On the money

Consultation has just ended on ODPM proposals on accounting for leaseholders’ money. The proposals provide information to leaseholders from 1 April 2006 regarding annual statements of account, accountants’ certificates, and summaries of rights and obligations.

They have been drawn up to protect leaseholders in the private sector from being exploited by their landlords. However, if applied to local authorities the proposals will require many accountants to implement them at extra cost to the authority, possibly for no benefit. Worse still, if leaseholders consider that the authority has failed to comply with the requirements, they can withhold their service charges – with potentially major financial implications to the Housing Revenue Account (HRA). Local authorities have expressed serious concerns about the proposals.

Essentially the ODPM proposals fail to understand the local authority accounting regime and how their councils already supply leaseholders with good quality information. To illustrate my point let us first consider the position of a private landlord.

If a private landlord owns several blocks of flats let to leaseholders, he or she needs to ensure costs and income are properly accounted for in respect of each block to ensure leaseholders pay the correct charge for the block they occupy.

On the other hand, local authority accounts have been constructed on a different basis. The HRA is a ring-fenced account whose format is prescribed by the Local Government and Housing Act 1989. The format is different from the ODPM’s proposals, which seek information on groups of dwellings. The accounting systems in councils are based on services delivered – for example, estate management, caretaking and communal energy.

If leaseholders consider the authority has failed to comply, they can withhold their service charges – with major financial implications

Where properties are sold on a leasehold basis (for example, flats), the common parts such as stairwells, grassed areas and lifts remain in the HRA. The associated costs continue to be accounted for in the HRA and are recovered by means of a service charge. Certain charges can be identified at a block level, for example communal repair items. Other items can only be accounted for at a higher level across several estates.

Costs relate to both tenanted and leasehold property because there is no way to split these costs. When service charges are being calculated, councils ensure that there is a calculation for leaseholders showing how the cost is apportioned to the individual property. There are proper audit trails. If actual costs are lower than the estimate, then the leaseholder is refunded the money.

Local authority accounting systems for the HRA are constructed on a totally different basis from the proposals outlined in the consultation paper. If these proposals are implemented then councils will need to retain their existing coding structure to comply with statutory reporting requirements. In addition they will have to create an entirely new coding structure to reflect the new requirements, probably based on the number of blocks in the housing stock. This could necessitate the creation of around 1500 cost/income centres in large authorities. The accounting for these will mean extra staff (mainly accountants), IT system maintenance costs and printing costs.

Councils consider they already supply good quality information to leaseholders using existing accounting systems. As a result we can only hope that the ODPM will ensure that the accounting requirements ultimately prescribed for local authorities are based on their current accounting arrangements.