UK: RSL Issues - A Briefing For Registered Social Landlords, November 2006

Last Updated: 7 December 2006

In this edition of RSL issues, we discuss the potential changes to the 2007 SORP now that the consultation phase has come to an end. We also look at other topical issues, including the benefits that a REIT may offer RSLs.

2007 SORP – what to expect

Article by Jonathan Pryor and Andrew Bond

The 2007 SORP consultation phase has just ended. Whereas the previous updates in 2002 and 2005 were well received, it is going to be much harder to predict the reaction to this draft.

Our expectation is that significant changes will be made to the phrasing of the 2007 SORP, but not to the actual substance. If this expectation holds, the document is going to have a dramatic impact on the financial position of many RSLs. Given the low levels of surplus reported by the sector, relatively small changes to the accounting treatment will have a dramatic impact on the bottom line.

The most significant changes that we expect to be implemented are as follows.

Shared ownership accounting

The draft SORP suggests that the costs of the first tranche disposal should be included in current assets and a profit or loss incurred on disposal. This is very different from the present treatment of deducting the net proceeds from the carrying value of the property, and may lead to earlier recognition of profit or loss, depending on the type of scheme.

The major concerns include whether earlier recognition of profit is prudent, and a number of worrying corporation tax implications. However, under the proposed new accounting treatment of mixed scheme accounting, earlier recognition of profit is not recognised if the shared ownership component is subsidising other parts of the scheme.

Mixed scheme accounting

The accounting treatment should be based on the overall financial position of the scheme rather than on the financial standing of the individual elements. Unfortunately, this is not clearly explained in the draft SORP and the wording needs to be more comprehensible. The intention is best illustrated by an example.

Imagine a scheme in which half of the properties are to be sold outright and half are for general needs. The overall cost is £20 million with a grant of £2 million. The properties for sale realise £12 million and the EUV-SH of the general needs properties is £7 million.

Under ‘normal’ accounting, assuming that the sold properties cost the same as the general needs properties, a surplus of £2 million on the disposal would be recorded (£12 million proceeds less costs of £10 million). The general needs properties would be recorded at cost (£10 million) less the grant (£2 million). Although the net cost is £1 million higher than the EUV-SH, no impairment provision would be made, assuming that the occupancy was high, on the basis that this was a scheme that had gone to plan and was fulfilling the objectives of the RSL. In effect, it is a planned impairment and thus no provision is required.

However, under the proposals in the draft 2007 SORP, the treatment would be very different. The general needs properties would be recorded so that the net book value was EUV-SH, i.e. a cost of £9 million and a grant of £2 million. Consequently, the cost of sale of the properties sold would increase to £11 million, reducing the surplus to just £1 million.

Onerous contracts

The expanded commentary in the draft SORP envisages that there may be situations where commitments to provide public benefits might create onerous contracts. However, the commentary does not provide any guidance on when this might occur or how it should be accounted for.

One scenario where this might apply is in relation to commitments given to tenants, leaseholders and local authorities during the transfer of local authority housing stock to RSLs. Sometimes these commitments are so specific that the RSL is unable to avoid the expenditure. Does this create a liability? Unfortunately, the SORP does not make this clear.

Stock transfers

The draft SORP confirms that in some circumstances, it is not just housing properties that are being transferred but actual businesses. In these situations, a different method of accounting for the transfer must be applied. This method involves deriving fair values for the assets and liabilities acquired, and recognising any difference between these and the fair value of the purchase price as ‘goodwill’. In some cases, the goodwill amounts will be substantial.

Component accounting

The draft SORP further encourages component accounting in certain circumstances, but makes it clear that it cannot be used selectively. This amendment will most probably result in some controversy, as there are many RSLs which are currently not compliant with these proposals. A leading RSL’s adopted accounting policies are used to illustrate this. Housing Association X capitalises expenditure on replacing windows, kitchens and bathrooms, and depreciates this expenditure over 15 years.

Implicitly, X does not expense previously capitalised amounts to the replaced item, e.g. the windows installed when the property was first constructed. It also does not depreciate components for new schemes separately over the 15 years. However, the draft SORP requires all or nothing. All the windows, kitchens and bathrooms would need to be separated for all of the RSL’s housing properties, and individually depreciated over 15 years (via a prior-year adjustment that restates the balances to what they would have been had the accounting policy been adopted from the outset). Alternatively, the items that are currently being capitalised separately should be expensed (again via a prior-year adjustment), unless they meet the general tests for capitalisation of an improvement to a property.

