The latest changes to the Local Government Reorganisation (LGR) programme have created new uncertainty for councils, but LGR is only one part of a much wider programme of public sector reform.

Although the government has not yet confirmed the sequencing, structural changes are progressing across local government, devolution, policing, fire and rescue services and the health sector.

For tax teams, the key question is not simply what the future organisation will look like. It is understanding what functions, people, assets, contracts and funding arrangements may move, who will be responsible for them and how the new arrangements will operate.

That was the focus of PSTAX’s September Breakfast Briefing, where Stephanie Leitch and Christine Robinson explored the VAT and Employment Tax implications of the changes now taking place across the public sector and the practical steps organisations can take now, even where future structures remain uncertain.

What is happening with Local Government Reorganisation?

On 7 September 2026, the government announced a rapid review of the Local Government Reorganisation programme.

Decisions affecting Essex, Hampshire, Norfolk and Suffolk were withdrawn. Plans for 14 other areas, together with Cambridgeshire and Peterborough and West Sussex, are being reviewed and paused. Surrey is not affected by the review and the government has confirmed that the May 2027 local elections will take place on existing council boundaries.

For affected councils, this creates uncertainty around the final structures and timetable. It does not, however, mean that tax work needs to stop.

There is still valuable preparation that can continue regardless of when final structural decisions are made.

What tax work can councils continue during the LGR review?

Councils can use this period to understand their current tax position and identify potential issues before organisations, systems and workforces begin to change.

Historic VAT positions are one example. A significant structural change provides a good opportunity to revisit historic expenditure, particularly where VAT recovery has previously been restricted or not reviewed in detail. Any claims remain subject to the relevant four-year time limits whether or not reorganisation proceeds, so delaying the work may reduce available opportunities.

Councils can also improve records relating to options to tax and Capital Goods Scheme assets, review partial exemption calculations and assess trading activities, shared services and fees and charges.

Alongside this, organisations may wish to review employment status and off-payroll working arrangements, CIS processes, payroll controls, PAYE compliance and expenses and benefits procedures. Identifying risks now is often easier than trying to untangle them after systems, responsibilities and workforces have transferred.

This work has value beyond LGR. It can improve the organisation’s current tax position while providing stronger information for any future successor authority.

There will also be work that can begin now and be completed once structural decisions are known, including future VAT registrations and deregistrations, asset transfers, workforce transitions and changes to payroll and tax reporting arrangements.

Devolution and strategic authorities bring their own tax questions

LGR also needs to be considered alongside devolution.

The government’s Rewiring the State programme says every area in England should have, or be in the process of establishing, a strategic authority by the end of 2027, with strategic authorities in place everywhere by the end of 2028.

For new strategic authorities, tax should form part of the set-up process from the outset.

This includes VAT registration and reporting arrangements, funding structures, fees and charges, and the treatment of assets and contracts. It also includes workforce transfers, payroll arrangements, employment status governance, off-payroll working compliance and CIS responsibilities.

As functions move between organisations, authorities need to understand who receives funding, owns assets, holds contracts, employs staff and carries responsibility for ongoing tax compliance.

These questions are best considered while arrangements are being designed, rather than after agreements have been signed.

Rewiring the State makes the picture wider still

The current programme extends beyond councils and strategic authorities.

The Rewiring the State statement includes plans to align regional police forces, fire and rescue services and Integrated Care Boards with strategic authority boundaries by the end of the Parliament, while local policing geographies are also expected to align more closely with local authorities.

Police reform is progressing separately. The Government’s Police Reform White Paper proposes abolishing Police and Crime Commissioners at the end of their current terms in May 2028, with police governance functions transferring to strategic authority mayors or, where that is not possible, elected council leaders. It also sets out a longer-term ambition for fewer, larger police forces.

Health reforms create another interface. Current government guidance states that, subject to legislation, relevant NHS England public health commissioning functions are intended to be delegated to Integrated Care Boards from April 2027.

For public bodies, this means several reform programmes may affect the same geographical area at the same time.

