Agenda Item No_____11_______
PROPOSAL TO ESTABLISH A COST SHARING GROUP
Summary:
This report sets out a proposal to establish a cost
sharing group (CSG) with Great Yarmouth Borough
Council which will provide services, in particular legal
services, to charities and not for profit groups within the
district at cost and exempt from VAT.
Options considered:
Establishing a cost sharing group without another
authority. This would be more expensive and less
attractive to NFPs as there would be less services
available.
Conclusions:
The establishment of a CSG for the delivery of services,
particularly legal services would be an innovative and
unique way of delivering services.
A CSG has the potential to build on the client base and
income generated by eastlaw with no risk to the Council,
thereby delivering efficiencies to the Council.
A CSG will enable service to be delivered to charities
and other not for profit groups at a reduced cost and
free from VAT ensuring funds are diverted into frontline
services.
Recommendations:
That Cabinet RESOLVE ;
1. To form a cost sharing group by establishing
a company limited by guarantee as set out in
paragraph 5 of the report.
RECOMMENDATION TO COUNCIL
2. To appoint a Member as the executive
director to the Board and the Head of Legal
Services as the non executive director to the
Board of the company as the Council’s
representatives.
Reasons for
Recommendations:
Establishment of a Cost Sharing Group will enable the
cost of back office services to be reduced whilst
maintaining service levels. It will also provide charities
and not for profit groups with access to services to
reduce the costs of their back office services.
LIST OF BACKGROUND PAPERS AS REQUIRED BY LAW
(Papers relied on to write the report, which do not contain exempt information and which are not
published elsewhere)
Draft Memorandum and Articles of Association
Solicitors Practice Framework Rules
Cabinet Member(s)
Ward(s) affected
Cllr Ivory
Contact Officer, telephone number and email:
Emma Duncan Head of Legal ext 6045
emma.duncan@north-norfolk.gov.uk
1.
Introduction
1.1
Members will be aware of the drive by central government to generate
efficiencies in local authorities from the provision of back office services such
as finance, legal, ICT, property and HR.
1.2
Some local authorities are looking to reduce costs by providing services to
external bodies through a charging arrangement which returns income to the
Council and therefore reduces the cost of the service to the Council.
1.3
NNDC currently does this with its own legal services which provides external
clients (other district councils, housing associations and charities) with legal
advice and assistance through its trading brand “eastlaw”. For the financial
year 2012/13 eastlaw returned £86,000 of income to the Council and there is
an increasing demand for services.
1.4
The imperative to reduce costs is coupled with the government’s “Big Society”
agenda which encourages more delivery of services by the not for profit
(“NFP”) sector.
1.5
As funding streams become more limited, NFP organisations ability to deliver
is being hindered by their inability to have access to the necessary
operational capacity and infrastructure to deliver services and initiatives at a
reasonable cost. This is particularly true in relation to small charities and NFP
organisations and their “back office” functions such as finance, IT, HR and
legal which are in many cases, prohibitively expensive for NFP organisations
to access and results in valuable (and diminishing) charitable income being
diverted away from the delivery of frontline objectives.
1.6
In addition to this many NFP organisations pay VAT (20%) on the services
they buy which cannot be reclaimed and adds to the already prohibitive cost.
1.7
In February 2013 the law surrounding the provision of services by and to NFP
and public sector organisations changed when the government legislated in
the Finance Act 2012 to make the supply of services between not for profit
bodies exempt from VAT, where those services are being supplied at cost
through a Cost Sharing Group (CSG).
2.0
What is a Cost Sharing Group?
2.1
A CSG is a separate legal entity (usually a Company Limited by Guarantee)
consisting of members who undertake exempt and/or non business activities
(i.e local authorities, parish councils, charities, Registered Social Landlords,
academies, unincorporated associations).
2.2
The members supply “directly necessary” services to and between the
members at cost and these services are free of VAT.
2.3
At “cost” includes the full amount of any additional costs incurred in the
provision of the service (i.e central charges – buildings, telephony, IT, HR
finance, corporate management etc) which currently forms significant part of
the Council’s costs.
