I get a few people searching my blog for the answer to this question. It's becoming a cult movie in the US, I reckon. The answer is the tiny Somerset city of Wells - which is a place I used to work when I was a printer. Some of the scenes like the supermarket fight were filmed in Midsomer Norton Somerfields. The church where Adam Buxton gets killed is St Cuthbert's and the pub featured in the movie is to the right of this photo.
I recently wrote some sleeve notes for an lp of our stuff and I compared Frome to the town in Hot Fuzz - this isn't quite so fanciful as the writers mention Frome as part of their inspiration for the movie. Wiki on the movie.