UK: RP Issues - A Briefing For Registered Providers Of Social Housing

Last Updated: 25 February 2011
Article by Jonathan Pryor

Editor's comment

In many ways, the housing association sector is facing its most fundamental period of change for a generation. Not only does the comprehensive Spending Review provide major challenges and opportunities for the sector, but the basis for financial reporting (via component accounting and subsequently IFRS) is also going through a major upheaval requiring considerable preparation.

Change is not confined to these areas however; VAT issues are increasing in significance with the sector continuing to recover only small percentages of the substantial VAT costs that it incurs, growing as a result of the change in VAT rate and corporation tax, similarly, remains a planning issue for many RPs.

This edition of RP issues includes articles on each of these areas, but also covers sustainability and the Bribery Act, two further key areas requiring consideration. We are also delighted to feature a guest article by Sarah Chiappini from Charles Russell on codified directors' duties.

What should housing associations be aware of when planning for 2011?

With three Finance Acts in 2010, not to mention the SORP 2010 update and regular pronouncements by the Coalition Government, there are numerous issues which might be relevant at this time. We have identified and summarised four items which may be of particular interest to housing associations, some of these areas are explored in more detail later in the newsletter.


By Jane Haydon and Trudy Amy

Component accounting

Housing associations are increasingly adopting component accounting, as recommended in SORP 2008, and need to be aware (unless they are charitable) of the impact this change in accounting policy will have on taxable profits.

Previously tax deductible replacement costs of components will be capitalised under the new policy and only the annual depreciation will then be tax deductible. This can have a significant effect on profits chargeable to corporation tax, or on the speed with which accumulated tax losses are used, and therefore needs to be factored in to an association's business plan where appropriate.

Changes in tax rates

Business plans will also have to take account of various tax rate changes announced this year. All associations will need to assess the impact of the increase in the standard rate of VAT from 17.5% to 20%. Associations will also need to factor in the gradual reduction in the main rate of corporation tax, currently 28%, which will reduce to 27% from 1 April 2011, and thereafter reduce by a further 1% each 1 April until, with effect from 1 April 2014, the main rate becomes 24%.

SORP update 2010 – negative goodwill

The 2010 SORP update includes consideration of the accounting for 'negative goodwill'. In effect, the proposal is to recognise in the income and expenditure account the 'gain' – in substance a gift – arising on a transfer of engagements from one association to another, or an amalgamation of two or more associations.

The National Housing Federation is, we understand, consulting with HMRC on the tax implications of this accounting treatment and clarification has yet to be received. Our initial view is that while the tax treatment of this credit is not straightforward, in all likelihood there is only a possibility of it being taxable where it relates to stock/WIP or loans, with no tax effect arising from any credit relating to transfers of fixed asset housing stock.

Worldwide debt cap rules

New tax rules were introduced in Finance Act 2009 for restrictions on loan interest deductions for accounting periods beginning on or after 1 January 2010. While aimed at multi-national groups, these rules, (the basic intention of which is to prevent a group from securing a UK tax benefit from lending a greater proportion of debt to the UK part of the group than the worldwide group borrows externally), can apply equally to a group with no overseas entities, such as a UK housing association group. The legislation only applies to large groups (those with 250 or more employees or both turnover exceeding €50m and balance sheet total exceeding €43m). For such housing association groups, there may be circumstances where a combination of the structure of the group and the profile of the inter-company and external loans around the group can trigger a potential charge under these debt cap rules, even though this may not have been the intention of the legislation. We therefore recommend that all such groups review their position regarding rules as soon as possible.


By Jonathan Pryor

We look at the issues arising from the comprehensive Spending Review which will affect the activities of RPs.

20 October 2010 was undoubtedly a big day in the collective life of the RP sector. It signalled, quite probably, the most substantial change ever in social housing in the UK. The details remain unclear and it will be many months before the full significance of the changes are understood. However, it is clear that the changes will have repercussions for many parts of RP activity, in ways which, we suspect, were not fully anticipated by the Government.

At this stage, many RPs are exploring the repercussions and trying to evaluate what, if anything, the change to 'up to 80% market rent' will mean for their business plans, their development strategies and current and future tenants.

