R Secretary of State for the Environment (Respondent) ex parte London Borough of Hammersmith and Fulham and Fifteen Other Appeals (Appellants) (Conjoined Appeals)

The Local Government Finance Act 1988, as amended by the Local Government and Housing Act 1989, introduces a radically reformed system of local government finance and local taxation in place of the long familiar rating system. As is well known, the central feature of the new system, the community charge, is a matter of acute political controversy. Scarcely less controversial in a political sense is the control which the Act enables the Secretary of State for the Environment to exercise over the finances of individual local authorities, subject to approval by the House of Commons, by setting a maximum which an authority's budget may not exceed and thereby limiting the amount which those liable to the community charge in that authority's area can be required to pay. The process is colloquially referred to as "charge-capping" or simply "capping" and this is a convenient terminology to adopt for brevity when referring to the statutory process. The current financial year, commencing on 1 April 1990, is the first year of the operation of the new system. After local authorities had set their budgets for the year the Secretary of State proposed to cap 21 authorities, 19 of whom challenged the legality of the action taken by the Secretary of State in proceedings for judicial review. These applications, together with certain others, were argued extensively by a galaxy of counsel appearing for the different authorities, first before the Divisional Court of the Queen's Bench Division (Leggatt L.J., McCullough and Roch JJ.) who gave judgment dismissing the applications on 15 June and secondly before the Court of Appeal (Lord Donaldson of Lymington M.R., Ralph Gibson and Taylor L.JJ.) who dismissed the authorities' appeals on 27 June but gave leave to appeal to your Lordships' House. The Court of Appeal gave reasons for their decision in a reserved judgment on 3 July. Only 16 authorities, all

but one now represented by the same counsel, availed themselves of the leave to appeal which had been granted. Your Lordships were able to report to the House on 16 July your unanimous opinion that the appeals should be dismissed so that an order to that effect might be made without delay, but then indicated that reasons for the decision would be given later.

I would like, if I may, at the outset to express my unqualified admiration for the thoroughness and the speed with which both courts below adjudicated upon the issues raised before them in these proceedings. The importance of an early determination was obvious. Both courts had to consider a formidable volume of documentary material and heard many days of oral argument, but were able within a very short time following the conclusion of the argument to deliver lengthy reserved judgments dealing comprehensively with every issue raised. I agree entirely with the conclusions which they reached and, in large measure, would be content to indorse the detailed reasoning in both judgments. Some of the points argued below were not pursued in your Lordships' House and of the many points which were argued I shall find it neither necessary nor useful to examine every one in detail. But having the opportunity, which the courts below were denied, for reflection at leisure in the formulation of my reasons, I hope it may be possible to examine from a rather broader perspective the legitimacy of the grounds upon which the local authorities seek to challenge the action taken by the Secretary of State.

It is necessary first to consider the broad scheme of the legislation. In the explanations that follow I acknowledge my indebtedness to the helpful guidance through the complexities of the Act of 1988 provided by the affidavit of Mr. Paul Rowsell, an Assistant Secretary in the Department of the Environment and the Head of its Finance Local Authority Expenditure and Revenues Division. Local authorities are divided into charging authorities, who are also referred to as receiving authorities, and precepting authorities. Among the appellants the charging authorities are either district councils or London borough councils and the precepting authorities are county councils. The income of both classes of authority is derived from three main sources, the revenue support grant, non-domestic rates and the community charge. It is the responsibility of the charging authorities to set and collect the community charge. Charging authorities also receive from central government their share of the revenue support grant and of the national pool of non-domestic rates. From this income charging authorities must fund the services they provide and meet the precepts of precepting authorities. Precepting authorities derive their income from the precepts they serve upon charging authorities.

The amount of the revenue support grant for any financial year is determined by two reports required to be made by the Secretary of State to, and approved by, the House of Commons. The first, under section 78 of the Act of 1988, determines the global amount of grant, the second, under section 80, determines the amounts to be distributed to individual receiving authorities. The Act provides for consultation with representatives of local government before the Secretary of State determines the amount of the global grant.

Non-domestic rates are payable by occupiers of non-domestic property according to a national rate poundage set by the Secretary of State. The rates are collected by charging authorities but accounted for entirely to the Secretary of State and then distributed by him to receiving authorities in proportion to their relevant population.

Thus it will be seen that the amount of income which a local authority will receive in any year from these two central sources is directly determined by the central government and in the case of the revenue support grant is subject to the approval of the House of Commons.

It is through the community charge alone that a local authority is able in some degree to determine its own local expenditure and taxation policies. Again as is now well known, at whatever rate the community charge is set by the authority it is payable, subject to reliefs and exemptions, at that rate by each adult resident in the local authority's area, representing broadly speaking the local electorate. As explained in the affidavit of Mr. Rowsell, the political thinking which underlies the new system is that it will operate to secure that local authorities are properly accountable to their electorate.

At the centre of the budgeting process prescribed for charging authorities are the calculations required to be undertaken for each financial year by section 95 of the Act of 1988, as amended by paragraphs 1 and 63 of Schedule 5 to the Act of 1989. Section 95(2) lists the main heads of revenue expenditure and certain other items for which funds must be provided on revenue account. Section 95(3) lists certain sources of funds available to meet the requirements under section 95(2), not including the three main sources of income. Having estimated these amounts, a charging authority must then calculate the difference between them under section 95(4) which is, in substance, the aggregate of estimated expenditure falling to be met out of the three main sources of income, revenue support grant, non-domestic rates and the community charge. I shall refer to this for brevity and convenience as the authority's annual budgeted expenditure. A parallel budgeting process is prescribed by section 68 for precepting authorities. A precepting authority's annual budgeted expenditure represents the amount it requires to raise by precepts which will reflect its own share of the revenue support grant and non-domestic rates included in the sums allocated to receiving authorities and also the additional amount which charging authorities require to raise by their community charge to meet the balance of the precepting authority's annual budgeted expenditure.

The amounts of the annual budgeted expenditure of precepting and charging authorities are the focal points of the whole system. It is by reference to these amounts that the Secretary of State's powers of capping are exercisable and it is by reference to these amounts that community charges are set. The statutory programme is such that before authorities set their budgets they will know how much they are to receive by way of revenue support grant and non-domestic rates and thus what is the balance required to be raised by way of community charge. Precepting authorities set their budgets before charging authorities, who therefore also know how much they require to raise to meet precepts. Thus when a charging authority sets its community charge it is determined by the amount required to meet precepts made upon it, so far as that amount exceeds the precepting authority's relevant share of revenue support grant and non-domestic rates and the amount by which the charging authority's own annual budgeted expenditure exceeds its own share of revenue support grant and non-domestic rates.

I have not included in this very much abbreviated and necessarily over-simplified account of the main provisions of the Act any reference to transitional arrangements or to the so-called "safety net" which are complex and do not, I think, throw any light on the issues falling for determination in the appeals. But before turning to the capping provisions themselves I must summarise, as briefly as I can, the steps taken by the Secretary of State in the...