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

Guidance relating to the role of Housing Revenue Accounts (HRA).


Key principle 1

The HRA must operate such that it is compliant with legislation; any statutory guidance that Scottish Ministers have or may issue in relation to local authority finance; and must in all material respects adhere to any accounting codes of practice from the relevant professional bodies

26. In delivering these outcomes, the local authority must comply with legislation on the specific operation of an HRA and more generally with wider legislation that relates to local authority expenditure more generally. Local authorities must also observe all relevant areas of statutory accounting guidance and the relevant code(s) of practice by the relevant professional accounting bodies which may or may not include details of 'service expenditure' analyses on which basis auditors carry out a financial audit. This will seek to identify all material compliance issues, not just those relating to service expenditure analysis.

Relationship between the HRA to the General Fund of the Council

27. Section 93 of the Local Government (Scotland) Act 1973 requires a local authority to have a General Fund. A local authority is required (with some specific exceptions) to receive all income into this Fund and pay out all expenditure from this Fund. Section 96 of the 1973 Act requires a local authority to keep different accounts for the purposes of distinguishing transactions for different purposes. The Housing (Scotland) Act 1987 (section 203) makes specific provision for the local authority to keep a Housing Revenue Account ( HRA). The HRA is therefore one of a number of accounts forming part of the General Fund of the Council.

HRA-specific legislation

28. Much of the current policy framework regarding the operation of HRAs in Scotland is contained in primary legislation i.e. in section 203 and Schedule 15 to the Housing (Scotland) Act 1987. However, there are more recent pieces of legislation that also impact on the operation of HRAs. [2] Whilst the 1987 legislation is still appropriate to today's council housing properties, the landscape in which council houses sit has itself changed considerably since then as outlined in Section 3. This means the original primary legislation is operating in a very different (and continually changing) environment than it was a generation ago.

29. Whilst the various pieces of legislation can be complex, it is important that both landlords and tenants are aware of the legal requirements and have a common understanding of it so discussions between them can progress with clarity.

Correctly assigning HRA assets and liabilities

30. A property has to be accounted for within the HRA if it is has been provided under Part 1 of the 1987 Act (entitled Provision of Housing) and various earlier equivalents.

31. If a property is not provided under the powers listed in paragraph 1 of Schedule 15 (entitled Application of the Account) to the 1987 Act, or in directions under section 203 of that Act, the authority must not assign it to the HRA. For example, land that is being bought by a local authority for a future sale to a third party for a non-housing purpose, or for development by another person, must be charged outside the HRA.

32. Equally, properties which may originally have been provided under Part 1 of the 1987 Act (or its predecessor powers) may no longer fulfil their original purpose in benefiting tenants or, in the case of investment properties, may not generate a financial return to the HRA. [3] This financial return may take the form of rental income from service charges over and above the costs of maintaining the asset or may be in terms of future capital appreciation. If there is no benefit to tenants either through the properties as investment properties or tenants not directly using such assets, the authority should consider the removal of the property from the HRA. Examples of properties which might fall into this category are estate shops and other commercial premises, such as banks, post offices, workshops, industrial estates and surgeries or any other property where there is no longer any connection with the local authority's housing stock. Individual garages or blocks of garages that are not being let to local authority tenants as part of their tenancy and/or are not providing a positive financial return and/or which are geographically distant from the housing stock may no longer part of a local authority's housing function. There should be a distinction made however between those assets which are providing (or might provide) a positive financial return to the HRA and those which are not. These are decisions for the local authority, though they must either involve or be able to explain retention and disposal decisions as well as the terms of any disposals to their tenants and auditors if required to do so in line with the expectations set out in the Charter. They should also be able to explain the basis of their decisions to Scottish Government when Scottish Ministers' consent is required for disposals.

33. The 'removal' from the HRA of assets that are no longer connected to the housing stock or are not providing a financial return can take two forms - sale (or lease) to a third party or transfer to the General Fund. There is no requirement for the General Fund to receive HRA assets no longer required by the HRA. A transfer will only occur where the local authority determines there is a benefit to the General Fund by retaining the asset. The default transfer value is the market price of the asset as outlined in existing guidance on the disposal of HRA assets. If transferring to the General Fund at market price, a local authority has the option to keep the asset and use it productively as a General Fund asset; sell the asset on; or enter into a commercial lease of the asset at the prevailing market rent. Equally, if HRA assets are sold or leased to third parties then the market value or best value is the default position. This approach ensures the HRA receives the full financial compensation for any disposal of HRA assets. Assets may be sold for less than the market value but this requires the consent of Scottish Ministers. Further information on disposals is contained in paragraph 43- 49 below.