This article, unfortunately, does not provide any answers but does attempt to illustrate some of the issues arising. The key word in all of this is risk: whichever route your association takes, whether to embrace the opportunities and expand your development activities or to withdraw and become largely management-focused, the risk profile has increased substantially.

Unlocking value

At face value, for some RPs, the change in future rent levels may unlock significant value and enable a more substantial development programme to be released. To take an example, suppose the association has 10,000 units and for half of these the potential for an increase in rent up to 80% market rent is capable over time of delivering on average an extra £20 per week of rent at present day values. Suppose also that 1% of properties become void each year, there is a 4% void and bad debt loss, and the relevant policies on rent setting do not change. Assuming a 5% real discount rate, this then equates to a massive £17m increase in the net present value of future cash flows. Surely this could generate a sizeable acceleration in development capacity?

Stepping into the unknown

Unfortunately, there are too many unknowns for this simplistic calculation to be sensible.

  • Increasing the cost of a service (i.e. the rent) will have some effect on demand; some properties may become hard to let. The end of lifetime tenancies may also have an impact on void periods.
  • Now that a social rent is worth so much more to an existing tenant, we would expect voluntary movements of tenants to be less frequent. Therefore, expect the turnover of properties to slow to some extent.
  • The burden on tenants of the higher rental will be increased. This is bound to have some effect on bad debts and arrears, particularly for those not receiving full benefits. Even for those on full benefits, the move to a universal benefit will mean for some that their income reduces.
  • The restrictions on rentals (e.g. the local housing allowance) will need to be carefully assessed, as will the overall cap. This probably means that in London, for example, larger properties simply cannot be built under this mechanism.
  • Expectations will be raised. Tenants will be paying closer to the market rent and therefore will perhaps expect higher quality in maintenance and service; associations may need to model higher maintenance costs and longer periods between lettings. This might be offset to some extent by tenants taking more care over the property.
  • The dependency on local and central government not changing the rules is now a major threat. Even if a local authority is keen on the changes at the moment, would (following an election) a council led by a different party in say three years time have the same view?
  • How will local authorities react to situations where increases in rents in their authority are applied to subsidise new units in another authority?
  • Given that the risks are higher, surely the association's modelling of schemes needs to reflect a greater level of risk. This would either be via a higher discount rate or a more challenging internal hurdle rate; depending on how the association assesses its potential schemes.
  • Similarly given the higher risks, expect borrowing costs to rise and security requirements to increase.

What to expect going forward

There are two other areas hugely affected by the Government's general approach towards funding social housing and care.

We expect temporary housing to go through a boom; whether or not it is the most sensible use of Government money, this is the one area that seems to be a clear winner from the changes.

Secondly, expect some care and support organisations to get into serious financial difficulties. The 11% or so cut and the removal of ring-fencing from Supporting People funding, the severe contraction in local authority funding generally and the relatively easy process for local authorities to tender and achieve reductions in cost, are combining to make care and support organisations, particularly those with a dependency on Supporting People funding, extremely vulnerable. Furthermore, the costs of redundancy on some projects may be borne by the existing provider which, given the limited level of reserves held by some of these organisations, it may not be in a position to bear.

One further consequence we expect to see is an increase in the level of merger activity amongst RPs and similar charitable bodies; as such, all associations should review their merger and acquisition strategies.

The increased risks and a fundamentally changed landscape arising from the comprehensive Spending Review will require all boards and management teams to be at the top of their game.


By John Voyes

The 20% VAT rate has now been introduced, are there opportunities to recover costs?

The 2.5% increase in VAT, which was introduced on 4 January, is expected to bring in approximately £10bn extra revenue to the Treasury at no extra cost. The real cost of course is incurred by the individual in the high street, and businesses that are unable to recover VAT on costs incurred, or have very low VAT recovery rates, such as housing associations.

Many associations have low VAT recovery rates ranging from 1% to around 10%. Recovery rates which are in excess of this are generally as a result of a particular activity being undertaken or possibly a high level of taxable rent income from opted commercial properties. Of course many housing associations do not even bother to recover VAT because the costreward relationship does not make it worthwhile.

It is worthwhile reviewing instructions to accounts staff to ensure invoices are being properly coded and the VAT being charged by the supplier is correct. Often, suppliers will issue an invoice with the standard rate of VAT because it is easier for them to do so (they are no more than collecting agents for HMRC), and 'that's what they did last time'. A quick check may reveal that the incorrect VAT rate has been applied, and if this is not picked up in the accounts department, it is unlikely to be picked up at all, and will have an impact on the bottom line. Do your accounts staff know what supplies should qualify for zero or reduced rate VAT?

