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Against the spirit of self-financing Matthew Warburton - 11/10/2013

loophole_300It was reported this week that three English councils have transferred a total of £34.5 million out of their HRAs to relieve financial pressure on their General Funds. In doing so, Manchester, Oxford and Dover used urgency powers to take advantage of a loophole in the law before it was closed.

They relied on a provision in the Local Government and Housing Act 1989 which allows councils no longer receiving housing subsidy to transfer their HRA balances to another account. The section of the Localism Act repealing this provision [under Commencement order No 9] did not take effect until 1 October.

Opinion is divided on the legality of these transfers. All three councils received advice that they were legal, although CLG is reported to have said that it is "looking into the appropriateness of these transfers" and "considering next steps". The relevant part of the 1989 Act [Schedule 4, Part III, paragraph 2] allows a council which is no longer receiving housing subsidy to transfer all or part of its HRA balances to another account. It was clearly originally intended to apply to councils left with HRA balances following large scale voluntary transfer of their housing to a housing association.

But replacement of the housing subsidy system by self-financing may have inadvertently extended its application to all councils with HRAs. What is clear is that, whether or not such action is within the letter of the law, Parliament clearly never intended the law to be interpreted in this way, and such transfers are completely alien to the principles of self-financing.

The intention of self-financing was that all councils with housing would be left, following a debt adjustment, with just enough rent income to support the management and maintenance and long-term repair of their housing stock, with any surpluses arising used for housing purposes to the benefit of existing or new tenants. Councils signed up to take on additional debt in exchange for a commitment from the Government to put an end to creaming off a significant part of rent income through negative housing subsidy.

It was never part of the plan to give councils the opportunity to milk HRAs in place of Government. It is clear that the councils in question, along with many others, are in acute financial difficulties. But the danger is that their action starts to push open a door that could lead to the unravelling of the self-financing settlement.

The timing of these decisions is not helpful. Also this week, CLG issued a consultation paper proposing to cap the charges that can be recovered from council leaseholders for certain repairs and improvements.

I will discuss these proposals in detail in another blog. But my immediate reaction is to argue that the government cannot dictate what repairs will cost, and if the appropriate share of those costs cannot be recovered from leaseholders, it will be tenants who have to pay. It is much harder, however, to take a high moral tone with a government which is proposing to go against the principles of self-financing and the HRA ring fence if even a few councils are seen to be doing the same.

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