Contact: Jon Pittam, ext 7400, e-mail: [email protected]

1 Introduction

1.1 This report sets out developments in the 2004/05 budget since the July Cabinet.

2 Residential allowance (Social Services)

2.1 The Government used to pay a residential allowance for those people in independent sector homes. This allowance continued to be paid to pre-2002 clients until October 2003, to coincide with the introduction of the new pension credit. A transitional specific grant was introduced for pre-2002 clients for the remainder of 2003/04 with a separate consultation on how to compensate local authorities in 2004/05.

2.2 The Government has now decided to allocate the County Council £7.6m in a non ring-fenced manner for the residential allowances transferred from specific grants. This is £1.5m more than the budget assumption made for 2004/05 in setting the Social Services cash limit. This is a windfall gain for Social Services as there is no additional spending pressure on residential allowances. Having received more grant than expected in 2004/05, that benefit will continue into 2005/06.

2.3 The grant gain is not ring-fenced and needs to be taken into account in considering the overall budgetary position for Social Services, both in 2004/05 and 2005/06.

2.4 Social Services are currently predicting an underspend of £0.7m in 2004/05 after the receipt of this grant. The underspend assumes that the £1.5m contingency retained within the 2004/05 cash limit for Social Services is allocated to meet additional pressures including those in children's services (more placements, £950,000) and on adults with learning disabilities (£550,000). It also assumes that other pressures of £0.8m are met from the £1.5m additional grant leaving £0.7m which the Executive Member, Social Services will consider allocating to new projects.

2.5 The extra windfall grant would then be used to:

	£m	£m
Meet additional pressures
local government pay award (0.25% over budgeted 2.5%)	0.2
maintaining existing recruitment and retention incentives for new staff	0.3
community equipment store	0.1
other pressures	0.2	0.8
New projects
Nursing home and nurse call IT projects	0.2
IT mobile working	0.3
Remaining "contingency"	0.2	0.7
Total additional grant		1.5

2.6 The Cabinet could decide:

· to allocate the extra grant in part, or in whole, to its efficiency savings list in both 2004/05 and 2005/06

· to require Social Services to meet the costs of market supplements agreed by Cabinet in July from this source rather than using reserves and balances which in turn could then be used to reduce the 2005/06 council tax rise

· to allow Social Services to retain the extra grant to fund additional pressures and new projects.

2.7 Continued good budgetary practice requires Social Services to manage and assimilate all its pressures within its cash limit for 2004/05. It would be prudent to defer allocating additional resources to new projects until the outturn position for 2004/05 is clear, and to provide some flexibility in making budget decisions for 2005/06. The Cabinet may therefore wish to consider making its allocation of additional resources for market supplements (discussed in paragraph 3 below) subject to: all other priorities and pressures being contained within the Social Services cash limit for 2004/05; and to the deferral of the allocation of £0.7m to new projects pending the determination of the budget cash limit and efficiency savings target for Social Services in 2005/06 later this year.

3 Market supplements (Social Services)

3.1 Cabinet on 12 July 2004 approved the principle of market supplements on the basis of market data presented for a number of difficult to recruit posts, mainly in Social Services. The Executive Member Policy and Resources has agreed the detailed allocations.

3.2 Neighbouring authority and market comparisons show that salaries in Social Services are being paid at a higher level than those offered by Hampshire County Council. While there is no current evidence of significant numbers having left to join these authorities, the higher salaries offered do present a risk for the future. There is clear evidence that recruitment difficulties continue to exist. In financial terms, fewer social workers could mean less frequent reviews and less time spent on placement decisions with a danger of more expensive outcomes resulting. It could also mean more need to employ expensive agency workers. In residential and home care, cover requirements dictate that contract, agency or overtime costs cannot be avoided if there are vacancies. Full staffing should lead to a reduction in these additional costs and would be a potential efficiency saving from 2005/06 onward.

3.3 In common with other market supplements, the need to continue with these will be reviewed on an annual basis. In particular, their continued applicability will be assessed in the context of the pay and benefits review outcomes. However, should the proposed supplements continue then the costs would be:

· £1.25m in 2004/05 (implementation is proposed from 1 September 2004, except for approved social workers and occupational therapists, which were backdated to 1 July 2004 to ensure competitiveness with specific jobs recently offered elsewhere).

· £2.15m in 2005/06, rising to £2.4m in 2006/07 when all the nursing care homes have been built and additional staff recruited.

3.4 It is recommended, subject to Cabinet consideration of paragraph 2.6, that £1.25m of the budgeted contribution of £2m towards the job evaluation transitional reserve should be added to the 2004/05 Social Services cash limit to pay for these market supplements. This allocation would be subject to Social Services not seeking further corporate funding during 2004/05 and ensuring that all its spending priorities and pressures in 2004/05 are contained within its revised cash limit.

3.5 The full year cost of £2.4m would have to be met within the budgeted increase for 2005/06 as eventually determined within the budget guidelines set by Cabinet in December 2004. An option, on the assumption that budget guidelines were restricted to base budget increases only, would be to cease the budgeted contribution of £2m to the job evaluation transitional costs reserve in 2005/06 and add it to the Social Services cash limit instead. The balance of £0.4m would need to be met by efficiency savings from improved recruitment and retention within Social Services existing cash limit.

3.6 Use of the £1.25m budgeted contribution will reduce the balance on the job evaluation transitional costs reserve from £6m to £4.75m at 31 March 2005. This will cause difficulties in meeting the transitional costs from job evaluation, as indications from other local authorities suggest costs substantially in excess of this figure. Any reduction in budgeted contributions also increases the difficulties of meeting any other cost pressures on a continuing basis from the pay and benefits review.