This may also be the time for housing associations to review their method for VAT recovery of overhead costs, and those that currently do not make any recovery to re-examine that cost-benefit analysis.

Finally, a number of associations are still considering setting up development companies outside their VAT group to take advantage of the VAT savings on development work that these structures can achieve. There clearly are VAT savings to be made, and certainly in terms of new and future development projects the use of such 'captive' development companies should be considered. However, these associations are also considering novating existing projects where development is already underway to newly established development companies. In these cases we would suggest exercising extreme caution as to the arrangements entered into. HMRC will review such arrangements for projects underway very closely (see Community Housing Association VAT tribunal case) to ensure that there is a legitimate onward supply of goods and services from the housing association to the development company enabling past VAT to be recovered.

Apart from VAT, there are also a number of other issues to consider relating to the novation, including employer arrangements, legal contracts, accounting and direct tax. We think that if the novation of existing contracts starts to happen in a big way, HMRC may well start asking whether the sole reason behind the novation is to avoid VAT, in which case housing associations run the risk of being told the practice is abusive and finding themselves spending time and money in the courts.


By Andrew Bond

The comprehensive Spending Review has brought sustainability back to the forefront of policy agenda.

While the economic turmoil of recent years has tended to overshadow sustainability issues, concerns over climate change, energy security and the longer-term price (not to say availability) of fossil fuels remain. With albeit tentative growth returning, the green issues (that never went away) are likely to rise up the policy agenda again.

The Spending Review and sustainability

The Spending Review demonstrated that the Government will continue to push forward in this area. Like many of the nonring- fenced departments, the department of energy and climate change suffered significant funding cuts, but the consensus seems to be that sustainability programmes held up reasonably well. Some key points arising from the Spending Review were confirmation of:

  • the creation of a green investment bank with over £1bn of funding
  • the renewable heat incentive (RHI) programme at £860m
  • security over the feed in tariff regime (FIT) for small scale energy generation projects until 2013
  • changes to the carbon reduction commitment (CRC) energy efficiency scheme.

For RPs the green landscape therefore continues to create threats and opportunities.

While detail on exactly how the green investment bank will operate and exactly what it will fund is short, it's a space that RPs ought to watch with interest.

The RHI scheme is intended to provide long-term support for renewable heat technologies, from household solar thermal panels to industrial wood pellet boilers. Again we await the detail, but it is an area many RPs will be looking to engage with.

Some of the opportunities may be relatively short lived. At present there are many opportunities available to facilitate the provision of smaller scale renewable energy generation, particularly solar energy generation. These opportunities can potentially assist in delivering a green agenda, reducing fuel poverty and generating economic returns. An expectation has, however, been set by comments in the Spending Review that the regime may be less favourable for projects post-2013. Many RPs are already exploring opportunities in this area and will note this possible window.

Zero carbon homes

The Government has a stated its objective that all new homes are 'zero carbon' by 2016. In the longer term, objectives set out by the Government to reduce carbon emissions by 80% by 2050 mean that there is an enormous retrofit opportunity/ threat looming over the sector. Taking advantage of the various schemes in place should assist in meeting increasingly tough obligations in this area.

Changes to the CRC energy efficiency scheme

The CRC energy efficiency scheme has effectively been turned from a 'cap and trade' incentive scheme into a carbon tax by the Spending Review. While at present this is only likely to affect the largest RPs directly and perhaps some smaller ones through charges passed on by large commercial landlords, it clearly flags a change in direction by Government away from cap and trade schemes to a tax-based approach. Given the need for the world to economise on carbon, the Government needs to deliver on its existing promises and in an environment where a new source of 'ethical' tax appears fully justified, it is difficult to see how the spread of the CRC 'tax net' to smaller organisations will not occur.

Most RPs will be looking at their business plans to try and accommodate the new economic landscape arising from the Spending Review, mentioned earlier in this newsletter. I would suggest that dealing with sustainability issues must also form an integral part of those plans.


By Julie Mutton

The ASB has revised the timing of its transition from UK GAAP to IFRS. We look at the implications of the changes for housing associations.