2.4
A CSG could ultimately provide a full range of services to the NFP sector
including (but not limited to) legal, accountancy, property (management,
surveying and valuation, conservation and design), payroll, HR,
communications, reprographics and ICT. It could be a “one stop shop” for
NFPs.
2.5
It could also play a key role in delivering income back to “provider” authorities
to reduce the cost of back office services to the Council and would be an
attractive provider of services to NFP organisations by selling services at cost
and with no VAT. This would enable NFP organisations to reduce their
expenditure.
2.6
It would also enable the Council to “shrink” the back office function, without
any degradation of service levels. It would also obviate any need for
redundancies and whilst retaining resilience and flexibility in the service, and
without losing jobs locally.
2.7
Importantly the establishment of a CSG could be a key driver in realising the
ambitions of the Council’s localism agenda by building capability in not for
profit and charitable organisations.
2.8
Dependant on how successful the CSG was, it could ultimately provide high
quality employment in North Norfolk through expansion.
2.9
Having taken advice from the Council’s VAT advisors and specialist Counsel,
it is clear that a separate legal entity could be established as a CSG by the
Council to provide back office functions to NFP organisations.
2.10
As the legislation is still new, a CSG has not been established by any other
local authority and would be an opportunity for the Council to deliver services
in an innovative way.
3
Delivery of Legal Services through a CSG
3.1 Legal Services, through eastlaw, currently deliver legal advice and assistance to
a number of external partners and will contribute £86k of income in 2012/13
exceeding the targets set in the business plan by 44%. eastlaw’s focus is on
delivering affordable high quality and specialist legal services within the public
sector and over the past two years of operation there has been a growing
demand for those services.
3.2A substantial part of this income comes from organisations such as housing
associations and charities who are not able to recover the VAT on legal services
and who would therefore benefit from a reduced total cost if the service was
delivered through a CSG.
3.3Additionally, there has been a recent change to the Solicitors Practice Framework
Rules to allow local authorities to deliver legal services to charities at a cost
without a waiver from the Solicitors Regulation Authority. This change is intended
to support local authorities in seeking to access new forms of income through the
provision of legal services.
3.4 Providing legal services through the medium of a CSG would be a logical
progression for eastlaw and its current clients and enable eastlaw to access new
client markets.
3.5 The CSG would provide eastlaw with a unique selling point and also provide a
tool to market its services to other NFPs who would initially come to the CSG for
the provision of a different service (eg. Property, etc)
3.6 Furthermore, other small charities that eastlaw act for currently have responded
extremely positively to the concept of a CSG and the potential savings, not just in
terms of legal work but in terms of services which could be provided.
4
Potential Partners in a CSG
4.1 In order to make the CSG as effective as possible, as many services as possible
need to be provided through it. This will enable the CSG to offer a “one stop
shop” for NFP and will also enable services to work together to deliver a holistic
solution for their clients.
4.2 There are a number of NFP organisations that would be willing to engage with
the Council but as purchasers of services, not providers.
4.3 Great Yarmouth Borough Council has also taken advice on the establishment of
a CSG in relation to a number of services and have indicated their willingness to
work with NNDC in terms of setting up the formal structure of the CSG. There is
no intention to deliver services to each other but simply to allow both
organisations (together with others) to use the same framework for the delivery of
services.
4.4 There seems to be little incentive to incur two sets of costs in setting up and
administering the CSG for exactly the same purpose when one “umbrella”
organisation would be more sustainable.
4.4 A combined CSG would be a significant resource for NFP organisations locally
enabling a comprehensive service to be provided, utilising the skills and
experience of local government across a wide range of functions which are
expensive for NFP bodies to access. It would also be a model of innovation and
excellence.
4.5 Furthermore a CSG operating with two local government areas would give
eastlaw access to markets outside of North Norfolk.
