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«February 2012 Department for Communities and Local Government © Crown copyright, 2012 Copyright in the typographical arrangement rests with the ...»

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Capital Finance

Guidance on Minimum Revenue Provision

Capital Finance

Guidance on Minimum Revenue Provision

February 2012

Department for Communities and Local Government

© Crown copyright, 2012

Copyright in the typographical arrangement rests with the Crown.

You may re-use this information (not including logos) free of charge in any format or medium,

under the terms of the Open Government Licence. To view this licence, visit

http://www.nationalarchives.gov.uk/doc/open-government-licence/ or write to the Information

Policy Team, The National Archives, Kew, London TW9 4DU, or e-mail:


This document/publication is also available on our website at www.communities.gov.uk

Any enquiries regarding this document/publication should be sent to us at:

Department for Communities and Local Government Eland House Bressenden Place London SW1E 5DU Telephone: 030 3444 0000 February, 2012 ISBN: 978-1-4098-3348-2 Department for Communities and Local Government





[This note is not part of the guidance]


Regulations 27 and 28 in the Local Authorities (Capital Finance and Accounting) (England) Regulations 2003 [SI 3146, as amended] require local authorities to make a prudent amount of minimum revenue provision (MRP). The Secretary of State has issued statutory guidance on determining the “prudent” level of MRP, to which authorities are required to have regard.

The guidance was first published on 28 February 2008 and a second edition was issued on 11 March 2010. The guidance has been further revised and the third edition is below. The previous editions are superseded.


The new guidance is operative from 1 April 2012.


The revisions in this third edition of the guidance are as follows. In Part 1, a new paragraph 39A is inserted after paragraph 39; in Part 2, a new paragraph (c) is inserted at the end of paragraph 19. Both relate to the HRA reform exercise on 1 April 2012 and are to ensure that the authorities taking on new debt do not face any inappropriate increase in their MRP liability.

Any queries about this document should be addressed to:

sarah.blackman@communities.gsi.gov.uk Department for Communities and Local Government February 2012



[Third edition] Part 1 Informal commentary


1. Part 2 of this document contains statutory guidance on Minimum Revenue Provision issued by the Secretary of State. Part 1 provides an informal commentary on that statutory guidance. Both parts have been revised and apply with effect from 1 April 2012. The previous editions of the MRP guidance are superseded.

2. Local authorities are normally required each year to set aside some of their revenues as provision for debt. More precisely, the provision is in respect of capital expenditure financed by borrowing or credit arrangements but, both in this commentary and in the statutory guidance, it has generally proved more convenient to use the term “debt” as shorthand for that technically more accurate form of expression.

3. The scheme of Minimum Revenue Provision (“MRP”) was set out in former regulations 27, 28 and 29 of the Local Authorities (Capital Finance and Accounting) (England) Regulations 2003 [SI 2003/3146, as amended] (“the 2003 Regulations”).

This system has now been radically revised by the Local Authorities (Capital Finance and Accounting) (England) (Amendment) Regulations 2008 [SI 2008/414], (“the 2008 Regulations”) in conjunction with the publication by DCLG of this MRP guidance.


4. As well as simplifying the system, this shift in emphasis from regulations to guidance will, for example, help to promote development schemes which would have been hindered by the inflexibility of the former regulatory regime.


5. Amendment regulation 4(1) of the 2008 Regulations revised the former regulation

28. In the new regulation 28, the detailed rules are replaced with a simple duty for an authority each year to make an amount of MRP which it considers to be “prudent”.

The regulation does not itself define “prudent provision”. However, the MRP guidance makes recommendations to authorities on the interpretation of that term.

The operative date of the change is 31 March 2008, which means that it applies to the financial year 2007-08 and to subsequent years.


6. The issue of statutory MRP guidance was made possible by section 238(2) of the Local Government and Public Involvement in Health Act 2007, which amends section 21 of the Local Government Act 2003. Section 21 already allowed regulations to be made on accounting practices and is the power under which the existing MRP regulations were made. The amendment inserts a new section 21(1A) into the 2003 Act, enabling the Secretary of State also to issue guidance on accounting practices and thus on MRP.

7. Authorities are obliged by new section 21(1B) to “have regard” to such guidance – which is exactly the same duty as applies to other pieces of statutory guidance including, for example, the CIPFA Prudential Code, the CIPFA Treasury Management Code and the DCLG Guidance on Investments.

8. The statutory MRP guidance itself is in Part 2 of the present document. Part 1 of this document is simply an informal commentary, explaining the policy intention in more detail and including other information to help practitioners; it has no statutory force.

9. Specific recommendations of the statutory guidance are considered in more detail below.

ANNUAL MRP STATEMENT [paragraph 3 of the guidance]

10. Authorities are asked to prepare an annual statement of their policy on making MRP for submission to their full council (for authorities without a full council, approval of the statement should be at the closest equivalent level). This mirrors the existing requirements to report to the council on the Prudential borrowing limit and investment policy. The aim is to give elected Members the opportunity to scrutinise the proposed use of the additional freedoms conferred under the new arrangements.

On the timing of the issue of this statement, please see paragraph 34 below. If it is ever proposed to vary the terms of the original statement during the year, a revised statement should be put to the council at that time. It is for each council to consider with its officers the preferred format of the statement and DCLG will not being issuing any advice on the matter.

