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 3

There must be robust, written methodology for calculating and allocating HRA costs (including internal costs charged by the Council to the HRA) in sufficient financial detail for tenants to understand why costs are charged to the HRA and who is benefiting from the services these HRA costs relate to. This must include the allocation to the HRA of the appropriate proportion of council Trading Operation surpluses attributable to council housing activities.

Furthermore, the HRA cost allocation methodology must be updated as appropriate to reflect changes in legislation, statutory guidance, codes of practice, the market for HRA goods and services and any other relevant changes.

65. It is likely that different councils will take different approaches to cost methodology and some will be more formal about this than others. This section outlines the current cost categorisation in the HRA and proposes that a more formal HRA written methodology should be developed.

Councils' current expenditure and income HRA cost categorisation

66. There are three principle sources for establishing cost allocation processes when allocating costs to the HRA reflecting requirements for internal financial management, the production of statutory accounts and the need to make financial returns to Scottish Government. These sources are:

  • Schedule 15 to the Housing (Scotland) Act 1987 - the legislation
  • CIPFA's Service Expenditure Analysis ( SEA) - the professional accounting body's principles including the format of accounts and break down of costs and income for the HRA in line with the 1987 Act
  • HRA estimates from local authority returns published in the Scottish Government HRA statistical bulletin - estimates of HRA income and expenditure. These are unaudited estimates for the year in which the statistical returns are requested, near actual figures for the previous year and actual i.e. audited for the previous year to that following publication of the accounts.

67. The sources are not widely recognised beyond the practitioners of local authority housing finance. This lack of wider awareness is itself an issue as the availability of such information is important to help achieving greater financial transparency for tenants as well as council tax payers.

Laying out the detailed cost and income categories

68. This section adds more detail to the legal and accounting principles in section 5 and in effect lays out the methodology, together with some further proposals for improvement.

For HRA purposes

69. Tables 4 and 5 below compares the main categories of HRA income and expenditure as used in the legislation, the CIPFA SeRCOP classification system and the Scottish Government HRA statistical bulletin. Further details of these cost and income categories can be found in Tables 1 and 2 in Appendix 1.


70. Schedule 15 of the 1987 Act provides broad categories of expenditure to be charged to the HRA but does not specify sub-categories. Local authorities and their tenants must start their discussions on how the HRA operates with this list as it is the list of legally permitted HRA expenditures. Table 4 splits the allowable costs into 6 broad cost categories; loan charges on HRA capital expenditure; supervision and management of HRA assets; repairs and maintenance of HRA assets; rent arrears and void losses (rental income not collected yet must be charged to the HRA); taxes and other charges on HRA assets; and any cost directions from Scottish Ministers. Within the loan charges category there are 6 cost sub-divisions ( Table 1 Appendix 1) specifying more detail on what capital items local authorities are allowed to charge loan charges.

71. On the income side, the legislation lays out a five way categorisation as summarised in table 5 namely rental income, other income, Housing Support Grant (abolished from April 2013); income directed by Scottish Ministers; and income directed by local authorities with Scottish Ministers' consent. Councils must not charge the HRA with costs or credit the HRA with income that doesn't fall into these categories and they must be unambiguous about this in their discussions with tenants.

Table 4: Main cost headings for HRAs in Scotland

Legislation (Housing Scotland Act,1987 Act) CIPFA Sercop Service Expenditure Analysis SG HRA income and expenditure statistical bulletin
1 Loan charges Depreciation and impairment of fixed assets Loan charges
2 Supervision and management Supervision and management Supervision and management
3 Repair and maintenance Repair and maintenance Repair and maintenance
4 Rent arrears and void rent losses Bad or doubtful debts Movement in allowances for bad debts
5 Taxes, feuduties, rents and other charges Rent, rates, taxes and other charges Other expenditure
6 Cost directions from Scottish Ministers Sums directed by the Minister that are expenditure in accordance with IFRS

Table 5: Main income headings for HRAs in Scotland

Legislation (Housing Scotland Act,1987 Act) CIPFA Sercop Service Expenditure Analysis ( HRA Income) SG HRA income and expenditure statistical bulletin
1 Rental income Dwelling Rents (Gross) Rental income from lettable dwellings
2 Other income Non-Dwelling Rents (Gross) Rental income from Hostels
3 Housing Support Grant (now abolished) Housing Support Grant (now abolished) Rental income from other HRA assets/properties
4 Income directed to HRA by Scottish Ministers Leasehold Service Charges Service charges to tenants
5 Income directed to HRA by local authorities with the consent of Scottish Ministers Charges for Welfare Services Government Grants ( HSG and Hostels)
6 Hostels Interest received
7 Other income Other income
8 Sums directed by the Minister that are income in accordance with IFRS

72. CIPFA highlights the importance of legislation as shown in this extract from a 1996 best practice bulletin:

Extract from CIPFA LAAP Bulletin 22: Promoting best practice

"Local authorities should look at the legislation and ensure that the principles they adopt in including income and expenditure within the HRA comply with statute."

