Can two neighbouring councils be merged?

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This would involve a town council merging with a parish council (it's immediate neighbour). Both are within the same county authority.
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Indeed it is possible. It would require a governance review by your Principal Authority.

There is a guidance document available - search for 'Community governance reviews: guidance'.

NALC have a couple of documents on the subject.

Look up Affpuddle PC & Turnerspuddle PC as an example.
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