This is a matter that often causes confusion and different councils have very different ways of approaching the issue.
There is some guidance in the Practitioners’ Guide at paragraphs 2.25 and 2.26. These say:
- As councils have no legal powers to hold revenue reserves other than those for
reasonable working capital needs or for specifically earmarked purposes, whenever a council’s year-end general reserve is significantly higher than the annual precept, an explanation should be provided to the auditor.
- Earmarked reserves, which are set aside for specific purposes and for savings for future projects, should be realistic and approved by the council. It is generally accepted that general (ie un-earmarked) revenue reserves usually lie within the range of three to twelve months of gross expenditure. However, the amount of general reserve should be risk assessed and approved by the Council.