SeRCOP Service Expenditure Analysis ( SEA)

73. Table 4 above shows that this classification method contains 6 main cost sub-headings: depreciation and impairment of fixed assets; supervision and management of HRA stock; repairs and maintenance of HRA stock; bad or doubtful debts; rent, rates, taxes and other charges; and sums directed by the Minister that are expenditure in accordance with International Financial Reporting Standards ( IFRS). Beneath these 6 categories there are 19 sub-divisions of costs as outlined in Table 1 in Appendix 1.

74. On the income side ( Table 5), CIPFA specify an 8-way classification; dwelling rents; non-dwelling rents; Housing Support Grant (now abolished); Leasehold service charges; charges for welfare services; hostels income; other income; and sums directed by the Minister that are income in accordance with IFRS.

Scottish Government HRA statistical bulletin

75. Scottish Government collates statistical information on the HRA to comply with section 204(4) of the 1987 Act. Table 4 notes the 5 broad cost divisions (loan charges; supervision and management; repair and maintenance; movements in bad debts; and other expenditure). This is an aggregation of up to 81 sub-divisions of costs reflecting 27 cost categories x 3 asset groups (dwellings, hostels and other assets) as outlined in Table 1 Appendix 1.

76. Table 5 identifies 7 stated categories of income required by the statistical return. Three of these relate to rental income (lettable dwellings, hostels and other HRA properties) and the remaining four relate to service charges to tenants; government grants; interest received and other income.

Beneficiaries of HRA income and expenditures

77. The cost categories in Table 4 largely relate directly to council housing properties and thus the council tenants who occupy these houses. This is the essential nature of the HRA - a council landlord account. However, as it is possible that HRA assets can be non-housing in nature such as hostels, shops, lock-up garages (as shown in Table 3). Alternatively, as HRA assets can also be common areas within flatted properties shared with non-council tenants or amenity land open to all residents. Local authorities, when discussing the operation of the HRA with tenants, must be clear about who benefits from these assets. This is an area for discussion between the landlord and tenants or RTOs.

For non- HRA purposes i.e. the General Fund

78. SeRCOP provides further accounting advice for allocating General Fund 'housing' expenditures that relate to wider groups of people or activities beyond council tenants. Detailed tables provided in SeRCOP are also used by Audit Scotland and independent auditors who audit local authority accounts. The 15 cost categories which CIPFA advises should be charged to the General Fund are shown in table 6 organised by the Scottish Government into the relevant service beneficiary categories.

Table 6: CIPFA General Fund Revenue Account broad cost categories for Scotland 1

General housing activities Non-council tenants Vulnerable groups Housing benefits administration Council tenants
Housing strategy Registered social landlords Homelessness Housing Benefits payments Contribution to the HRA
Housing advice Private sector housing renewal Welfare services Housing Benefits administration
Housing advances Other council property Housing support services (supporting people) Rent rebates including HRA rebates & discretionary additions

1. The category headings have been added by Scottish Government but the individual categories are those specified by CIPFA in SeRCOP 2013-14.

79. Further details of the 33 sub-cost categories of General Fund housing expenditures are given in Table 4 in Appendix 1. Tenants should use the classifications as a basis for discussion with councils on how costs are allocated between accounts systematically working through the different cost categories. A list of cost categories is required to work through systematically. Not all cost categories and sub-categories will apply to all councils but both councils and tenants should focus on which of the costs are relevant to their HRA or their General Fund. Table 4 in Appendix 1 is provided as a guide to ensuring that these particular costs are left out of the HRA and remain in the General Fund.

Beneficiaries of these General Fund expenditures

80. Unlike tables 4 and 5 above, the broad service cost categories in table 6 (specified by Scottish Government but based on information from CIPFA) are relevant to much wider groups of residents ( e.g. private rented sector housing tenants) rather than just council tenants in terms of both tenure and much wider activities than 'housing provision' ( e.g. support and welfare services). Thus, it is not surprising that the accounting principles state that such costs should fall to the General Fund and not to the HRA.

