government electors for the area of the council on the first day of  December immediately previous to the application;

c) any unallocated balances (including, where appropriate, capital receipts), beyond those required for the prudent financial management of the council, should be used in the project for which borrowing is required;

d)  the council should have a realistic budget (this must be affordable, taking account of its effect on the council’s precept) for the servicing and repayment of the debt. The Secretary of State will expect to see that the affordability of the loan charges and any other revenue costs arising from the project is demonstrated in the written report to the council recommending the borrowing application. A copy of the report should be submitted with the application form.

When should a council apply?

Councils wishing to borrow are encouraged to let their County Associations know of their borrowing requirements as soon as possible.  However, councils should not apply for borrowing approval until all negotiations have been completed and all other consents (eg planning) have been obtained. If an applicant council is successful, processing of the borrowing approval should generally take about 15 working days from the date of its receipt by DCLG. The borrowing approval will authorise the council to take out a loan within a period of twelve months starting with the date of issue of the borrowing approval.

The amount that an individual council will be authorised to borrow will normally be limited to a maximum of £500,000 in any single financial year for any single purpose. If a council wishes to borrow more than this then early contact with the county association and DCLG is encouraged.

Councils may not, without the consent of HM Treasury, borrow otherwise than in sterling (section 2(3) of the 2003 Act). In practice, most councils are likely to obtain funds from the Public Works Loan Board or the clearing banks. When councils apply for funds, the Public Works Loan Board will insist that they have sight of the original borrowing approval. Loans may also be taken out from individuals or private or voluntary sector organisations.  Councils are advised to seek appropriate advice.

Councils are reminded that the decision to borrow must be taken by the full council (2003 Act, Schedule 1 paragraph 2(4)). This is a separate decision from the decision to apply for borrowing approval.

All borrowing by a council, together with interest on it, is charged indifferently on all the revenues of the council (2003 Act, section 13(3)). A council cannot mortgage or charge any of its property as security for money borrowed or which it otherwise owes; any security given in breach of this provision is unenforceable (2003 Act, section 13(1) and (2)).

Councils must determine the period within which the money borrowed will be repaid, and they are required to make charges to revenue account sufficient to repay the principal within that period and meet the interest charges on the borrowing (2003 Act, Schedule 1, paragraphs 3 and 5). The period determined is known as the “fixed period”, and the council’s determination requires the consent of the Secretary of State. The borrowing approval letter will normally include consent to any period determined by the council, provided it is no greater than a maximum period specified in the letter. The maximum period will begin on the date on which the money is borrowed, and will generally be either:

• 50 years, for the acquisition of, or works on or to, land, buildings, roads or structures, or the making of grants for such purposes; or

• 10 years, in all other cases.

Councils are asked to consider carefully whether it would be appropriate to borrow for the permitted maximum or for a shorter period. Generally the borrowing period should be no greater than the period for which the expenditure is forecast to provide benefits to the council (or the body being assisted). Thus if a piece of equipment is only thought likely to last for five years, it would be more appropriate to borrow for five years than for the ten years that the borrowing approval might permit.

If a council finds it no longer needs the borrowing approval issued to it, it must inform DCLG.

If a council finds that it does not need to borrow the full amount as specified in the approval letter, DCLG should be informed of the actual loan amount as soon as is reasonably practical.

Best Practice

• Seek appropriate advice and guidance early
• Programme prudent use of balances as well as borrowing
• Budgets or revised budgets should be considered before applying for borrowing approval
• The borrowing term should not exceed the life of the asset
• Even if the council secures an interest free loan, it will still require borrowing approval
• Original borrowing approval letter should be kept in safe custody

The Secretary of State’s decision on the borrowing application will be sent direct to the Clerk to the council. A copy of the decision letter will also be sent to the Chair of the council and the local County Association. Where approval to borrow is given, as well as containing the legal authority for the council to borrow money, the approval will state the maximum amount of money that can be borrowed, the purpose for which the money may be used, the period within which money must be borrowed, and the maximum period within which the borrowing must be repaid.