The Accounting Standards Board (ASB) first started its consultations on the transition of UK GAAP to international financial reporting standards (IFRS) in 2004. The initial idea was for a gradual transition, but the thinking has changed. The preferred option is now a 'big bang', with change expected to take place in time for March 2015 year ends. It would be hard to understate the significance of the change, since a considerable part of what we regard as normal accounting will be different under IFRS; the implications for finance functions, boards and loan covenants are substantial.

So what is on the cards?

The ASB proposes to divide entities into three tiers. The top tier, tier 1, will need to comply with IFRS, in full. Tier 2 will apply a simplified version of IFRS, referred to as financial reporting standard for medium-sized entities (FRSME). Tier 3 will be eligible to comply with the existing financial reporting standards for small entities (FRSSE). Whichever tier an entity is in, it can adopt a higher tier if it wishes (so for example, a tier 2 entity can adopt full IFRS).

Under the rules, if a housing association has issued a listed bond in its own name, and is traded on a market such as the stock exchange, then it will be in tier 1; otherwise, unless it is very small, it will be tier 2. The ASB envisages a continuing role for a RP SORP although it is not clear how much leeway it will have.

Why does this matter?

There are very substantial differences between full IFRS, FRSME and FRSSE. It will make comparisons between entities that happen to be in tier 1 and tier 2 respectively extremely difficult. It is hard to see why having a listed bond (and therefore tier 1), as opposed to a bond issued jointly with two or three other RPs (and therefore tier 2), should necessitate fundamentally different financial reporting rules.

In practice, apart from the ten or so RPs that have issued listed bonds (although this number is set to grow given the current market conditions), the majority of RPs will be tier 2. Some RPs with less than 50 employees (provided other conditions are met) may be able to use FRSSE, which will provide some respite.

Additionally, some of the 'rules', particularly in FRSME, are arbitrary and potentially highly damaging to the sector. The main examples are listed below.

Capitalised interest

FRSME does not allow any interest to be capitalised. This change would also be retrospective and require prior year adjustments. The effect for developing associations would be a substantial reduction in both reserves and the surplus in the year.

Financial instruments

Basic swaps and forward contracts would require additional documentation to be compiled, demonstrating that the instruments are effective hedges. In these circumstances, although there would be some fluctuations on the balance sheet, the movements can be kept away from the reported surplus. However, anything with optionality in it, including prepayment, extension or early termination features (for example callables) would need to be fair valued with movements going through the income and expenditure account. The effect would be potentially huge swings in the surplus as relatively small interest rate movements can have a profound impact on fair values. This volatility would also be hard to predict since it would depend on the position as at the year end, potentially varying significantly from the position only a few days previously.


Housing properties would have to be carried at historic cost. For those associations adopting valuation accounting, FRSME would remove this option.


FRSME would not allow grants to be deducted from housing properties. This therefore would require them to be shown gross, potentially increasing the risk of impairment charges.


Although not retrospective, FRSME will not allow merger accounting for future business combinations (other than reorganisations of existing groups). Any future merger would be dealt with under acquisition accounting (unless it was in substance a gift). In addition, there are a substantial number of additional disclosures that will be required, probably making the financial statements longer and, arguably, less intelligible.

Quite apart from the extra work this will require, there is a risk that lenders may take the opportunity provided by the changes to re-price some loans; the impact on borrowing costs and administration costs could be substantial.

What can associations do?

In our view, there is a genuine opportunity to influence the ASB to make substantial changes. It is unlikely that the ASB will be aware of the serious repercussions of its proposals for the RP sector. Provided sufficient numbers of housing associations (preferably in excess of 100) respond making a reasoned case, we believe the ASB is likely to make changes to some of the points which are causing problems. These are the areas on which we suggest associations comment.

1. The requirement to adopt full IFRS when a listed bond is issued should be modified to exempt those where the level of trading in the bond is low. This is provided that the board can reasonably judge that bond holders do not have a desire for full IFRS to be applied.

2. Capitalised interest should be permitted as an option, in line with UK GAAP.

3. Where the purpose behind entering into derivatives is for reduction in risk, the entity should be required to account for the instrument as a hedge. Rather than follow a set of rules which ultimately lead to classification as a trading instrument by default if you are unable to meet the required tests for treating it otherwise, for FRSME entities the approach should be based on the substance of the arrangement. There should not be an option to change classification after the initial decision on how to treat the instrument.