Internal charges being levied on the HRA

81. This has been an area of concern for tenants and some other stakeholders and is one where greater clarity and insight is highly desirable. This is an area where a systematic recording mechanism for calculating costs charged to the HRA will lead to much greater certainty in the allocation of costs and therefore greater accuracy and ultimately fairness.

82. Internal charges include costs such as central staffing/overhead costs and internal service charges (or re-charges as they are referred to) that are being charged to the HRA should be calculated and recorded systematically. This will lead to greater transparency in costs and address the generally acknowledged difficulty across local authorities on such charges which is in part down to the complex nature of such costs. Scottish Government recognises the complexity of splitting these costs logically between accounts as does CIPFA itself. CIPFA overtly recognises this as a 'subjective' element ( i.e. each specific 'type' of expenditure that is recorded separately) which they recommend as an approach of preparing the accounts. [5] Table 3 Appendix 1 lists the types of centralised costs that are 'subjective.' The HRA may not be liable for its 'fair share' of all of the cost categories as the list covers the entire span of local authority spending and many of these will be beyond the scope of local authority housing. They are referred to as subjective as the basis for their calculation is less clear cut, individual to each council and, to an extent, the allocation of cost will be based on judgement as well as hard evidence. Simply having a list of cost categories to work through systematically should benefit any tenant/council discussions on transparency on these subjective costs.

83. The number of potential areas of cost allocation depends on the complexity of the finances of each local authority. Some councils also incur other costs which cannot be assigned directly to services but are required to manage the Council. These are categorised as 'Democratic Representation and Management and Democratic Core' as set out by CIPFA in SeRCOP 2013-14. There may be other costs which cannot be directly charged to services and these are categorised as Non Distributed Costs. Table 7 (an extract from the detailed Table 3 in appendix 1) gives an example of the kind of centralised costs that the HRA should be asked to pick up a share of if tenants benefit indirectly from such services.

Table 7: CIPFA Service Expenditure (Subjective) Analysis extract

Code Divisions and subdivisions
5050 Finance
5051 IT
5052 Human Resources
5053 Property Management/Office Accommodation
5054 Legal Services
5055 Procurement Services
5056 Corporate Services
5057 Transport Functions

84. Councils and tenants should agree a) which costs the HRA should be charged a share of and b) the methodological basis of such charges bearing in mind the possibly subjective nature of allocating a share of these costs. Councils may not be able to attribute all costs with total accuracy but they should still document their methodology and effectively be able to explain their approach to tenants. They should also compare their approach with other councils (or CIPFA) who may have greater experience or internal expertise and who may have looked at these issues already.

85. Depending on how calculations are currently made, this may require the Council to effectively revise its dataset but this can be part of a gradual process of moving towards a more transparent system in line with Charter agreements between each council and the RTOs. Initially, this may raise practical issues for councils in cost/ resources terms if they require an adjustment to their central support recharge approach. However, this may not be necessary if current approaches are clearly laid out and considered to be an accurate way of allocating costs. Once again, if experiences are shared between councils and advice is taken from organisations such as CIPFA, then the practice of councils who address the issue first could be replicated more widely and thus save considerable time, effort and duplication. Councils may even be able to share data development costs such as software as well as expertise.

86. In some local authorities, service costs that relate to both council tenants and wider groups such as anti-social behaviour posts may be fully funded by the HRA. Applying the principle of 'who benefits' may reveal that costs should be shared between the HRA and General Fund or with the wider beneficiaries of the service. This aside, tenants must recognise that in some instances projects or initiatives may cease if some form of whole or partial General Fund resources are requested even if it is clear that the General Fund should bear some of the costs. Transparent discussions with tenants will again be crucial in such cases.

87. CIPFA guidance on internal charging is very clear and is provided with permission:

Extract from CIPFA LAAP Bulletin 22: Promoting best practice

"Those principles need to be kept under review as circumstances are changing. For example the move from being a provider of housing to a housing enabler, working through housing associations, may mean that more management costs need charging to the General Fund rather than the HRA. Alternatively office changes, e.g. the relocation of staff or the use of less office space, may mean a rework of accommodation charges.

"Working papers must be kept which explain the basis of the charges to the HRA, General Fund and also contributions in respect of shared amenities for both direct charges and support service charges. Even if in certain instances assessments have to be very subjective it is essential that splits are made and the authority can show that it has at least considered the issues.