Correctly accounting for HRA income and expenditure that relates to correctly assigned assets

34. Schedule 15 to the Housing (Scotland) Act 1987 lists what should and should not be credited and debited to the HRA and thus states how local authorities must legally account for HRA income and expenditure.

35. Schedule 15 details the income and expenditure which should be charged to the HRA. The main items of income and expenditure to be accounted for are, on the income side:

a) Rental income from houses (and other HRA assets) which makes up the vast majority of total income;

b) Income from the investment of HRA monies (whether interest on cash balances or monies received from the sale of HRA land or property);

And, on the expenditure side:

c) Expenditure on managing, maintaining, repairing and improving the council housing stock;

d) Expenditure on debt (loan charges) relating to amounts borrowed to fund capital expenditure on HRA properties (existing or new) some of which may have already have been disposed of;

36. An estimated debit or credit should be made where the actual expenditure or income is not known.

37. Schedule 15 also sets out items that should not be debited to the HRA and these include:

a) Expenditure required for the provision of shops, laundry facilities and furniture (though provision of garages and some other tenant facilities can be debited);

b) Any expenditure which exceeds the expenditure required for the provision of the service to tenants (an important consideration)

c) Any expenditure on items in Schedule 15 Scottish Ministers might instruct authorities to exclude from the HRA

38. In turn, it is a legal requirement for local authorities to ensure that only the above items of HRA income and expenditure are recorded in the HRA. Local authorities must subsequently submit income and expenditure estimates of this HRA income and expenditure to Scottish Ministers for the following year according to section 204(4) of the Housing (Scotland) Act 1987. The Scottish Government publishes these estimates in the annual HRA statistical bulletin which is Local Authority Housing Income and Expenditure 1997-98 to 2013-14.

Powers of Scottish Ministers regarding the HRA

Exclusion of charges/income being made/credited to the HRA

39. Paragraph 6 of Schedule 15 to the 1987 Act states that local authorities may, with the consent of Scottish Ministers, exclude any items of income or expenditure from the HRA. This might arise should a local authority wish to do so following discussions with auditors and/or tenants.

Correcting improper credits or debits

40. If the HRA has been improperly credited or debited, Scottish Ministers may, after consultation with the local authority concerned, give directions for the appropriate credits or debits to be made to rectify the Account. For example, the legislation (Schedule 15, paragraph 4(b)) is clear that any expenditure incurred on site works and services should be no more than that required for the provision of the house. If such expenditures did exceed the actual cost of providing the housing site works and services ( e.g. the provision of new roads or new play areas which are proper General Fund charges), then such payments would not comply with the 1987 Act and rectification would appear necessary. In order to eliminate any potential risks to the General Fund of having to pick up any improperly assigned HRA costs it is therefore vital to efficiently manage capital projects in the HRA. Such a situation could arguably be unfair to council tax payers who may, in theory, become liable for some of the costs of capital inefficiencies in the HRA.

General Fund Contributions to the HRA

41. Under paragraph 9(2) of Schedule 15 to the 1987 Act, if an HRA deficit arises in any one year, the local authority must make a contribution to make good the deficit from the General Fund. Scottish Ministers consent is not required for this contribution. Prudent practice is for the local authority to hold HRA reserves (either as a specific reserve or an earmarked part of the General Fund reserves). HRA reserves are the result of years where the HRA income exceeds the HRA expenditure, i.e. a surplus rather than a deficit. These surpluses (reserves) will therefore be available to apply to the HRA in any year when a deficit arises negating the need for the General Fund contribution.