4. For those sectors with substantial fixed assets (such as RPs), FRSME should permit carrying fixed assets at valuation using specific methodologies set out in their respective SORPs.

5. FRSME should allow entities to deduct capital grants from the carrying value of housing properties.

6. Merger accounting should be permitted in those circumstances where genuinely there is no acquirer or acquiree.

7. The timetable for implementation should be delayed to allow further time for planning and assessment of the implications.

8. The number of entities applying FRSSE should be increased; one option would be to increase the present size limits to double those for small companies.

9. The impact analysis does not presently take into account the risk of re-pricing loans. It would be sensible to conduct more research into assessing how significant this risk is, and the potential impact.

In order to influence the debate, you will need to write to the ASB on or before 30 April 2011 with a summary of the points you wish to make; please feel free to use any of this text as part of your letter.

Letters should be addressed to:

Michelle Sansom

Accounting Standards Board

5th Floor Aldwych House

71 – 91 Aldwych



It would be sensible to avoid using too many pejorative terms; phrases such as 'outrage', 'criminal' and 'deserve to be taken out onto the street and hanged' don't tend to go down too well with accounting standards setters, and probably only belong in your responses to your bankers' revised borrowing margin proposals.


By Jackie Oakes

Component accounting has been covered in some detail in past editions of RP issues, but while previous articles have explained the theory and the process for preparing component accounting numbers, we now focus on the implications.

It is becoming clear that the RP sector as a whole is putting aside its substantial reservations over the benefits of the change to component accounting, and instead is knuckling down to the task. Various points of detail are emerging, but there is now strong consensus on how the changes should be made. In particular, apart from a minority of associations, there is agreement that in nearly all cases a prior year adjustment will be required. In practice, this will provide difficulties to those associations that adopted component accounting early, and took a different view based on the advice they received at the time. Technically, they ought to consider restatement. However, it remains to be seen whether those entities will revisit their policies in the coming year; I suspect they will decide not to.

What is also becoming clearer is that, with the exception of the above point on prior year adjustments, the impact on RPs' financial statements is less influenced by the choices the RP makes now (e.g. in respect of useful economic lives of the components or the specific choice of components), but is hugely influenced by the previous accounting policies adopted by the RP in respect of capitalisation of major repairs. For most RPs we would expect that the higher level of capitalisation that component accounting brings, offset only partially by higher depreciation charges, will lead to a boost to net assets.

However, for a small number of RPs, who had previously adopted very aggressive accounting policies on capitalisation, the impact is going to be different. Not only will they face a marked deterioration in operating results, but net assets will also decrease. This latter point may place them at risk in respect of covenant compliance. In a way (and this will sound harsh to some) all that is happening here is that certain chickens are coming home to roost with a number of years of over-capitalisation being corrected. The question of 'where were the auditors?' is also still appropriate. In my view, associations that had capitalised at such levels, and are now facing a marked reduction in net assets, have not been well served by their advisers. It may be time to consider change.

For most, the effect will not be sufficiently sizeable to cause breaches in covenants to occur. Nevertheless, there may be some changes to the way the association sees itself, both at management and at board level. This is because an organisation which previously had high levels of capitalisation, which is now faced with a reduction in net assets and reduced surpluses in the future, may well consider itself to be less financially strong than before. This in turn may cause it to rethink its business plan.

It remains to be seen, but for those associations who have approached the change positively some real benefits are starting to emerge. These have come from a number of areas, including:

  • better understanding of variations in costs for similar components across the stock
  • clearer appreciation of differences between the asset management strategy (as documented) and the actual component replacement experiences
  • better appreciation of the differences in life and cost for components replaced as part of a planned programme as opposed to replacements that have arisen in response to relettings (or other events)
  • better appreciation of the contractor invoicing processes (in one case, this has led to substantial refunds due to errors that component accounting identified).

For those boards and senior management teams who do not believe these benefits can be achieved, I would urge them to approach the change with an open mind. I am prepared to make a prediction: by 2015 the majority of RPs will look back on the changes as a result of component accounting and agree with the statement that, on the whole, it has been beneficial to have made the change. Anyone wishing to place a bet with me on this only has to get in touch.


