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The rise of the local authority trading company

With budget pressures rising but outsourcing in stiff decline, more local authorities are forming trading companies in order to achieve much needed flexibility and efficiency. A recent report by accounting firm Grant Thornton, for which Acuity Legal provided the legal content, examines the growing popularity of local authority trading companies (LATCs) across the UK.

When the Chancellor imposed austerity measures in 2010, and the sheer scale of Britain's economy drive came into view, the chief cost-saving technique open to local authorities was outsourcing. There were already doubts about its effectiveness. Contracts were typically long-term and inflexible, whilst providers were predominantly focussed on short-term profits. Too many big players dominated the marketplace, and there were growing fears about sustainability and resilience. The Localism Act provided greater flexibility to adopt other solutions, and provided much needed certainty as to the lawfulness of some innovate approaches.

The report reveals that almost 60% of local authorities now own at least one trading company. The most common business activity engaged in is property and investment, which accounts for nearly a quarter of all LATCs. However, taken as a whole, such bodies fulfil a wide variety of services, including waste management (accounting for 8.5% of LATCs) and social services (at 6.5%). There is also wide regional variation in take-up, which is not always easy to explain. They are most popular in the north west of England, for example, and least popular in Wales.

Trends and predictions

LATCs will become increasingly common and increasingly varied. Local authorities have a choice of corporate structures. The standard option is the wholly-owned limited company. Where a social purpose is being served, the organisation might also be structured as a social enterprise.

An additional benefit of the LATC is its scope for collaborative working. They may be joint ventures between more than one local authority. This can be an attractive option for authorities to bring together smaller budget or collection of resource and can pre-empt or postpone the structural changes implied by the Local Government Reform process, and the reduction in numbers that it threatens.

The legal context

In order to enjoy the many benefits of the trading company, local authorities must navigate a new and evolving legal landscape. The normal obligations of company law may constitute a minor cultural change for those unused to them, but this is only a part of the challenge. Add to this the use of charities and mutuals in the local government sector, and local government need to ensure compliance with charities law and the Co-operative and Community Benefit Societies Act 2014 respectively.

Change, reform and complexity can be expected. These things are generally true of all new areas of law, but because the nature of LATCs will always be at least partly political, they can certainly be expected here. Given the range of company structures which may be applied, the breadth of purposes they can serve, and the different rules applying to each, sound legal advice is essential.

If you have any questions about forming a local authority trading company, call our commercial team today on 029 2048 2288 about how we can help, including cost-effective options such as our Acuity Counsel service.

Read the Grant Thornton report here: https://www.grantthornton.co.uk/insights/the-rise-of-local-authority-trading-companies/


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