4 Local area committees

4.1 The Leader proposes allocating £100,000 for 2004/05 to the pilot Havant area committee, subject to review of its success or otherwise in improving services and value for money. As a one-off allocation the sum could be taken from balances (£3.6m was set aside by Cabinet on 28 June 2004 when considering the final accounts for 2003/04, primarily for use in 2005/06 and subsequent years).

4.2 Longer term funding could be based upon devolvement of existing budgets within that area, or possible allocation of any reduction in the council tax discount on second homes introduced by Havant 2005/06 (see item 5).

4.3 It is suggested that a further £25,000 is set aside from balances for external consultancy reviews of the new Policy and Resources scrutiny arrangements as well as the two area committee pilots in Test Valley and Havant, subject to a report back to Cabinet on the outcome of the consultancy reviews.

5 Every Child Matters

5.1 A central contingency of £0.2m was set aside for the corporate start up cost of Every Child Matters. There have been no calls on this so far apart from initial consultancy costs and it is suggested that the Executive Member, Policy and Resources should allocate sufficient from the contingency to meet these costs.

6 Value added tax (VAT)

6.1 Customs and Excise has accepted that they had given wrong advice on the VAT treatment of the hire of CDs, videos, DVDs and computer games from the library service. Instead of being standard rated, the hires should have been non-business.

6.2 In common with past practice this refund will accrue centrally and be available as a potential cash saving on a one-off basis as far as the refund is concerned. Continuing savings of around £150,000 per annum could be added to any cash efficiency savings target for 2005/06, or retained in part or whole within the cash limit for Recreation and Heritage.

6.3 Cabinet will also be aware from previous reports that the County Council is close to breaking the 5% partial exemption limit on VAT.

6.4 If more than 5% of the VAT the County Council pays on goods and services is attributable to VAT exempt supplies made, then the ability to reclaim the VAT on expenditure (both revenue and capital) generating all the County Council's VAT exempt supplies will be lost. This would roughly equate to about £3m a year.

6.5 The source of the funding is irrelevant; once the funding is covered by the Council's registration it scores against partial exemption. Expenditure is counted in the year it is incurred regardless of whether any exempt income has yet been generated. Much of the VAT loss on capital would fall on Education projects. VAT exempt income is generated by Education from adult education, general and sports lettings, nursery education and some activities under extended schools such as health and welfare.

6.6 Over this year and next there are many capital projects programmed, mainly Education and Discovery Centres, that may generate exempt income. 2005/06 looks to be under pressure. As a result there may not be any scope to slip projects from the current year to 2005/06, which means that there remains a risk of exceeding the limit during 2004/05 and 2005/06.

6.7 The County Council cannot restrict schools bidding for New Opportunities Fund, lottery funding etc. This makes it difficult to limit capital projects generating exempt income.

6.8 As an example the new build of John Hunt of Everest School, with expenditure of £12m predicted to fall in 2005/06, adds 0.75% towards the 5% threshold.

6.9 Government is well aware of the problem with the issue being discussed nationally with Customs and Excise, Department for Education and Skills, and the Office of the Deputy Prime Minister by the Local Government Association, Society of County Treasurers and Chartered Institute of Public Finance. There are no simple answers as the private and charitable sectors have a more restrictive partial exemption regime and have objected to any further increase in the favourable treatment of local government. In addition, both National and European tax legislation limit the options for change. Any solution, in the short term, will have to come at local level.

6.10 The provision of adult education, and nursery education are not statutory duties and such welfare services are VAT exempt supplies. If the County Council provides these services the expenditure counts towards the 5% limit. However, the County Council could opt to tax new projects at school sites which would mean all lettings for that facility, both general and sports, becoming standard rated rather than exempt. This could only be applied to separate buildings. Any revenue and capital expenditure incurred would be removed from the calculation. This would reduce the net income for the school and could impact on the viability of the facility. Changes to the funding of adult learning have already resulted in other problems. Also, once the option has been exercised it has to remain in place for a minimum of 10 years.

6.11 Nursery education provision is set up already where possible via third parties to avoid the generation of exempt income. Any rent charge to the provider would be at a peppercorn rent, or the building could be taxed to make the rent standard rated. It is unlikely that the provider would be able to recover any VAT charged on such rent.

6.12 Another option might be to set up management agreements with third parties to run sporting facilities at schools where large capital works take place, effectively to remove the exempt income from the County Council's calculation. Such arrangements are being put in place at Hounsdown and Test Valley schools where governors are developing community provision for the first time, but it would be very difficult to impose them retrospectively at established community schools.

6.13 The VAT difficulties mainly arise from successful capital bids intended to increase community sports facilities on school sites and increased provision for childcare and adult learning. The cost of losing the partial exemption would be prohibitive, have a material impact upon schools and Recreation and Heritage and could add around 1% to council tax or require a 0.3% cut in spending across all budgets.

6.14 The position is being closely monitored to avoid this occurring but from now onwards it may be necessary to pursue options which would

· delay timing of major capital works to keep within the partial exemption limit in each tax year, although there is limited scope for this

· use third parties to run the facilities where possible, and failing that would mean

· opting to tax new community developments on school sites.

6.15 The County Treasurer and County Education Officer will consult closely with the Schools Forum and other interested parties to ensure that the overall interests of all County Council and School activities are not compromised by breaking this partial exemption limit.

Recommendations

1. The recommendations are set out in the summary decision sheet.

Section 100 D - Local Government Act 1972 - background papers

The following documents disclose facts or matters on which this report, or an important part of it, is based and has been relied upon to a material extent in the preparation of this report.

NB the list excludes:

Published works.

Documents which disclose exempt or confidential information as defined in the Act.

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