By Sarah Chiappini

Sarah Chiappini looks at the pratical impact of the codified directors' duties, following their introduction two years ago as part of The Companies Act 2006.

Although most RPs take the legal form of industrial and provident (I&P) societies, an increasing number are companies limited by guarantee formed under the Companies Acts.

The Companies Act 2006 codified directors' duties, with the final provisions coming into force on 1 October 2008. Two years on, we examine the practical impact of these new duties and in particular how they might affect RPs.

When is this relevant?

As noted, most RPs are I&P societies and so these provisions do not automatically apply. However, board members of RPs have common law duties and in interpreting what those duties are, the courts will, inter alia, consider established practice. We believe that the courts will look to the statutory provisions of the Companies Act 2006 (the 2006 Act) in undertaking such considerations. In addition, the subsidiaries of RPs may be companies formed under the Companies Acts and in which case these statutory provisions apply in full.

For RPs the most significant aspect is how to deal with conflicts of loyalties. Such conflicts may occur when a board member:

  • is also a director of a trading subsidiary or a board member of a subsidiary RP
  • is also a trustee of a charity or a board member of another RP which has a contractual relationship with the RP
  • is an employee
  • is a tenant. Such situations are common in RPs. For example, contractual relationships can occur between RPs when one owns a property and another manages it.

Duty to avoid conflicts of interest

For charitable companies formed under the Companies Act, section 175 provides that a board member must avoid a situation in which he/she has (or could have) a direct or indirect interest that conflicts (or may conflict) with the interests of his/her RP.

Clearly in the situations above, a board member could fall foul of this duty.

The reference in the 2006 Act to an 'indirect interest' is interpreted as including interests of those connected to a director, e.g. members of a director's family and companies controlled by a director.

Consequently, any relevant interests of those connected to a director will also need to be considered. However, this duty is not infringed in certain situations as set out in section 175:

  • the conflict is, subject to certain conditions, authorised by the directors
  • if the situation is not likely to give rise to a conflict.

The practicalities relating to the former provision are discussed below.

With regard to the latter, the test is one of reasonableness and this will depend on the facts of the matter (and in particular, what facts were known at the time). If reliance is to be placed on this exemption, be sure that the minutes of the relevant meeting contain sufficient detail so that someone reading the minutes is able to see that you acted reasonably.

Dealing with conflicts

Before the implementation of this duty, when a conflict of loyalty arose it was acceptable for board members to vote on a matter on which they had such a conflict. However, in such a situation, the board members had to remember 'which hat they were wearing' when making decisions.

They cannot now do this. Where a conflict of loyalty arises, they must now either:

  • abstain from voting on the relevant matter
  • obtain authorisation to vote on the matter from those board members who are not conflicted.

If the conflicted board members choose to abstain, the remaining members of the board must achieve a quorum; if a quorum is not reached, then no decision on the matter can be taken. Similarly, a conflicted board member can only be authorised to vote if the remaining members achieve a quorum and the rules must permit such authorisations.

The practical issues

The number of unconflicted directors needs to be such that they can constitute a quorum to either enable them to authorise the conflicted board members to vote or to take decisions without the involvement of the conflicted board members. However, many RPs will not have a sufficient number of unconflicted board members and/or a sufficiently low quorum.

In such a situation, RPs may need to:

  • appoint one or more unconflicted board members. Of course, recruiting board members is often easier said than done, especially if they are unpaid
  • reconstitute the boards of the RP and its subsidiaries.

Consideration should also be given to reducing the quorum provisions for meetings of directors. For example, for the purposes of authorising conflicts of loyalty, a quorum of two board members might be considered acceptable and appropriate, (a quorum should never be less than two).

The rules of the charitable company (the memorandum or articles of association in Companies Act jargon) must specifically permit conflicts of loyalty to be authorised by the board. Consequently, many charitable companies will now need to insert the relevant provisions into the rules.

Finally, the board members who are not conflicted should be aware of their own duties when deciding whether to give authorisation for a conflicted board member to vote. In particular, for a company formed under the Companies Acts, they have a statutory duty to promote the success of the RP and to exercise independent judgement.

Non-charitable companies

So far as non-charitable private companies are concerned, e.g. a trading subsidiary, section 175 of the 2006 Act provides that unconflicted directors can authorise a director's conflict of loyalty provided that there is nothing in the company's constitution to the contrary.

