Summary

Client: Newly formed unitary authority in England (vesting April 2023)
Context: Several legacy councils consolidating, each with established VAT and employment tax positions
Our role: Set up and led a coordinated LGR tax workstream and HMRC engagement
Key actions: Maintained a live tax register, completed a pre-vesting risk review, and held structured discussions with HMRC
Outcome: Clear view of inherited risks, aligned positions across councils, and smoother HMRC engagement after vesting

This case study represents one of several Local Government Reorganisation programmes supported by our team and is provided as evidence of comparable delivery.

Overview

Local Government Reorganisation (LGR) creates a new authority but does not reset historic tax positions. Employment tax and VAT treatments adopted by legacy councils, whether formal policies, informal practices, or unresolved issues, transfer to the new authority on vesting day. The legal entity changes, but the underlying risks do not. Responsibility for evidencing and managing those risks moves to the new organisation.

This case study outlines structured Employment Tax and VAT support delivered during a county and district LGR. The work enabled the new unitary authority to understand inherited positions, manage transition risk and provide assurance to senior stakeholders and HMRC.

The reorganisation brought together multiple councils with separate VAT registrations, historic capital projects and differing employment tax approaches. Much of the preparatory work took place before final structures, governance arrangements and staffing models were confirmed. This reflects the reality of current and forthcoming LGR programmes, in which tax positions must be identified and evidenced before structural certainty is achieved.

Baseline position and approach

Without early, coordinated tax involvement, LGR programmes often see fragmented HMRC engagement, inconsistent legacy positions transferring into the new authority and limited visibility of risk before vesting. Documentation gaps are frequently discovered only after go-live, when HMRC queries arise.

In this case, early structured engagement meant inherited positions were identified and documented in advance. Legacy approaches were aligned where appropriate and HMRC discussions took place before vesting. Senior finance teams therefore had a consolidated view of risk ahead of go-live, and post-vesting work focused on validation rather than discovery.

This contrast highlights the difference between the best practice of  treating tax as a core programme workstream rather than addressing it solely as a high-risk, late-stage compliance exercise.

Context

The authority went live in April 2023, around 18 months after the reorganisation proposal was submitted. This timeline allowed meaningful Employment Tax and VAT planning well before vesting rather than restricting tax input to final-stage compliance.

Most legacy councils already had a working relationship with PSTAX through advisory support or membership. Early discussions therefore focused on identifying existing tax positions, understanding differences between councils and assessing readiness for transition. Senior finance leadership recognised from the outset that tax would influence decisions throughout the programme, not just at go-live, so early activity centred on documenting inherited risks that would transfer regardless of the final structure.

Early work before structures were finalised

Although the actual new unitary structures are not yet confirmed, substantial Employment Tax and VAT preparation can still begin early.

Initial work in this case study included (but was not limited to):

• identifying existing VAT and employment tax treatments across legacy councils
• reviewing options to tax and partial exemption methodologies
• mapping capital projects
• documenting areas where positions differed

Starting early avoided compressing review work into the final months before vesting and created a clear baseline for whatever structure emerged. Once arrangements became clearer, a dedicated tax workgroup could build on this foundation rather than starting from scratch.

Establishing a coordinated tax workstream

A coordinated Employment Tax and VAT workstream was established well ahead of vesting. Each legacy council contributed input, but issues and HMRC engagement were managed centrally. This avoided fragmented communication, inconsistent positions and unclear ownership of inherited risks.

As governance arrangements developed, the workstream evolved into a more formal structure aligned with the emerging authority. Because key issues had already been identified and recorded, the transition into a defined workgroup was straightforward and focused.

Live LGR tax register

A central element of the approach was a live Employment Tax and VAT register. This recorded existing positions, anticipated changes, risks and agreed actions, and was updated throughout the programme. It became a single reference point as structures, staff, and systems evolved.

Items captured included:

• historic options to tax
• partial exemption methodologies
• capital projects
• treatment of non-business and cultural activities
• employment tax implications of staffing changes and shared arrangements

Early documentation allowed deliberate decisions about how positions would transfer rather than inheriting outcomes by default.

Example (VAT): One council held a historic option to tax over a property, which, in this case, was going to transfer to the new authority, but supporting documentation was not readily available. Because the issue was identified early through the register, records were located, continuity confirmed and the new authority inherited a clear, evidenced position.

Without early identification, the authority would likely have needed to reconstruct the position later in response to HMRC enquiry with reduced access to original records and decision makers. This example illustrates the type of inherited issue commonly identified during early LGR tax reviews.

Flexible support aligned to programme needs

Support was delivered through a flexible pre-purchased consultancy hours (a bank-of-hours model), allowing specialist input as issues emerged. This reflected the evolving nature of LGR programmes, where timelines shift and additional risks become visible as legacy activity is reviewed. Advice was provided at key decision points rather than confined to fixed phases, ensuring tax considerations informed decisions in real time. This ensured that Employment Tax and VAT considerations informed decisions as they were being made, rather than being applied retrospectively once positions had already been set.

HMRC engagement before vesting

Structured engagement with HMRC took place ahead of vesting. Rather than waiting for post-vesting review, anticipated risk areas were discussed in advance, focusing on how positions would transfer and be managed.

Topics included:

• continuity of options to tax
• partial exemption during and after reorganisation
• VAT registration issues for the new authority
• transfers of cultural and non-business activities
• employment tax implications of staffing changes

This proactive approach ensured HMRC understood how positions had been identified and monitored and set expectations for post-vesting compliance against a backdrop of preparation rather than uncertainty.

Vesting and post-vesting activity

Early planning did not remove the need for post-vesting work, but it made it more targeted. Support after go-live included validating assumptions with real data, reviewing partial exemption outcomes as the authority stabilised and responding to HMRC queries. Because issues had already been documented, responses could be supported by clear evidence and consistent reasoning.

Outcomes

• Consolidated view of inherited Employment Tax and VAT risk before vesting
• Significant preparatory work completed ahead of vesting date
• Early HMRC engagement rather than reactive discussions
• Alignment and documentation of legacy council positions
• Established evidence base for post-vesting queries
• Lower likelihood of retrospective VAT correction
• Clear audit trail demonstrating reasonable care

These outcomes reduced disruption during transition and supported constructive HMRC engagement, enabling the new authority to focus on service delivery.

Relevance for councils approaching LGR

Most Employment Tax and VAT risks associated with LGR already exist before reorganisation and are best addressed ahead of vesting. Much of the necessary work can begin before new unitary council structures or staffing models are confirmed. Early identification and documentation provide a stable foundation regardless of the final authority model.

The approach described mirrors PSTAX Pathfinder support, including an LGR readiness review, a live tax register and a concise tax pack evidencing agreed positions and actions. Where councils undertake this work early, transition is more controlled and easier to evidence to HMRC, auditors and governance stakeholders. Dedicated tax workgroups can then be refined once structures are confirmed, building on an established record of issues and risks.

Summary

Early, structured Employment Tax and VAT planning during LGR improves visibility of inherited positions, supports reasonable care, and reduces post-vesting disruption. A substantial portion of this work can begin before final structures are confirmed, ensuring councils are prepared for whichever new unitary council model is implemented. This case study demonstrates comparable delivery and shows how early engagement strengthens HMRC relationships and reduces risk as new authorities take shape.