42. Until March 2010, a limit of zero was set annually (under the power at section 204(1) of the 1987 Act) on any estimated contribution the General Fund could make to the HRA. This limit applied to all local authorities in Scotland with HRAs. This effectively meant that the General Fund could not contribute resources to the HRA in terms of a budgeted contribution. Since April 2010 no limits have been set on estimated financial contributions from the General Fund to the HRA. Though no limit has been set, should local authorities wish to make one, a contribution from the General Fund to the HRA requires the consent of Scottish Ministers under paragraph 2(5) of schedule 15 to the 1987 Act. Given the limit has been set to zero until fairly recently, Scottish Government will consider whether a specific process will be required to assist with applications.

Disposals or internal transfer of HRA assets

43. A local authority can borrow to fund new capital investment, such as the provision of new HRA housing and for other expenditure which can be capitalised in accordance with proper accounting practices. Borrowing to fund this expenditure creates a liability (a debt) for the HRA. The amount borrowed must be repaid, together with interest on that debt (loan charges). Scottish Ministers permit the borrowing for housing to be repaid over a period of up to 60 years.

44. A local authority may not mortgage its assets. This means that the borrowing will not be secured against specific HRA housing. Whilst some local authorities may hold records identifying the borrowing costs for specific housing, there is no legal requirement for such a record. Many local authorities will therefore only maintain a record which identifies the value of outstanding debt for the HRA as a whole, split between housing and non-housing assets.

45. This approach to borrowing for the HRA should be borne in mind when a local authority disposes of an HRA asset. A capital receipt (the money received from the sale of HRA land or property) may only be used to fund new capital expenditure of the HRA or for the redemption of debt. As the main income to the HRA is rental income then any disposal will reduce that income stream, placing a higher debt burden on the remaining assets, and reducing the rental income available to fund other expenditure costs. A local authority should therefore give careful consideration as to the application of capital receipts - whether it is best to use these monies to reduce debt or fund new capital investment.

46. It is expected that local authorities will sell their assets at the best price they can achieve i.e. at market value. There may be occasions where a local authority, for policy reasons, may wish to dispose of an asset at less than the best price. For the HRA such disposals require the permission of Scottish Ministers. Whilst it may not be possible to identify the outstanding debt for a specific housing asset, it is possible to identify the impact of that disposal on the HRA. This is important as the HRA will be providing a subsidy or grant to the body that is acquiring the asset for a sum less than could be obtained if sold on the open market. The local authority needs to consider the opportunity cost to the HRA. The opportunity cost is the amount foregone from the sale that could be used for new capital investment or to reduce the existing debt costs (redeem debt). The local authority should therefore quantify the cost to the HRA in terms of (i) the revised debt per housing dwelling, and (ii) the revised loan charge cost per dwelling. The calculations should assume the capital receipt is used to redeem debt. As a result of these calculations it should be possible to identify (a) the current debt per dwelling, (b) the revised debt per dwelling based on the actual receipt proposed and (c) the revised debt per dwelling if the asset had been sold at market value.

47. Where the local authority wishes to dispose of an HRA asset at less than market price to support wider housing policy reasons it should also consider whether the asset should first be transferred to the General Fund at market value. The HRA would in such cases receive the full financial compensation for the sale. The General Fund could then dispose of the asset at a reduced price, the General Fund therefore providing the subsidy or grant.

48. Authorities should be aware of both the powers available to them to hold land or property when they are considering whether to dispose of it, or transfer it, out of the HRA and to the General Fund or vice versa. Section 12(7) of the 1987 Act requires authorities to obtain Scottish Ministers' consent before an HRA asset, or part of an HRA asset, can be disposed of (with a few exceptions, such as sales to a sitting tenant, surplus property or property that is hard to let). If an asset is transferred between the HRA and the General Fund, this may require adjustments to the HRA in accordance with the relevant consent under section 203(2).

49. Disposals of land, buildings or any other assets from the HRA irrespective of size or value usually require the consent of Scottish Ministers principally under section 12(7) of the 1987 Act. This requirement is in addition to the requirements of the Disposal of Land by Local Authorities (Scotland) Regulations 2010 ( SSI 2010/160) on disposals of land for less than best consideration. Where local authorities wish to dispose of HRA land for less than best consideration, they must both follow the procedures in the Regulations and obtain Ministerial consent under section 12(7) of the 1987 Act, where required. Scottish Government guidance published in October 2012 for local authorities on the process for applying to Scottish Ministers for consent when disposing of HRA assets is available. The Guidance contains a standard application form to be completed for each asset being disposed or transferred into or out of the HRA.