In other words, unlike charitable companies, there is no need to include express provisions in the company's constitution. However, if a company's rules are updated, it may be sensible to explicitly include the relevant provisions.

Companies in existence before 1 October 2008

A transitional provision provides that any company formed under the Companies Act in existence before 1 October 2008, i.e. when section 175 came into effect, needs to pass a members' resolution before board members can authorise conflicts of loyalty.

The question arises whether a company which adopts new rules incorporating revised directors' conflicts provisions still needs to pass such a resolution. There is a divergence of opinion on this issue amongst practitioners and therefore it is sensible for such a resolution to be passed at the same time as the rules are amended.


By Adrian Wild

A risk management issue – immediate action required What is your organisation doing to mitigate the risks of the Bribery Act 2010?

When the Bribery Act 2010 (the Act) comes into force, it will affect every business in the UK irrespective of whether they are based purely in the UK or operate overseas. While the Act primarily consolidates existing law, it also introduces a new corporate offence of failure to prevent bribery. The possibility of unlimited fines for both corporate entities and board members means that the Act needs to be taken very seriously indeed.


As well as codifying existing common law and consolidating existing statute, the Act also introduces certain new offences, including the failure by a commercial organisation to prevent bribery. The penalties for a breach of this provision are unlimited fines.

Are RPs caught by this provision? The law applies to commercial organisations, which include UK corporate bodies which carry on a business. Whether the activities of RPs are business activities is, ultimately, a question that can only be determined by the courts. However, there is no doubt that new RPs run as profit making, rather than charitable, enterprises are businesses. It would be a brave board which decided that a charitable RP, undertaking the same activities, was not a business and was not subject to this section of the Act.

In any event, many RPs have activities which are undertaken for profit and are undoubtedly business activities.

What is the offence?

A commercial organisation commits the offence of failing to prevent bribery when an associated person 'bribes' another so as to obtain or retain a commercial advantage for the organisation.

This is incredibly widely drawn. An offence can be committed even if no money changes hands – providing that there was intent, it is enough that an offer or promise was made. Also, the person doing the bribing need not have been convicted under the Act. However, the most significant issue for corporate entities is the definition of an associated person. This is defined as being a person who performs services for or on behalf of the commercial organisation – this represents a large number of organisations and individuals.

Associates include those where the RP can direct or influence the activities – for example, employees, board members, subsidiaries and contractors appointed under framework agreements. However, it will also include those who operate at a more arms length basis, such as selling agents, land acquisition agents, consultants, surveyors and even the auditors.

Therefore, even though you and your staff have the utmost integrity, you could be tainted by (and convicted from) the actions of someone over whom you have only a limited influence.

Your defence

Clearly, this is a very onerous obligation on RPs (and all other commercial entities), made worse as it is a strict liability offence. That is, no element of negligence needs to be proved for the RP and its board members to be found guilty. The only defence available is that the commercial organisation had in place 'adequate procedures' to prevent those associated with it from committing offences under the Act. The Government is to issue guidance as to what the adequate procedures might be. Given the potential onerous nature of the obligations and the significant penalties, it is rather disappointing that the guidance has yet to be issued. However, the Government has consulted on its draft guidance and we use this to highlight the possible actions.

Six principles

The draft guidance highlights six principles which give general guidance and are based on good practice, both from the UK and internationally. The procedures adopted to implement the principles are a matter for each entity and, ultimately, it is for the courts to assess whether the procedures are adequate.

1 Risk assessment

An assessment of the risk exposure should be undertaken, which will inform subsequent actions. Internal risks primarily arise from employees, whereas external risks will depend on the nature of transactions undertaken and the extent to which 'associates' are used.

2 Top level commitment

The board should commit to a culture of integrity and be seen to make that commitment.

3 Due diligence

Appropriate enquiries should be made regarding the specific risks associated with particular activities and the RP's associates.

4 Policies and procedures

olicies and procedures should be established which seek to prevent employees and associates from committing bribery on the association's behalf. Such policies and procedures should be clear, concise and accessible.

5 Effective implementation

Once appropriate policies and procedures have been established they must be implemented, both internally and externally. The aim is for the policies and procedures to become embedded throughout the organisation.

