Guidance on the operation of Local Authority Housing Revenue Accounts (HRAs) in Scotland

SECTION 3: THE RATIONALE FOR HRA GUIDANCE

7. This guidance complements specific HRA and wider local government finance legislation and guidance. It focuses on explaining Ministerial expectations in relation to the proper operation of the HRA and aims to allow local authorities to provide greater transparency on how tenants' rental income is spent.

8. Whilst legislation provides the specific requirement to operate an HRA and broadly sets out what may be charged (debited) to the HRA and what income should be credited to the HRA, it cannot fully answer all the questions that are likely to be asked as to whether each account is operating as was originally envisaged. This guidance is designed to help ensure that both landlords and tenants have a common understanding as to how and why the legislation applies as it does.

9. Some operating differences in HRAs are inevitable given different geographical considerations, property types and social conditions across Scotland but guidance can assist in ensuring that there is as great a consistency as possible across Scotland despite such differences. This does not mean that each HRA will operate identically as landlords will need to consider the specific needs of their area. However, guidance can lay down a set of central principles which can act as a basis for landlords and tenants discussing the particular council housing issues which exist in their area. There are, however, a number of other reasons why guidance and more transparency on the operation of HRAs in Scotland is now required:

Geographical tenure changes in traditional council housing areas

10. Former local authority housing-dominated areas now have a much greater mix of tenures across individual estates and within individual flatted blocks. This is due to the continued operation of Right-to-Buy ( RTB) from its introduction in 1980 and through its various guises to the present day; private sector (with or without public funding) new build activity in previously 'mono-tenure' areas; the growth of non-traditional forms of owner-occupation such as shared equity properties in former council housing-only areas; the growth of the buy-to-let sector in private rented sector properties; and numerous partial local authority stock transfers to Registered Social Landlords ( RSLs) that took place principally in the 1990s and 2000s. This has resulted in a much greater fragmentation of HRA assets than was originally envisaged and has created complexities in allocating costs between local authority accounts which this Guidance is now aiming to address.

11. At the outset of the RTB policy in 1980 there were a little over 1 million council houses in Scotland whereas today (as at September 2013) there are an estimated 315,000, a reduction of approximately 70%. Not every 'council' estate in Scotland has witnessed such a large reduction yet some will have experienced an even greater reduction. Clearly, former Scottish council estates are therefore no longer 'solely' council estates. Indeed, it is quite likely that council tenants are now in a small minority in some traditional council housing areas. It is inevitable that these tenure changes mean that costs charged to the HRA for council house services in areas that were once exclusively inhabited by council tenants, will no longer exclusively benefit council tenants. The most prominent examples of this are the maintenance of common areas within multi-tenure flatted properties and common areas adjacent to the housing stock.

Rising expectations

12. As well as the wider economic situation, society's expectations which include those of council tenants, other residents and consumers generally have placed increasing demands on most public services including council housing services. They are frequently being called upon to provide services to meet the needs of wider communities and neighbourhoods which are beyond the traditional remit of a council landlord service. Greater clarity and transparency is therefore required on what services should normally be charged to council housing budgets and paid for by rents, and what additional, wider services should be charged either to council tenants, the wider community or shared by both.

Greater concentrations of income poverty in the council house sector

13. Whilst council housing should not be perceived as housing the poorest in society, the evidence clearly shows there is a far greater concentration of relative poverty in the social rented sector now compared to when the principal HRA legislation was introduced in the 1980s. Towards the end of that decade, typically around a tenth of council tenant households were in relative poverty. This compared to a very similar proportion in both owner-occupied households and private rented sector households i.e. poverty was much more evenly distributed across the tenures. By 2011/12, between a quarter (27 per cent) and a third (35 per cent) of households who rented from council or housing association landlords were in relative poverty depending on whether housing costs are included in the definition or not. This compares to around 7 per cent of households who own their property with a mortgage as table 2 shows.

Table 2: Proportion of households in relative poverty before housing costs ( BHC) and after housing costs ( AHC) by tenure

Source: DWP Family Resources Survey Households Below Average Income Dataset: 2011/12
Note: All figures rounded to the nearest 10,000 individuals or 1 percent.

14. The relative incomes and indeed economic activity profile generally of today's 'cohort' of council tenants is therefore very different to that of the late 1980s cohort. This concentration of income poverty in specific tenures requires close attention to ensure that the financial resources that were intended to be targeted on council housing such as HRA expenditures are not displaced or misplaced to the wider population who are much less likely to be in income poverty. If HRA expenditure is therefore not carefully targeted on council tenants, this expenditure will not benefit some of the poorest households in Scotland that it was, and is, still intended to benefit.

Greater local authority autonomy and the impact on rent levels

15. HRA capital investment, to improve or enhance existing properties or to build new housing, is now undertaken within an entirely different financial regime to that which existed in 1987. The Local Government in Scotland Act 2003 places a local authority under a statutory duty to determine the amount they can afford to allocate to capital expenditure. In doing so they are required to have regard to the Prudential Code issued by the Chartered Institute of Public Finance and Accountancy ( CIPFA). This requirement is contained in SSI 2004/29, the Local Authority Capital Expenditure Limits (Scotland) Regulations 2004 (insert link). The Prudential Code requires that the capital investment plans of the local authority are affordable, prudent and sustainable.

16. A local authority can borrow for capital investment and is responsible for making their own decisions about how much they can afford to borrow to support capital expenditure plans. In relation to HRA, the council, as a landlord, has responsibility for ensuring the HRA operates in accordance with the law but also that HRA capital investment plans are affordable, sustainable and prudent. This means that they must consider the implications of capital expenditure on council rent levels when deciding whether to borrow to fund capital investment plans.

17. Local authorities must also consider the implications of rising operating costs on the HRA and rent levels. HRA cost, and thus rent, increases that are not transparent as to their purpose or benefit will come under increased scrutiny from tenants when they are contributing to the prospect of higher rent levels.

Tighter public sector budgets

18. Wider economic circumstances are seeing significant restraint on public sector spending including spending on welfare. Around six out of ten council tenants in Scotland claim either full or partial housing benefit (as at 31 March 2013). Current UK Government reforms to the welfare system, including housing benefit, could result in greater pressure being placed on HRA income. Up to 60% of tenants of local authority landlords could be adversely affected by both tight public sector budgets and welfare spending reform. Moving to direct payment of housing costs to tenants (under Universal Credit) are likely to mean that rent levels and the value for money of rental and service charges will come under increasing scrutiny from tenants in the future. Under this system, tenants are more likely to feel that they are paying rent from their own pockets and some will inevitably therefore take a greater interest on how it is spent and accounted for. It is therefore important that the council housing sector is well positioned to respond to any future pressures on rents and service charge costs in order to continue to protect the interests of council housing tenants at a time of tight public sector budgets and welfare reform.