Tax and the Trading Imperative: What Council-Owned Companies Need to Know

Across local government, the rise of council-owned companies — from housing developers to shared-service providers — has been a feature of the past decade. They promise agility, income generation and a degree of commercial freedom, but they also introduce layers of fiscal and regulatory complexity that many councils underestimate. 

While the H&DN focuses on housing and development companies, tax and governance questions are common across the wider family of local authority trading companies (LATCos). Understanding what has gone right — and wrong — in energy, services and investment vehicles can help housing-focused entities avoid the same pitfalls. We’ll cast a wider net here, to capture those transferable lessons. 

As our next Expert Briefing explores, tax sits at the centre of that complexity. Get it wrong, and margins disappear. Get it right, and a council-owned company can create real, sustainable value for both shareholders and residents. Here are a few examples, ahead of the Briefing:  

1. Structure shapes everything 

The starting point is structure. Whether a company is limited by shares, by guarantee, or set up as an LLP determines its corporation-tax profile, VAT recovery position and how profits flow back to the council. 

Cantium Business Solutions, created by Kent County Council to commercialise back-office functions, shows the upside of careful planning. By designing its internal charging model and VAT treatment early, Cantium avoided many of the “partial exemption” traps that catch others. Within its first year it repaid start-up costs and began trading externally. 

Contrast that with Kyndi (formerly Medway Commercial Group). It inherited council control-room services and took time to adjust to life as a standalone business. Early operating losses, council loans and scrutiny over internal pricing underlined the importance of getting transfer-pricing and loan terms right from day one. 

2. The VAT and subsidy minefield

Once trading begins, the next challenge is VAT and subsidy control. Moving activities from the local authority into a company can jeopardise VAT recovery or introduce mixed-supply complications. At the same time, the council must avoid providing “selective advantage” to its own company — a breach of UK Subsidy Control rules. 

The Cantium and Kyndi examples demonstrate both sides: one achieved VAT compliance through up-front design; the other had to rebuild its internal arrangements later. Each council had to document arms-length transactions and justify any service charges or loans, not only to HMRC but also to auditors and political scrutiny panels. 

3. When commercial ambition outruns control 

The darker side of council-owned enterprises emerges when ambition overtakes governance. Croydon’s Brick by Brick development arm was launched with high hopes of delivering homes and dividends. But aggressive borrowing, circular lending within the group and optimistic sales forecasts left the council exposed when the housing market cooled. Brick by Brick never produced the surpluses envisaged, and Croydon’s wider commercial strategy contributed to one of local government’s most serious financial failures. 

Here, tax issues were entangled with governance: unclear intra-group recharges, capitalised interest, and uncertain VAT groupings made it difficult even for auditors to map risk accurately. The lesson is simple — fiscal transparency is not an administrative chore but a line of defence. 

4. The cost of opacity 

Thurrock Council’s collapse offers the ultimate cautionary tale. Its investments in solar-farm bonds through complex subsidiary structures promised steady yields but instead triggered a £ 600 million black hole and criminal investigation. While the case centred on investment risk rather than tax evasion, the lack of clarity over ownership, debt, interest deductibility and returns has forced government to intervene directly. 

The episode illustrates how tax, governance and reputation intertwine. Once confidence is lost — among auditors, lenders or the public — the fiscal damage is exponential. 

5. Building resilience through tax literacy 

The best protection is early, integrated tax thinking. Our webinar will outline how seemingly minor decisions — such as how staff costs are recharged, how land transfers are documented or whether a company joins the council’s VAT group — can add or remove millions from a project’s bottom line. 

Tax literacy, in other words, is a core competency of local-government enterprise. As councils stretch to deliver homes, manage assets and generate income, those that succeed will be those that treat tax not as a compliance afterthought but as part of the business model itself. 

Join us online on 12 November to hear from KPMG’s Peter Chapman and Gareth Blower, and Qualis Group’s Andy Howarth, as we unpack these issues — from everyday VAT pitfalls to the strategic tax planning that can make the difference between success and failure.