6 Monitoring and review S

ystems for monitoring and reviewing (and if necessary, improving) should be established.

Impact on RPs

RPs are fortunate that they have previously had to comply with the Housing Corporation's Good Practice notes (and the earlier determinations) and therefore should have many policies and procedures in place which will serve to prevent bribery. Therefore, it is likely that relatively few changes will be needed as a result of the Act with the majority of actions will arise from the need to control and monitor associates. Associations will nevertheless need to document how these policies and procedures help to ensure compliance.

Areas which we feel may need to be addressed include the following.


  • Ensure that your code of conduct refers to the Bribery Act and that it is readily accessible.
  • Perform a risk assessment to ensure you have considered how best to control any areas where there is the potential for bribery.

Suppliers, contractors and agents

  • Include a process for assessing whether they have adequate procedures (as defined by the Act) in place.
  • Revise contractual arrangements to include:
    • an explicit confirmation of compliance with the Act, with breaches permitting immediate contract termination, the right to withhold payment and the ability to recover any consequential fines and/ or costs
    • a continuing commitment to maintain adequate procedures and to report to you any incidents or suspicions of bribery -- prohibition on assignment or subcontract without permission.


  • Contracts of employment and staff handbooks may need to be updated to reflect the new Act. In particular, an explicit statement that breaches of the Bribery Act may amount to gross misconduct would be appropriate.
  • Ensuring that there are clear guidelines as to what entertaining (if any) can be provided to third parties.

Consultants, interim workers and agency workers

  • Contracts should be reviewed/amended as above.
  • Individuals should be made aware of the code of conduct and should sign to confirm their awareness and compliance.

Monitoring and review

  • Ensure that Acts of bribery and compliance with the Act are specifically within the risk management process.
  • Whistleblowing procedures should be reviewed to ensure that they specifically cover Acts of bribery.
  • (Possibly) extend the work of the internal auditors to cover potential Acts of bribery.
  • (Possibly) survey staff, suppliers, agents etc to obtain their views and comments, which could inform future reviews of risks.

Education and dissemination

  • Ensure that the board is made aware of the Act.
  • Once the Act comes into force, the board should make a short statement highlighting the new legislation and making it clear that Acts of bribery are prohibited.
  • Any new policies and procedures put in place as a result of the Act should be disseminated throughout the RP and beyond to associates.


On 31 January 2011, the Ministry of Justice (MoJ) again postponed the implementation of The UK Bribery Act 2010. The Act was due to come into force this spring but will now not be implemented until three months after the MoJ has published clear guidance for companies. No date has currently been set for the publication of the guidelines.

The Bribery Act 2010 is one of the world's strictest pieces of anti-bribery legislation. When enacted, it will significantly increase the penalties for any Acts of bribery. To mitigate that risk, RPs need to take appropriate action now.


By Rachel Bennett

Smith & Williamson's annual Housing Association Executive Reward survey 2010/11 offers some interesting findings.

Designed and produced by HR specialists, our Hosuing Association Executive Reward survey report aims to provide an analytical approach to reward data, giving an accurate context for registered providers to use as they deliberate on executive reward decisions for 2011.

We understand the difficulties of balancing budget pressure with inflationary trends and the need to provide a competitive reward package that will support retention and staff engagement. In our work with housing associations across the country, we continue to see innovative and creative approaches to getting this balance right and to using effective reward planning to reinforce culture and values in difficult times.

41 associations have participated in this year's survey, up from 37 last year, ranging in size from large national groups to highly localised small associations.

The survey report includes an analysis of executive pay by job level, gender, and organisation size (turnover, employees and units under management) as well as an analysis of trends in bonus schemes and executive benefits. We believe that this report stands apart from other surveys in the sector in that it provides very detailed analysis of the different executive levels, providing accurate and current data that is needed to make important decisions about reward for senior people.

Key findings

  • Executive pay has increased by an average of 1.7% over the past year.
  • 65% of chief executives have had their pay frozen in the last year.
  • Where chief executives are eligible for a bonus, they all received a payment in the last 12 months.
  • The equal pay gap at executive level is narrowing: an encouraging sign since equal pay issues continue to be a hot topic.
  • The median general pay award for all staff expected for 2011 is 1.0%, with a pay freeze expected in 43% of organisations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Click to Login as an existing user or Register so you can print this article.

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