In a number of cases this change in treatment will have a catastrophic effect on the reported results.

At this stage, it could be argued that there is little RSLs can do since the final content of the SORP is not known. However, it is clear that these proposed changes will affect many RSLs and therefore early planning will be essential for the final SORP publication in March 2007. In particular, some RSLs will see a significant impact on their reported results and covenant compliance.

Do you have sufficient cover?
A new approach to the tax benefits of sheltered housing schemes

Article by Raj Taank

Are you concerned about HMRC’s recent change in attitude towards the provision of living accommodation for sheltered housing wardens?

To determine if the change in HM Revenue & Customs’ (HMRC) approach towards the provision of living accomodation for sheltered housing wardens will affect you, it is necessary to consider why, historically, the provision of the accommodation may not have given rise to a taxable benefit and what has changed since.

In the past, HMRC accepted that the living accommodation for wardens of sheltered housing schemes was provided for the ‘proper performance of the duties’, as long as the employees lived on the premises and were on call outside of normal working hours. If these conditions still apply to those wardens you provide accommodation for, then no taxable benefit should arise.

However, your organisation’s working practices may have changed over time and wardens may now not be on call outside of normal working hours due to the increased use of call centres. This is particularly the case when call centres are used to action all or the majority of the calls received instead of the on-site staff being on duty.

Even if a call centre is used extensively, the accommodation may still not create a taxable benefit if it can be demonstrated that it is provided for the ‘better performance of the duties’ and it is customary for employers to provide accommodation to employees engaged in these specific duties. However, this may be difficult to show if the warden is not often required to react to a call.

Potential implications

This change to HMRC’s approach regarding accommodation could result in additional tax bills for employees if HMRC considers the accommodation to be taxable. Furthermore, HMRC will seek to recover from the employer any potential liabilities for the last six years, unless there has been a change of circumstances in that time. This could result in an organisation facing a substantial tax bill.

"...consider why, historically, the provision of the accommodation may not have given rise to a taxable benefit..."

Planning ahead

We recommend that social landlords who provide staff with live-in accommodation review the terms of their employment contracts and consider what impact the use of call centres may have had. It would be wise to do this before receiving an enquiry from HMRC.

If this is currently not an issue for you, it might still be advisable to monitor the extent to which call centres forward calls to wardens to ensure that no unexpected exposure risks arise in the future.

In addition, employers should ensure that employment contracts for wardens are structured to support the premise that the accommodation given to wardens is for the purposes of the proper performance of their duties, and to minimise any potential risks.

The working practices of staff provided with accommodation should also be reviewed to ensure that current procedures do not fall foul of HMRC guidelines. Having the correct procedures in place should help to reduce the risk of HMRC seeking to recover potential liabilities and help you provide the right type of shelter for all concerned.

Should RSLs put stock in REITs?

Article by John Voyez

There has been a considerable amount written over the past year about the advent of REITs, which come into effect on 1 January 2007.

Most of the commentary surrounding real estate investment trusts (REITs) has been in relation to commercial property, with many of the top property companies declaring their conversion intentions. It is only recently that more attention has been paid to the prospects of a REIT for social housing.

  • A number of housing associations are now considering putting stock into a REIT where they see that there may be certain advantages presented by this strategy. RSLs can get stock off the balance sheet to improve gearing. Initially, this might include difficult housing stock, but future development could be for key worker, student accommodation, retirement homes, etc.
  • RSLs reserve the right to manage the stock contributed in order to secure income, and they certainly have the skills to do so.
  • The pooling of resources with other RSLs should produce cost savings and allow for more diversification of activities, as a REIT could take on projects which are normally outside the remit of RSLs.
  • Investors are likely to find a social housing REIT attractive, as the stock will be managed by experienced people in the sector and should provide a secure rental stream that allows for almost guaranteed yields with good prospects for growth.

However, it is not all plain sailing and there are a number of obstacles, particularly on the tax front, which still need to be ironed out. For this reason, it is unlikely that a social housing REIT will enter the market with the first wave on 1 January 2007. But, subject to the outcome of ongoing negotiations between the various interested parties, and a possible relaxation of some of the rules, REITs for RSLs will be a viable option.

Best practice under review

Article by Jonathan Pryor

The Housing Corporation is currently reviewing two regulatory documents – Circular 25/01 and Good Practice Note 7.

