It was long recognised that the Housing Revenue Account (HRA) borrowing cap was a major obstacle for councils seeking to build new homes. It was therefore met with applause that Theresa May announced that the cap on how much councils can borrow against their housing revenue would come to an end swiftly before the end of October 2018. Since then, a PublicFinance snapshot survey has revealed that a staggering 93% of councils across England are planning to borrow more to boost activity.
What does this mean for local authorities?
This is welcome news indeed for local authorities who were forced to look to complex structures to try and deliver council housing whilst being restrained by the borrowing cap and we have certainly seen some interesting structures proposed in that environment. Fortunately, local authorities can now look again at such structures and concentrate more on substance and achievement of outcomes rather than a contrived form.
A number of structures are available to local authorities to deliver such housing. The most obvious is direct delivery or direct commissioning, albeit different risk structures can be employed to secure a joined up approach. Some favour models that start with the end in mind, looking at the maintenance and rental risks alongside the design and build risks and employing structures such as Design, Build, Operate and Maintain contracts to minimise risk whilst maximising outcomes. We have employed this model to excellent effect for local authorities, housing associations and the private sector. Also, whilst commercialisation has caused authorities to look at innovative ways of investing in and delivering housing, one cannot ignore this most simple and tax efficient form of delivery. If a local authority doesn’t deliver through a company limited by shares, then it also doesn’t pay corporation tax and it doesn’t pay income tax on its shareholder dividend or the expenses that can relate to having a further corporate entity to keep running.
In other circumstances, corporate entities can be useful, as they have the potential to provide focused delivery, proactively respond swiftly to market changes and work outside of the EU procurement regime. They can also generate an income stream for a local authority keen to lend cash at market rates to the company and potentially allow the authority to off-set some of its back-office costs, by way of an arm’s length service level agreement with the company. Also, if the motivation to deliver housing is not commercial, then the limit on the s1 and s4 Localism Act 2011 ‘General Power of Competence’ of doing so for a commercial purpose through e.g. a share company won’t apply, and the authority can chose to use an LLP which is tax transparent and hence more tax efficient.
The right structure for the right reason
However, the right structure needs to be chosen for the right reason. It should not be chosen to circumvent limits placed on the authority by local government. The greatest benefit with this announcement is that there are no perverse incentives for authorities to set up artificial structures to deliver social housing. They can deliver such housing alongside other forms of housing (affordable and shared ownership, private for rent and sale), on their own or in partnership with others (private sector, housing associations or other Registered Providers), in a way that makes most sense for the circumstances whilst being cost and tax efficient – that has got to be good news!
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