"Ideally where costs need to be split between the HRA and General Fund then there is some detailed method behind the split, such as time sheets filled in by staff on a weekly/monthly basis showing the split. Failing this staff will need to make best estimates. Sometimes if the pattern of work is consistent on a weekly or monthly basis it may only be necessary to keep records for a particular week or month.

"Where tenants, leaseholders or residents are unhappy with the apportionment, officers may wish to meet them to explain the bases used and the reasons they were selected.

"As stated above the ideal is for there to be a detailed analysis on which to base charges to the HRA. If this does not exist local authorities will have to use their judgement. However any judgement must be as well founded as possible. Where no data exists to support it, it must appear to be based on a reasonable judgement. Authorities must not look at what is the maximum or minimum they can charge to the HRA but what is the correct amount.

"In arriving at the correct amount they will need to be mindful of the overriding principle that costs charged to the HRA, whether direct or in respect of support services, must relate to the management and maintenance of the housing stock."

Improving methodology building on the existing categories

88. A significant issue in establishing a transparent allocation of HRA costs is the actual quality of data on costs which is sometimes data that lies 'somewhere between' the HRA and General Fund responsibilities. Where responsibility isn't clear, such data can be overlooked. To illustrate the point, below are two possible scenarios to illustrate the importance of having good quality management cost data:

  • Scenario 1: Service A is not handled by the housing department but by another council department and the housing department pays a recharge for that service. However, the basis for the figure the housing department is charged is not clear and this may result in the HRA (and council tenants) being charged inappropriately. It should be possible to accurately track who is using the service and then to calculate a cost i.e. it might be all council tenants, all non-council tenants and owner-occupiers or a mixture of the two. It is suggested that good practice would be to base this on a 'total cost'/ 'full cost' basis ( i.e. including associated fixed costs/overheads which represent real resources used to provide HRA tenants with benefits/ services not just on a 'marginal cost' basis. This could be flagged in the housing management system or in their customer information systems ( e.g. customer contact centre). The same information could be made available to the department in charge of the service so that when charging for the service they can cross reference cases and accurately charge according to whether tenants, the wider community or a mixture of the two are the users.
  • Scenario 2: Service A is fully paid for by the General Fund, even though a proportion clearly relates to council tenants. The same issue as above applies i.e. the non-recording of information by management systems as to whether council tenants or non-council tenants are using the service. However, in this scenario, it is not only the HRA not paying a fair share which is the issue but also the local authority is not realising (through a lack of management data) that they are providing the service to tenants of housing associations and/or owner-occupiers in their area. The local authority could, if they wished, suggest that a fair proportion of the costs are paid by the housing association based on data evidence. In the face of charges, this will incentivise the housing association to re-direct their own service to their own tenants. If the housing association was not properly recording data either, they too might even be providing a 'free' service to non-housing association tenants.

Getting better cost methodology and data over time

89. A more systematic cost recording approach will also bring about greater scope for accurate benchmarking in order to compare costs locally, regionally or nationally with both other councils and with housing associations.

90. Complicated cost methodology can be more fully explained and understood by documenting it and sharing it with tenants. It is a reasonable expectation from tenants that a written methodology should be available as this provides transparency and will give confidence that cost allocations are appropriate. The capacity to do this should exist within organisations given their considerable experience of working within the legislation, using the SeRCOP classification and making statistical returns to Scottish Government. Advice would also be available from organisations such as CIPFA.

'Core, 'core plus' and 'non-core' costs

91. Though the existing cost classifications are available in their various forms, there is no current sense for which groups these services are benefiting. Work carried out for the Department of Communities and Local Government ( DCLG) by the Housing Quality Network (HQN) in the run-up to 'self-financing' HRAs in England from April 2012 involves a three-way classification of costs. This classification reflects the relative centrality (and thus the specific relevance) to council tenants of some costs rather than others. We believe that the general methodological approach involved in this work is sound and could be developed further. As a result we have outlined some of the ideas behind the categories of "core, core plus and non-core" in Appendix 2. Scottish Government would like stakeholders to consider this as a potential approach for the future given that it does offer a way of designating 'who benefits' from various services provided. The involvement of landlords, tenants, Regional Networks of RTOs and the professional bodies in local authority housing and accountancy in such work could result in a more systematic cost methodology for HRAs in Scotland.

