Beware the HRA/general fund transfer

In his regular feature, Ask The Auditor, Graham Liddell from Grant Thornton UK LLP this month discusses the highly topical issue of local authorities proposing to divert Housing Revenue Account (HRA) funds to the General Fund. To ask Graham a technical query, email editor@room151.co.uk

Following the introduction of self-financing for the HRA, many local authorities consider that in contrast to their general fund, their HRA is relatively healthy. This has stimulated some local authorities to consider whether the HRA is being charged for its fair share of costs, for example by revisiting the allocation and apportionment of costs between the HRA and the general fund. During September we have also seen some local authorities proposing to transfer resources from the HRA to the general fund by taking advantage of the Local Government Housing Act 1989 (the LGHA) before it is amended on 1 October 2013.

At Grant Thornton we are urging local authorities not to take such action without fully considering the major legal, reputational and financial consequences.

Purpose of the HRA ring-fence

The LGHA requires local authorities to maintain a statutory, ring-fenced HRA. The ring-fence is controlled by Schedule 4 of the LGHA and is still in place following the move to self-financing in England. Its purpose is to ensure that council taxpayers do not subsidise services specifically for the benefit of tenants and that rent is not used to subsidise functions which are for the benefit of the wider local community.

Any proposal that results in a transfer of resources from the HRA to the general fund could be seen as breaking the ring-fence and contrary to either the letter or the intention of the LGHA to protect tenants. This risks taking us back to the 1980’s when political dogma led to the general fund and HRA being raided to support either tenants or taxpayers as politics suited.

Proposals to transfer HRA balances to the general fund before the LGHA is amended on 1 October 2013

Schedule 4, Part III (Special Cases), paragraph 2 of the LGHA states: ‘A local housing authority to whom no Housing Revenue Account subsidy is payable for any year may carry the whole or part of any credit balance shown in their Housing Revenue Account for that year to the credit of some other revenue account of theirs.’

Some councils have argued that the abolition of HRA subsidy means that they can now transfer HRA balances to the general fund. In our view this would be an unintended consequence of HRA self-financing. Our view is supported by the fact that Schedule 4 Part III paragraph 2 of the LGHA will be amended on 1 October 2013 so that it will only apply to Wales.  From that point onwards, transfers between the HRA and general fund in England will only be permitted following a relevant determination by the Secretary of State.

Until 1 October 2013, the LGHA does appear, in certain circumstances, to permit local authorities to transfer balances from the HRA to the general fund. However, the legal position is not clear cut and given that a transfer might be seen as contrary to the intention of the ring-fence, we would expect local authorities to:

–          take legal advice on whether it has authority to make the transfer and to ensure that it exercises its discretion reasonably

–          consider the governance and accounting issues with making a transfer.

We would expect local authorities to consider whether:

–          the LGHA permits the transfer of balances that have been generated in years during which an authority was in receipt of housing subsidy or only in the year that the transfer is proposed

–          the council is following due process and acting consistently with other policies and decisions

–          the HRA is sufficiently resilient to withstand the loss of funds and is supported by a robust 30 year business plan

–          the council could suffer reputational loss by being seen to take advantage of a technical loophole to use funds that it should be protecting for council tenants to shore up council finances. Many commentators were quick to criticise Starbucks and Vodafone for taking advantage of “tax loopholes”

–          central government might take retrospective action. By amending the LGHA it is clear that central government is not supportive of such an approach.

–          how any decision to transfer funds from the HRA to the general fund will be reflected in the 2012/13 financial statements.

–          the proposed injection of funds from the HRA is masking an underlying problem in the general fund.

Revisiting the allocation and apportionment of costs between the HRA and the general fund

Given the significant changes that many local authorities have faced in recent years, now may be the right time to review the basis for charging costs to the HRA and the general fund. The purpose of such a review should be to ensure that the authority is balancing fairly the interests of council tax payers and tenants. The aim should not be to divert resources from the HRA to the general fund (or vice versa).

The allocation of direct costs is relatively straight-forward and we would expect local authorities to refer to Schedule 4 of the LGHA. As a general rule, we would not expect the HRA to be charged for services that a local authority would be expected to provide to tenants if it was not the landlord (such as waste collection, libraries and street-lighting).

There is no statutory guidance for apportioning overheads. Authorities should follow CIPFA’s Service Reporting Code of Practice (SeRCOP) by applying the same bases when recharging overheads to the HRA as they do for other services.

Authorities should also consider whether any Corporate and Democratic Core (CDC) costs and Non-Distributed Costs (NDC) should be charged to the HRA. This is because:

–          the HRA might be expected to benefit from the overall democratic process and corporate management reflected in CDC

–          some of the costs in NDC may have arisen from previous HRA activities.

SeRCOP provides useful guidance on how such costs might be apportioned.