Taking stock of HRA

10 Jun 13
A year on from the start of housing self-financing and most elements are working well. But the move to full depreciation accounting needs a bit more time

By Alison Scott  | 1 June 2013

A year on from the start of housing self-financing and most elements are working well. But the move to full depreciation accounting needs a bit more time

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It is a year since local authorities gained control of their Housing Revenue Accounts, moving from the centralised pooling system to keeping their own rents. So what has happened since then and what still needs to be done?

Much of the work before April 1 2012 concentrated on the one-off payments made to and from councils as the historic national housing debt was distributed among them as part of the arrangements. Most councils making payments to the Department for Communities and Local Government had to take on equivalent additional borrowing to cover this – but the £13bn worth of transactions eventually went through without a hitch.

Given the work involved, it is not surprising that since then housing and finance colleagues have taken some breathing space to allow the new system to bed in. Feedback suggests that few councils are currently intending to borrow more to spend on housing at this stage. This is partly to do with the debt profile, which peaks after the first few years of the transfer. But it is also because of the housing borrowing caps set by the government, particularly as there is uncertainty over changes to welfare payments and the ability to use receipts from tenants’ right to buy.

CIPFA argued throughout the lead-up to self-financing that the debt cap was unnecessary, and behaviour during this initial year supports that view. Removal of the cap would allow housing authorities to choose the most cost-effective capital/revenue expenditure splits as their business and capital plans improve along with their understanding and experience of self-financing.

A side effect of self-financing has been to put HRA accounting under the spotlight. The intensity of this spotlight has been increased by the ending of the Major Repairs Allowance, which the previous government set up to charge to the HRA revenue budget for capital assets. The decision was taken to move the HRA toward full depreciation accounting following CIPFA’s research on the impact of valuation methodology and componentisation in pilot authorities. This work suggested that where componentisation and asset lives accurately reflected asset management assumptions, sensible charges could be achieved, provided that the asset management plan itself was affordable.

There were two key concerns. The first was about authorities still using the MRA as a proxy for depreciation and the second was the impact of revaluations and, more importantly, impairments. While all local authorities should have been applying componentisation to their housing stock for some time, it was recognised that some had not sufficiently developed this approach to be able to make a non-reversible charge to the revenue account. They might benefit from being given some time to develop their componentisation sufficiently.

The impact of revaluation and impairments was more problematic. Although some stability could be achieved by varying the basis of valuation, concern over impairments led the government to introduce transitional arrangements to mitigate this risk. A major issue was insufficient balances in the revaluation reserve to offset impairment losses against. With this in mind, the government allowed the MRA to continue to be used for a period of up to five years. However, this applies only to housing assets.

When these arrangements were first discussed, it was felt that five years would be enough time to allow authorities to build up their revaluation reserves. With hindsight, the recession has been longer and deeper than was projected then and the five-year period might now be too short. Given that the MRA will become increasingly out of date, extending the transition period would not be a long-term solution.

CIPFA is therefore beginning to look at alternative scenarios for the end of the transitional period and at how full depreciation could still be implemented in an affordable way. To give time for possible solutions to be assessed and consulted on as widely as possible, it is important that this work starts now. The institute wants to encourage as many local authorities as possible to be involved so that the arrangements can be firmed up in time to give councils as long a run-up to implementation as possible.

To prepare for the end of the transition period and, more importantly, make the most of the opportunities of self-financing, councils need to look closely at both their asset management planning, and their valuation and componentisation policies to ensure that these reflect a realistic and affordable plan for the HRA. Ultimately, the success of self-financing will depend on how well authorities use their property and finance skills to manage their assets.

Alison Scott is assistant policy and technical director at CIPFA


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