When it comes to navigating the intricacies of local council accounting, the maze of rules, regulations and responsibilities can often seem daunting. Regardless of size, every local council is tasked with managing public funds with utmost transparency and diligence, and the task is no less challenging for smaller Parish Councils.
That being said, where the gross income or gross expenditure falls under £25,000 for a Parish Council for the financial year, some specialised rules and simplifications apply. These guidelines offer an opportunity for councils to streamline their processes without compromising on accountability or transparency.
This guide will offer an introduction for those managing small Parish Councils, on a Receipts & Payments basis, helping you to understand the unique aspects of financial accounting in this threshold.
🧠 Things to forget
This blog will highlight the key rules & responsibilities to be aware of as a Council under the £25,000 threshold, but first let’s take a look at the things you don’t need to know; terms you may come across, but don’t need to worry about!
- Terms relating to Income & Expenditure accounting: Adjustments (accruals, prepayments, debtors creditors etc), Balance Sheets, Box 7 & 8 reconciliation
- Terms relating to VAT-Registered Councils: Making Tax Digital, VAT Returns, VAT 100, VAT payments & liabilities
- Terms relating to commercial finance: Depreciation & amortisation, statement of cashflows, profit & loss account, GAAP, double-entry bookkeeping, journal entries
💷 Accounting approach
For councils under the £6.5million threshold there are two approaches that can be taken - Receipts & Payments or Income & Expenditure.
Income & Expenditure is sometimes known as accrual accounting and records transactions on the date to which they relate, rather than when they were received/paid. Councils are only required to work on an Income & Expenditure basis when their gross income, or gross expenditure, exceeds £200,000 for 3 consecutive years.
So when we’re looking at a small Parish Council with gross income or gross expenditure under £25,000, we’re assuming that the accounting approach used will be Receipts & Payments.
Receipts & Payments is a much simpler form of accounting, sometimes known as cash accounting. Under this method, transactions are recorded based on the flow of cash in and out of the council's accounts. Receipts are recorded when income is received, and payments are recorded as they are made. This method records transactions as they happen, regardless of when they relate to.
🔍 Transparency code
The Transparency Code for Smaller Authorities requires Parish Councils (not exceeding £25,000) to publish certain information set out in the code. The primary aim is to ensure transparency, and in place of external audit, allows local taxpayers to access relevant information about their local council's financial activity and governance.
As a Parish Council under the £25k threshold, the data and information specified in this Code must be published on a website (which is publicly accessible free of charge).
Documents to be published annually:
- All items of expenditure above £100
- End of year accounts, annual governance statement, and internal audit report (as found in the Annual Governance and Accountability Return or AGAR - covered below)
- List of councillor/member responsibilities
- The details of public land and building assets
Documents to be published regularly:
- Minutes, agendas and meeting papers of formal meetings (agendas to be published no later than 3 clear days prior to the meeting, and draft minutes to be published no later than a month after the meeting).
For further information on the transparency code, click here.
📄 Year End & Audit
The financial year for local councils is a 12-month period from 1st April to 31st March, and is used as the basis for preparing the Annual Governance and Accountability Return (AGAR) - a mandatory document that local councils have a legal requirement to complete under the Local Audit and Accountability Act 2014.
There are 3 separate AGAR Forms for varying levels of financial activity. Form 2 is to be completed by local councils that wish to claim exemption, due to gross income and gross expenditure not exceeding £25,000. You must still undergo the internal audit, and there are further criteria you must meet in order to claim exemption, which will be detailed on the AGAR.
What’s included in AGAR Form 2?
Annual Internal Audit Report: This section is to be completed by your internal auditor, and requires a ‘Yes’ or ‘No’ response to a set of statements. This must be signed and dated by the internal auditor.
Section 1: Annual Governance Statement: The Annual Governance Statement is used to review the effectiveness of the system of internal controls and requires a ‘Yes’ or ‘No’ response to a set of statements. This section is to be completed by the Clerk/RFO and approved at a council meeting.
Section 2: The Accounting Statements: When completing on a Receipts & Payments basis, figures on the annual return will be gross (with VAT paid included in Box 6 and VAT received from HMRC included in Box 3).
Certificate of Exemption: This is for local councils completing Form 2, who have claimed exemption from the external audit. The certificate of exemption must be completed, which includes stating the gross income and gross expenditure.
Top tip: If you are certifying the Council as exempt, you do not need to send the completed Internal Audit Report, AGAR Section 1 and Section 2 to the external auditor - these just need to be approved and signed by the council, and published on the website.
Take a look at the publication requirements here.
🌟Financial Habits - Your Future Self Will Thank You!
It’s important to keep records accurate and up to date, and by following the habits below you can expect to save many hours at Year End.
- Add transactions to the cashbook
- Ensure VAT is correctly accounted for
- Pay/create invoices
Top tip: Record your supplier’s VAT registration number when entering the payment - this will save a lot of time when it comes to preparing your VAT Form 126 reclaim.
- Bank reconciliations
- Reports for Council - payments awaiting authorisation, bank reconciliation etc.
- Council Meeting
- Pay Salaries
- Review budget vs actuals
- Check VAT Reclaim - ensure all information is correctly recorded
Top tip: Keep a note of any variances against budgets throughout the year - this will help towards Year End when explaining any significant variances for the AGAR.
Read our handy guide on reclaiming VAT for non-VAT registered Councils here.