92. Whilst we are not proposing a switch to this classification, we have developed a variation to that balances the benefits of an agreed nationwide approach whilst retaining some local flexibility to reflect geographical or social issues in certain areas. See Appendix 2 for more details.

Updating the existing categorisations regularly and applying a more formal methodology

93. The methodology that underpins current cost categorisation on HRA charging (including any internal charges made by General Fund), should be kept up-to-date. This includes the methodology for calculating any Trading Account surpluses that should be returned to the HRA as client. In doing this and to avoid the potential for inaccurate charging, local authorities should take account of:

  • Market prices of goods and services purchased by the HRA change over time and with the economic cycle in particular
  • Improved procurement methods for purchasing goods and services can deliver cost savings irrespective of market conditions and the HRA should be sharing in these improvements
  • The changing cost base of the central services charged to the HRA by the General Fund is not appropriately or proportionately calculated and/or regularly reviewed i.e. if the General Fund is making cost efficiencies then these should be reflected in the allocation of costs to HRA and the benefit passed to tenants as laid out, for example, in the legal requirement in paragraph 27(b) above
  • New costs may arise and old costs disappear from the HRA each year

94. An updated methodology is therefore not only preferable from an accuracy perspective but is more transparent and fairer to all parties. One of the benefits of adopting a more systematic and dynamic classification of costs as proposed in paragraph 93 and Appendix 2 is that it could be very useful to help generate future thinking on how council housing services can go on providing Best Value in an uncertain financial landscape. Alternatively, it may help in thinking about an alternative charging basis to help fund the provision of HRA services. Keeping any methodology updated would also promote much better awareness of how reductions (or indeed expansions) in services would affect council tenants and non-council tenants alike.

A checklist for councils and tenants

95. The Charter is the main vehicle for establishing financial transparency in terms of the HRA and approaches and timetables must be agreed locally. However, the following checklist may be useful for those that are considering reviewing the way their HRA operates:

i. Use this document to agree an approach to improve transparency on costs and the HRA in line with the Scottish Social Housing Charter (see section 8)

ii. Allocate HRA costs and incomes (as laid out in tables 3, 4 and 5 above and in Tables 1, 2 and 3 in Appendix 1) using established cost categories and proper accounting practice: HRA and Best Value legislation, accounting guidance and the HRA statistical return cost categories

iii. Allocate General Fund housing-related costs and incomes correctly (as laid out in Table 6 above and Table 4 in Appendix 1) using established cost categories: HRA and Best Value legislation and accounting guidance

iv. Under (ii) and (iii) above, establish which costs should:

  • continue to be appropriately charged to the HRA
  • should receive contributions from the General Fund
  • continue to be charged to the General Fund

and establish a written, evidence-based allocation mechanism for doing this

v. If councils or tenants not satisfied with current methodology (content or transparency), councils should meet with tenants to discuss the issues and agree a programme with tenants for improvement if required

vi. Record the HRA methodology used in writing for the benefit of internal council colleagues, tenants and auditors thus bringing greater transparency in terms of procedures

vii. Keep working papers on the methodology being used

viii. Consider the use of an HRA cost/revenue database linked in some way to the HRA asset register.

ix. Update the cost methodology regularly in conjunction with new information and in conjunction with tenants' views.

x. If in doubt whether to charge the HRA or the General Fund, consider the 'who benefits' principle as a simple guide

xi. Seek advice on difficult methodological issues such as central recharges, trading operation surpluses and the recouping of resident recharges from CIPFA/Audit Scotland and consider opportunities to share/learn from best practice with/from other councils.

xii. Consider other more formal improvement mechanisms such as:

  • employing the services of cost benchmarking specialists;
  • the Improvement Service;
  • the Public Sector Improvement Framework (PSIF)
  • Setting up a working group of council practitioners and RTOs under the auspices of, for example, the Association of Local Authority Chief Housing Officers( ALACHO) or other relevant body

96. Scottish Government recognises that a process of cost reallocation as described above can be complex. We recognise it requires resources and may create issues for services which are the potential losers. However, the pursuit of financial transparency is important and if it identifies that improvements can be made, then these should begin at the pace agreed by individual councils and tenants as laid out in the Charter.

97. Section 3 pointed to some major funding issues heading the way of housing revenue accounts over the next 3 years. Dealing with those issues would be difficult enough so having a written robust methodology which is capable of being updated to deal with possible financial distress would be a very valuable asset with which to help respond to those prospective changes.


Email: HRA Guidance

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