RP Issues - A Briefing For Registered Providers Of Social Housing (Spring 2010)

Editor's Comment - Testing Times

This edition of RP issues covers a wide range of topics of particular significance in today's challenging times. The core theme of value for money pervades all of the articles; it highlights the importance of an awareness of cost pressures and the difficult state of Government funding, particularly for housing, and the need to avoid unnecessary cost.

This in turn feeds directly into the need to evaluate whether group structures really do add value, and the care all Associations need to take when bidding for government related work not to take on avoidable pension costs. Another key theme is the very real cost of irrecoverable VAT that the sector has to bear, potentially set to rise further if VAT rates are increased, and the need therefore to ensure that you are taking advantage of appropriate reliefs and planning. In our experience, all too often insufficient attention is paid to this area leading to unnecessary cost.

We include two articles on future accounting changes; one makes some further comments on component accounting (it seems inevitably), which we covered in depth in our previous issue, and the other summarises the future changes in treatment of negative goodwill.

There is a very interesting article on motivation, which may well prove particularly important for organisations going through restructuring, or who are feeling pressures from drives to improve efficiency. We have also included a further reference to Brixx, which is now proving to be an invaluable modelling resource for many registered providers of social housing (RPs), and with which we have particular expertise.

Finally, we are delighted to welcome a guest article from a recently retired finance director, who has shared with you some of his ideas on how to improve financial reporting. Clearly, each organisation will need to take particular care in considering his innovative ideas on accounting policies and presentation.

Overall, there is so much in this edition of real significance to housing associations. In each case, we are outlining issues and solutions from a position of in-depth knowledge. Please do not hesitate to contact us if there any points you would like to discuss in more detail. We are really keen to help and look forward to your call.

OPTIMISING GROUP STRUCTURE FOR TAX PURPOSES

Thinking about simplifying your group structure? We look at how best to restructure for tax purposes.

In recent years, we have seen mergers between housing association groups which have led, in some cases, to very complicated structures. These often include a large number of entities, including charitable RPs, non-charitable RPs and non-charitable, non-RP companies. It was also fashionable in the late nineties/early noughties to create group structures that were 'ready for anything', with separate entities being created to carry out each activity of the RP group.

Apart from the administrative and governance issues that such unwieldy structures bring, they can also increase the rate at which corporation tax has to be paid by taxable group entities, give rise to the need to consider transfer pricing issues on inter-company transactions, and inhibit the ways in which profits earned by non-charitable entities within the group can be sheltered by gift aid payments.

There are therefore often compelling reasons to consider simplifying large groups, which may have evolved over several years and for several purposes. As a result, we are now seeing a trend towards the collapse of the larger group structures. Generally this is achieved by amalgamation or a transfer of engagements and undertakings and there are various reliefs available to make this as neutral as possible from a tax perspective. However, a review of the proposed restructuring is essential to ensure that no unintended tax liabilities arise.

In some instances, a group will contemplate a collapse of all operations into one charitable RP on the basis that there are fundamentally no non-charitable activities being undertaken. This may well be a risky oversimplification, as there are often grey areas for tax, particularly when considering shared-ownership or mixed-tenure developments. Such a charitable housing association may find its scope for certain activities restricted, or else that it has inadvertently generated non-charitable (i.e. taxable) profits, which, for a charity, cannot be sheltered by a gift aid payment. It should also be remembered that there is often a disparity between what activities are acceptable for a charity to undertake for legal/regulatory purposes, and what will qualify for tax exemptions.

Is there an optimum structure for tax purposes for a housing association group? It would need to minimise the number of active companies and allow sufficient flexibility with regard to the activities that can be carried out, and the ability to shelter taxable profits by way of gift aid. This would probably comprise a charitable RP (usually the parent company), a non-charitable RP, particularly for shared-ownership and mixed-tenure developments with a potentially non-charitable element, and a non-charitable, non-RP company for any activities of the group which may not sit well within an RP, or where it might be preferable for them to be carried out in an unregulated environment.

VAT should also not be overlooked. Often the overall recovery rate can be enhanced with a careful review of the group structure, perhaps by introducing a non- VAT group development company.

To an extent, this 'optimum' structure presupposes an ideal world, and there may be other configurations that will be equally workable. The most important point is that any restructuring exercise should always include consultation and advice on the tax consequences of the proposals, even in a largely charitable environment. This will ensure that no unforeseen tax issues arise, either when the restructuring occurs, or subsequently, in the operation of the new group.

A BLEAK OUTLOOK FOR SOCIAL LANDLORDS

We look at what the future holds for RPs now that we are (for the moment at least) out of recession.

Technically, the recent increase in GDP of 0.3% means that the economy is now out of recession. But as we look to the future – and putting aside fears of a double dip recession – what can social landlords expect from the economy and the Government?

Unemployment

The worst aspect of any recession is the human cost of unemployment: lives put on hold, childhoods blighted and for some youth unemployment moves seamlessly into long-term unemployment.

There is also the financial cost to consider: not just unemployment benefits and housing benefits, but also the wider support which higher levels of unemployment requires to mitigate its effect. And while people are unemployed they are not creating wealth.

So, what now? Regrettably, the story is a rather pessimistic one. In the last two recessions, unemployment lagged GDP and continued to increase even as the economy started to grow (shown in figure 1). If unemployment follows the same trend this time around, the headline rate could easily increase by a further 2% of the work force. That would imply a further 400,000 people becoming unemployed over the next six months and potentially remaining unemployed for at least two years.

Unemployment always seems to bear down hardest on those who are in lower-paid work and so social landlords need to be braced for more tenants falling out of work. Housing benefits should protect the rental income in the longer term, but inevitably the transition from paid employment to benefit claiming is not easy. Social landlords will need to offer more support and assistance, and may also face an increase in rental debtors while housing benefit claims are resolved.

Government Spending And Public Debt

The treasury estimated that the recession will reduce the national income by 5.2%, which will increase the public sector deficit by some £73bn. In the short term, this hole is being filled by increased Government borrowing, which will push up the overall forecast debt requirement for 2009/10 to an incredible £177.6bn.

The current Government expects to reduce the deficit and the borrowing requirement in the following ways.

Through the effects of economic growth, which is assumed to resume at an annual rate of 2.75%. Such growth will increase the tax take and should, in time, reduce the cost of social benefits. By implementing a fiscal tightening regime which will reduce the gap between Government income and expenditure by £77bn over the next eight years. This will be implanted by tax rises and by freezing outgoings at current levels, i.e. a reduction in total spending in real terms. The Impact Of Fiscal Tightening

Fiscal tightening will be felt throughout the economy. Currently, there is a lack of clarity as to exactly how and where reductions in spending will arise. This is partly because some of the tightening is expected to be...