Greater alignment of boundaries does not necessarily make the tax position simpler. Shared services, recharges, joint commissioning arrangements, asset transfers and contractual changes can all create VAT implications, while workforce transfers and new operating models can create Employment Tax consequences that need to be understood as part of the overall design process.

Understanding the workforce before transition

People sit at the centre of every organisation whose structure is changing.

Organisations should therefore understand not only their employees, but also contractors, agency workers, election staff, CIS subcontractors and other worker populations connected to the organisation.

Employment status, off-payroll working, CIS, expenses and benefits, payroll processes and PAYE arrangements can become harder to assess once systems and workforces have been combined. The transition period provides an opportunity to identify risks, strengthen processes and improve the quality of available data before that happens.

Map what is moving before deciding the tax treatment

Whether the change is LGR, devolution, police reform, fire reform or closer integration between health and local government, the same questions repeatedly arise.

What functions are moving? Who will deliver them? Who receives the funding? Who incurs the expenditure? Who owns the assets? Who holds the contracts? Who employs and pays the people?

Once those movements are understood, the VAT and Employment Tax implications are usually much easier to identify.

More importantly, early engagement allows tax considerations to inform decisions on structure and implementation, rather than requiring problems to be resolved afterwards.

Further developments since our Breakfast Briefing

Since our September Breakfast Briefing, further announcements have reinforced the pace and scale of public sector reform across the UK.

HMRC has begun engaging with Police and Crime Commissioners on the VAT implications of the planned abolition of PCCs and the transfer of functions into Mayoral Combined Authorities. Discussions have covered areas including VAT governance, representative membership, Section 33 recovery, partial exemption, funding arrangements and operational processes.

Separately, proposals have emerged in Scotland that could fundamentally reshape local government structures. The Scottish Government has put forward initial proposals for replacing the current 32 councils with 6 to 10 regional authorities, supported by 120 to 160 community authorities. These remain consultation proposals rather than final decisions.

Although these developments affect different parts of the public sector, they reinforce a common theme: understanding what is moving, who will exercise control, how activities will be funded, how services will be delivered and who will employ and pay the people involved remains critical to establishing the correct tax treatment.

Frequently asked questions

Has Local Government Reorganisation been cancelled?

No. On 7 September 2026 the government announced a rapid review of the LGR programme. Some previous decisions were withdrawn and other areas were paused for review. Surrey is not affected by the review.

Should councils stop their LGR tax work while the review takes place?

No. There is still significant work that can be undertaken regardless of the final structure or timetable. This may include reviewing historic VAT positions, options to tax, Capital Goods Scheme records, partial exemption calculations, employment status arrangements, payroll processes and other tax compliance risks.

What are the VAT implications of devolution?

The VAT position will depend on how functions, funding, assets and contracts are allocated. New strategic authorities will also need appropriate VAT registrations, reporting processes and governance arrangements.

How does public sector reform affect Employment Taxes?

Changes to employing organisations, payrolls, employees, contractors and working arrangements can affect PAYE, employment status, off-payroll working, CIS, expenses and benefits compliance and wider governance processes. Reviewing these areas before transition can make implementation significantly easier.

Why should tax be considered before new arrangements are agreed?

Tax treatment often depends on the underlying contractual and operational arrangements. Considering VAT and Employment Taxes while arrangements are being designed provides greater opportunity to establish an efficient and compliant structure from the outset.

Preparing for public sector reform

The latest LGR review may have changed the timetable for some councils, but the wider programme of public sector reform continues.

For councils and other public bodies, this is an opportunity to understand their current tax position, identify gaps, address historic risks and ensure tax considerations are built into future organisational structures from the outset.

Whether reforms involve councils, strategic authorities, police, fire or health bodies, early attention to both VAT and Employment Tax issues can help organisations avoid unnecessary complexity and establish robust arrangements for the future.

PSTAX is working with public bodies across Local Government Reorganisation, devolution and wider public sector reform. If you would like to discuss your current position, the tax work that can continue now, or the implications of proposed structural changes, speak to our team.

Contact the PSTAX team