Best Value and accountability legislation that relates to local authorities' functions including HRAs

50. Local authorities, whether in terms of HRA or non- HRA financial matters, must also observe Part 1 of the Local Government in Scotland Act 2003 in a number of respects.

Duty to secure best value

51. The Local Government in Scotland Act 2003, places a statutory duty of Best Value on local authorities in the discharge of their functions. This system was agreed with COSLA following a series of Best Value pilots in local authorities in the late 1990's.

52. Part 1, section 1 of the Local Government Scotland Act 2003 states that is the duty of a local authority to make arrangements which secure best value. Best value is defined as "The continuous improvement in the performance of the authority's functions." Authorities are required to maintain an appropriate balance among:

a) the quality of the performance of their functions (which include local authority housing);

b) the cost to the authority of that performance (the costs which the HRA incurs in managing and maintaining the houses or other costs being charged to the HRA for whatever HRA-related reason); and

c) the cost to persons (council tenants through rents or the wider population through any charges that are made to them) of any service provided by the council for those persons on a wholly or partly rechargeable basis.

53. Part 1, section 2 of the 2003 Act points out that, in the pursuance of best value, local authorities must have regard to any statutory guidance on securing best value issued by Scottish Ministers and also to any code(s) of practice that are generally recognised. Statutory guidance was issued to local authorities in 2004.

Proper accounting practices

54. Part 1, Section 12 of the 2003 Act places a duty of a local authority to observe proper accounting practices whether contained in (i) primary or secondary legislation; (ii) statutory guidance issued by Scottish Ministers or (iii) the relevant accounting code(s) of practice published by recognised bodies such as CIPFA. Moreover, in the event of any conflict between any of these three, the order in which they must be observed is legislation first, statutory guidance second and proper accounting practices such as those contained in code(s) of practice third, reflecting the primacy of the legal system. Though this legislation is not aimed exclusively at the HRA, HRAs are included in its scope. This means that local authorities must ensure they observe proper HRA accounting practice of whatever form.

55. The Code of Practice on Local Authority Accounting in the United Kingdom (The Code) is the main generally recognised code of practice. In addition to the Code, local authorities should also observe the specifications of the Service Reporting Code of Practice ( SeRCOP) and the total cost principles therein to comply with the Local Government Scotland Act 2003, section 12(2)(c). [4] Since 2001, and in addition to the 1987 HRA legislation, the annual HRA accounts should be prepared on the basis of SeRCOP. SeRCOP sets out which costs and incomes should be accounted for under which departmental service head. It also requires central support costs to be attributed to individual services such as the HRA. This is prepared in accordance with the requirements of the Code. SeRCOP applies to all local authority services (including HRA) throughout the United Kingdom for the preparation of the budgets, performance indicators and statements of accounts in the financial year that is about to begin. The Code is reviewed annually to ensure that it develops in line with the needs of modern local government, transparency, best value and public service reform. In Scotland, the requirement to follow SeRCOP's Service Expenditure Analysis ( SEA) is specified in the Code of Practice on Local Authority Accounting which itself must be followed to comply with the 2003 Act.

Summary on legislation relevant to the HRA, statutory guidance and accounting codes of practice

56. The statutory basis of the HRA is that it is one of a number of accounts forming a part of the General Fund of the Council but that the account should be effectively be treated as a designated 'landlord account.' Councils must, firstly, accurately assign assets to the account i.e. it must only hold certain types of asset relevant to tenants. Secondly, councils must ensure that income and expenditure arising from those 'correctly assigned' assets accurately reflects a housing authority's landlord functions. If costs appearing in the account are not landlord-related then the account should not be charged for them unless there is a clear rationale for the HRA paying a proportion of the costs and they fall within the categories set out at paragraphs 3 to 4A of Schedule 15 to the 1987 Act. Scottish Ministers have the power to require the local authority to add in or remove certain items of expenditure completely and may request the local authority to adjust values of any items of expenditure if evidence is brought forward to suggest that they are being inappropriately charged. Local authorities must follow all legislation and statutory guidance relevant to the HRA even if this is not specific to the HRA. Councils may wish to seek clarification of the law and proper accounting practices from their legal advisers or professional accountancy bodies respectively.


Email: HRA Guidance

Back to top