11. To underpin this recommendation, it was necessary to amend the Local Authorities (Functions and Responsibilities) (England) Regulations 2000 [SI 2000/2853]. Regulation 4(1)(b) specifies functions which are not to be the sole responsibility of an authority’s executive and includes the authority's borrowing, investments, capital expenditure and now also the making of MRP.

MEANING OF “PRUDENT PROVISION” [paragraphs 4 to 6]

12. The main part of the guidance is concerned with recommendations on the interpretation of the term “prudent provision” as used in the amended regulation 28.

The guidance includes specific examples of options for making “prudent provision”.

13. It explains (paragraph 5) that provision for the borrowing which financed the acquisition of an asset should be made over a period bearing some relation to that over which the asset continues to provide a service. In the case of borrowing supported by the Government through the Revenue Support Grant system, however, it will be reasonable to link the period of making provision broadly with that implicit in the determination of the grant; and options 1 and 2 (below) are based on that principle.


14. Four ready-made options are included in the guidance (and there are two alternatives under Option 3). The options are those likely to be most relevant for the majority of authorities but other approaches are not meant to be ruled out, provided that they are fully consistent with the statutory duty to make prudent revenue provision. Authorities must always have regard to the guidance, but having done so, may in some cases consider that a more individually designed MRP approach is justified. That could involve taking account of detailed local circumstances, including specific project timetables and revenue-earning profiles. Authorities may wish to consult their legal advisers and external auditors about their approach to MRP if it involves a significant departure from the guidance or relates to any large, complex or novel schemes. However, the decision on what is prudent is for the authority and it is not for DCLG to say in particular cases whether any proposed arrangement is consistent with the statutory duty.

Option 1: Regulatory Method [paragraph 7]

15. For debt which is supported by the Government through the RSG system, authorities may continue to use the formulae in the current regulations, since the RSG is calculated on that basis. Although the existing regulation 28 is revoked by regulation 4(1) of the 2008 Regulations, authorities will be able to calculate MRP as if it were still in force. Solely as a transitional measure, this option will also be available for all capital expenditure incurred prior to 1 April 2008 – see paragraph 34

below. The earlier regulations relevant to MRP are available online at:

http://www.legislation.gov.uk/uksi/2003/3146/contents/made http://www.legislation.gov.uk/uksi/2004/3055/contents/made http://www.legislation.gov.uk/uksi/2006/521/contents/made http://www.legislation.gov.uk/uksi/2007/573/contents/made

16. Normally, under this option, the former regulations should be followed exactly as if they had not been revoked. That includes taking advantage, if desired, of the commutation adjustment in the former regulation 29.

17. When introducing the new MRP regime in 2004, as part of the Prudential system framework, the Government’s policy aim was that the move from the former MRP scheme should not itself increase any authority’s MRP liability. Safeguards to achieve that result were built in from the outset (or added later as anomalies came to light).

18. The main device for achieving the neutrality between old and new MRP systems was “Adjustment A” in the original regulation 28. This was an amount to be calculated at the start of the new system in 2004 and not subsequently varied. For the purposes of Option 1, Adjustment A should therefore continue to be given the value attributed to it in the financial year 2004-05, even if that value reflected erroneous calculations under the former capital finance system which reduce MRP liability under the present system. If, however, Adjustment A reflects an error which increases the current MRP liability, the authority would be justified in recalculating it and hence reducing MRP to its proper level.

19. Similarly, if an authority considers that, in its particular circumstances, strict compliance with any other aspect of the former regulations would produce an anomalous and disadvantageous result, it may consider modifying the rules to achieve the intended neutrality. Again, such a step should be discussed in advance with external auditors.

Option 2: CFR Method [paragraph 8]

20. This is a technically much simpler alternative to Option 1 which may be used in relation to supported debt. While still based on the concept of the Capital Financing Requirement [CFR], which is easily derived from the balance sheet, it avoids the complexities of the formulae in the old regulation 28 (though for most authorities it will probably result in a higher level of provision than Option 1). It does however still

rely on definitions in regulation 28(11), which are as follows:

“Non-housing CFR” means that part of the capital financing requirement which is not housing CFR. “Housing CFR” means that part, if any, of the capital financing requirement which is in respect of borrowing or credit arrangements used to finance capital expenditure on housing assets. “Housing assets” means any land, houses or other property to which subsection (1) of section 74 of the Local Government and Housing Act 1989 (duty to keep Housing Revenue Account) for the time being applies.

Option 3: Asset Life Method [paragraphs 9 to 13]

21. For new borrowing under the Prudential system for which no Government support is being given and is therefore self-financed, there are two options included in the guidance.

22. Option 3 is to make provision over the estimated life of the asset for which the borrowing is undertaken. This is a possibly simpler alternative to the use of depreciation accounting (Option 4), though it has some similarities to that approach.

Within option 3, two methods are identified

23. The first of these, the equal instalment method, allows the use of the simple formula in paragraph 9 of the guidance. This will normally generate a series of equal annual amounts over the estimated life of the asset. The original amount of expenditure (“A” in the formula) remains constant. The cumulative total of the MRP made to date (“B” in the formula) will increase each year.

24. The outstanding period of the estimated life of the asset (“C” in the formula) reduces by 1 each year. For example, if the life of the asset is originally estimated at 25 years, then in the initial year when MRP is made, C will be equal to 25. In the second year, C will be equal to 24, and so on. The original estimate of the life is determined at the outset and should not be varied thereafter, even if in reality the condition of the asset has changed significantly (paragraph 11).

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