5. Potential Structures
5.1 A CSG is required to be a separate legal entity from the individual partners.
5.2 The concept of a CSG lends itself to a number of different legal structures but
having taken advice from leading Counsel, the preferred delivery model is a
company limited by guarantee (CLG) as it retains flexibility and control.
5.3 It is suggested that a combined CSG with GYBC should consist of initially 5
Directors (2 exec and 3 non exec) 2 from each authority (a Member and an
Officer), together with an independent non exec board member with expertise in
the NFP sector. The Board would have control over the strategic and structural
decisions relating to the CLG. As the provider authorities they would retain
control.
5.4 It is recommended that a Member be appointed to the Board on behalf of the
Council and that the Head of Legal having developed the concept of the CSG
and who will perform the role as Company Secretary to the CSG also be
appointed to the board as the officer representative.
5.5 Below that would sit an operating committee consisting of representatives of key
clients or client groups and service providers dealing with any operations issues
(SLAs etc).
5.6 To become a recipient member of the company in order to benefit from the VAT
exemption there would be a simple administrative process and no initial charge
for as it is considered that this would act as a barrier to NFPs joining the
company.
5.7 The company structure allows the structure and Board to change as the CSG
evolves.
5.8 There would no additional liabilities arising from this company as it would simply
offer an environment within which the CSG could operate rather than owning
assets and incurring liabilities.
5.9 Service providers would simply bill those members buying services through their
own internal processes and not charge VAT.
5.10 A Member’s Agreement would cover these arrangements and make provision
for the remainder of the operating arrangements between the parties.
6. Conclusion
6.1 The proposal to establish and develop a CSG by taking advantage of the
changes in the Finance Act 2012 is an innovative and new service delivery
method which has the potential to deliver savings to the Council and at the same
time support the delivery of services within the NFP sector. It has the potential to
significantly change the way in which the public and NFP sector work together
6.2 It supports NFP groups by giving them access to services at a reduced cost at a
time when their own funding is being squeezed. By giving smaller organisations
access to a raft of specialist advice and assistance at cost it will enable them to
be fit for purpose in the delivery of their own services to the public. NFP
organisations would be able to direct more funding into the delivery of frontline
services rather than having to pay for expensive infrastructure support, meaning
that more charitable/ public income can be applied where it is most needed.
6.3 As identified above a CSG could reduce the costs of provision of services to the
Council by charging other bodies to use them at cost. It enables the Council to
retain control over costs incurred through retaining control over the service.
6.4 There is the potential to grow services within a CSG, supported by external
funding streams to increase resilience which will benefit provider members. This
would retain high quality employment in the local area rather than the jobs being
provided elsewhere.
6.5 The Council is identified as a provider of services to NFP organisations but also
could, if needed purchase services at cost from another partner (at cost)
potentially delivering savings for the Council.
6.6 Establishing a CSG would meet a number of the Council’s key objectives,
particularly reducing the costs of internal services and using that released
capacity to support the ambitions and capability of other organisations.
4.
Implications and Risks
Benefit
Risks
Provides minimum cost services to a
range of not for profit partners enabling
more money to be delivered into front
facing services.
This is a new piece of legislation and
consequently the establishment and
operation of such a CSG will be “cutting
edge”.
This will involve using an exemption to
the VAT rules but specialist advice has
been sought to protect the Council’s
position.
Reduces costs of provision of services to
“host” organisation and enables host
organisation to retain control over costs
incurred.
Risk that the savings will not be able to
be realised or will be delivered more
slowly because of a lack of purchasers
for the services.
Retains flexibility and resilience.
Retains a “tailored” service at the
Council delivered through SLAs.
Supports delivery of “Big Society”
through building capacity at NFP
organisations
Retains high quality employment in the
local area rather than incurring the costs
of redundancy and the loss of
experienced staff.
The providing authority can still provide a
"profit" based service to clients outside
the CSG thereby supporting income
levels from those streams.
5.
Financial Implications and Risks
Any costs associated with the establishment of the CSG will be met by
existing budgets although these are expected to be minimal. Extensive legal
advice has been taken in order to protect the Council’s VAT position and
there is not expected to be any impact.