Circular 25/01: Five years on

Five years have passed since Circular 25/01 on internal controls assurance was published, and now the Housing Corporation wants to determine whether or not its objectives have been achieved.

Since implementation, most RSLs have, as required, established a regular process for reporting to their boards on whether or not the structure of internal controls has been effective, and summarising the key points for their annual accounts.

However, there has been debate about whether this is the best way of ensuring that RSLs pay sufficient attention to their internal controls or if this is just another, somewhat repetitive, bureaucratic process replicating others – in particular, the requirements for risk management.

Due to this debate, the Housing Corporation decided to review the Circular and its intended objectives in order to determine what changes, if any, are needed.

Smith & Williamson has been assisting the Housing Corporation with the review. The findings are expected to be published before the end of the year.

Good Practice Note 7: An update

For similar reasons, Good Practice Note 7 on external audit is also under review. There have been a number of fairly significant developments which impact on the relationship between external auditors and their clients, and the ways in which external auditors are appointed.

These developments include the International Standards on Auditing, the EU procurement rules, the greater awareness of responsibility amongst audit committees, revised ethical standards that limit the roles external auditors can play beyond an external audit, and the volume of mergers resulting in increased frequency of more than one firm of auditors within a group.

We have also been assisting the Housing Corporation with this review, which is similarly expected to be completed by the end of the year.

Jury’s In

A round-up of recent VAT cases relevant to RSLs

Article by John Voyes

Landmark decision on ‘activities in the course of business’

In St Paul’s Community Project and Yarburgh Children’s Trust the Court ruled that the provision of nursery facilities in return for fees charged was not an activity in the course of business. While HMRC is not happy with the Court’s judgement, it has chosen not to appeal.

These rulings represent landmark decisions, as the question of whether a charity/RSL is operating in the course of business has significant implications for a range of zero-rating reliefs.

RSLs qualify for VAT exemption on long-stay guests

Following the ruling in Afro-Caribbean Housing Association, the VAT exemption for accommodation charges on stays exceeding 28 days is no longer restricted to individuals, and now extends to organisations that contract with the accommodation provider. This includes, amongst others, local authorities and RSLs.

Thus the cost to RSLs for providing accommodation to homeless people or asylum seekers now qualifies for the ‘reduced value’ rule after 28 days. The only prerequisite is that the same person must occupy the same accommodation for the entire period concerned.

Riverside Housing Association’s case rejected

Following the Cardiff Community Housing Association’s recent success, Riverside tried to convince the VAT Tribunal, and then the High Court, that its activities were not undertaken in the course of business. If its application had been successful, the construction cost of its new head offices would not have attracted VAT on the basis that the offices are used for a relevant charitable purpose.

However, both the Tribunal and the High Court rejected the argument, holding that Riverside was involved in an economic activity with a view to a profit, and that its operations had the characteristics of being in business.

Financial reporting trends in the RSL sector

Smith & Williamson is conducting research into a number of issues relevant to financial reporting in the RSL sector, including the following.

  • Do financial statements indicate a similar picture of improving efficiency as is reported by RSLs in their Annual Efficiency Statements?
  • With the increased disclosure required by the 2005 SORP, is a consistent picture emerging of the percentages of major repair costs that associations are capitalising?
  • What levels of inflation on management and maintenance costs is the sector experiencing?
  • Do the disclosures in the Operating and Financial Review compare across the sector and is there any emerging best practice?
  • To what degree are pay rises exceeding the average for the country as a whole?

We are planning to report on our findings and conclusions in the next RSL issues.

If there is a particular issue that you would like us to investigate, please contact Emma Brett on 020 7131 4403 or at

Housing association seminar reminder

Our Housing Association seminar will address anticipated developments in financial reporting. With the publication of the SORP 2007 Exposure Draft there are, potentially, significant changes ahead.

The speakers will comment on current taxation and VAT issues for RSLs and will include consideration of a range of issues arising from our recent reviews of business plans. The seminar will also include an overview of some of the employment issues arising as a result of consolidating group structures, mergers and contracting with public sector partners.

Who should attend?

Finance directors and senior members of the management team and those looking for informed discussion on topical housing issues.


Thursday 30 November 2006


Smith & Williamson

25 Moorgate

London EC2R 6AY


Gemma Smith
020 7131 4328

We have taken great care to ensure the accuracy of this publication. However, the publication is written in general terms and you are strongly recommended to seek specific advice before taking any action based on the information it contains. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. © Smith & Williamson Limited 2006.

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