Happy Halloween! Welcome to another edition of the monthly snapshot.
This month we’re looking at the Sector Risk Profile 2022, political campaigning by charities and more developments around the sector.
Sector Risk Profile 2022
The Regulator of Social Housing (RSH) has published this year’s Sector Risk Profile (SRP). This continues to be an important read for all working in the sector, but particularly for leadership teams and non-executives. This year’s publication highlights new struggles that many registered providers (RPs) have faced as a result of the Russian invasion of Ukraine, the rise of inflation and the Government’s plan on capping social housing rent increases.
The SRP also recognises a number of other key risks across a range of themes that will be familiar:
- Strategic risks: When setting strategic direction, boards are facing an uncertain operating environment particularly where many mitigation plans have already been implemented. Investment in existing stock is required to respond to changing building and safety standards while the demand for new homes continues to climb. In order for RPs to increase turnover and supplement rental income and grant funding, which will in turn enable reinvestment into social housing stock, RPs continue to branch out into non-social housing areas such as market sales, student housing and specialist care. Boards should consider whether they have the required skills, information and advice in that sector before diversifying. Check out our upcoming webinar on diversification and our recent Governance Spotlight: Charitable RPs – your charitable status needs to feature in your strategic decision making.
Shortages of skilled labour workers are also causing delays in planned construction and maintenance of properties as well as making it difficult for RPs to meet energy efficiency and building safety targets.
- Existing Stock: There has been a significant increase in tenants requiring housing repairs and maintenance works since the COVID-19 pandemic as people’s working patterns and lifestyles have changed, resulting in more wear and tear in their homes and the greater use of utilities and appliances. Boards need “comprehensive, robust, and up-to-date stock condition data” to make informed decisions while at the same time ensuring that repair and maintenance services provide value for money. From April 2023, the new Tenant Satisfaction Measures will come into force and RPs will need to start collecting data to support these measures. Boards should ensure that they have strong governance arrangements in place to continue to manage effective delivery of services to tenants and maintain compliance with consumer standards.
- Finance and treasury management: The increase in interest rates has led to RPs taking advantage of the previous low interest rate by fixing more than 80% of their debt. A substantial amount of RPs still have a significant proportion of debt at variable rates. Boards should ensure risks from existing debt are managed and ensure that appropriate treasury management and governance processes are in place to effectively monitor existing loan covenants to mitigate the risk of breaches. The failure of RPs to manage interest rate exposure can lead to reduced capacity to deliver new developments and capital investment in existing stock. Boards should ensure that decisions around which debt funding option is right for their business stems from their activity, rather than the other way round and that they have the skills and expertise to understand and effectively challenge financial advice.
- Rents: RPs should review their business plans in light of the government’s proposals to cap increases in social rents from April 2023. When implementing mitigations, RPs should prioritise statutory obligations on safety and key service delivery while maintaining viability.
- Inflation: RPs will also need to assess the impact of increased inflation costs and the further increase in energy prices - failure to do so could impact on business resilience, with reductions in free cash flow, margins, and interest cover. Boards will need to fully understand their cost base and capital requirements and have a clear prioritisation approach to ensure continued delivery of essential services and safety.
Read the Sector Risk Profile 2022 in full here.
Charities, politics and campaigning
Given the rather ‘scary’ political climate recently, along with the various challenges outlined above, you may be considering how to refocus your campaigning activities to best effect.
For RPs that are charitable, there are some parameters within which you are entitled to participate in political activities. The principle is that an organisation will not be charitable if its purposes are solely political, particularly party political. This principle is widely interpreted to the extent that a charity is not permitted to undertake activities that could even be perceived by the public as being party political.
However, you are permitted to engage with a political purpose where this is ancillary (linked) to your main charitable purpose. Campaigning and political activity can be legitimate and valuable activities for any charity – particularly at the moment where there are proposals that will have a significant impact on beneficiaries and finances. Such activities must be carried out in such a way as to simply support the delivery of your charitable purposes.
Applying this rules to charitable RPs - campaigning for the Government to provide more and/or better affordable housing is perfectly acceptable, because the purpose of this is absolutely aligned with your charitable objects, and it is not intended to persuade towards any voting behaviour. This is particularly true in light of the ongoing energy and housing crisis as the issues at the heart of these campaigns become less and less political.
Charities participating in political activity will need to be alert to the regulations set out in the Elections Act 2022 which obtained royal asset in April of this year and brought into force a number of significant changes. Prior to this Act coming into force, charities who spent more than £20,000 on activities intended, even partly, to influence an election outcome (known as the ‘purpose test’) in the twelve months leading up to that election (known as the ‘regulated period’) were subject to additional compliance regulations. The 2022 Act has introduced a new lower threshold so that charities who spend more than £10,000 in this way will also be caught, albeit by less onerous regulation.
In these times of political uncertainty, it is worth highlighting that the ‘regulated period’ can apply retrospectively and therefore charities could suddenly find themselves caught by the regulations if an election is called at short notice. When considering whether a charity’s activities satisfies the ‘purpose test’, the tone, content and timing of the activities will be taken into account, together with a consideration of whether the activities involved a call to action to vote.
If you are considering any changes to your policies or strategy in this area, we’re always happy to provide guidance and tips about how to strike the right balance – do get in touch with one of the team.
FAQs – Am I dormant?
Welcome to our monthly FAQ section where we spotlight some of the more common topics that you have been asking us to advise on. We have received a number of questions around the requirements for dormant subsidiaries and we have set some of these out below.
Does my trading subsidiary qualify as dormant?
If you are unsure whether your company is dormant or not the general rules is that a company is considered dormant during any period in which it has no significant accounting transaction. The following are considered not to be significant accounting transactions:
- a payment for shares in the company by taken by a subscriber to the memorandum of association;
- a fee paid to the Registrar of Companies on a change of company name, the re-registration of the company or filing of annual returns; and
- payment made to the Registrar of Companies as a penalty for failure to file accounts.
Other than the transactions listed above, there is no minimum exemption for what may amount to a "significant accounting transaction". If your trading subsidiary has not carried out trading this financial year, then it will likely be in a position to claim dormant status. If this is the case, then for the remainder of the financial year 2022/2023, care should be taken to ensure the company does not pay any fees (including audit fees) or carry out any other significant accounting transaction other than those listed above.
Does my dormant company have to file accounts?
A dormant company may be exempt from filing audited accounts. To qualify for such exemption the company’s individual accounts for the financial year in question must meet all of the following requirements (for most of our clients where the parent is the sole shareholder and the first bullet is satisfied then the rest of the requirements will apply automatically):
- the company has been dormant since the end of the previous financial year (i.e. the company should seek not to make any “significant accounting transactions” from 31 March 2022 (the last day of its current accounting period) onwards; or
- the company is entitled to prepare its individual accounts in accordance with the small companies regime in relation to that year, i.e. it meets at least two of the following criteria:
(a) annual turnover must be not more than £10.2 million;
(b) balance sheet total must be not more than £5.1 million; and
(c) average number of employees must be not more than 50; and
(d) it is not required to prepare group accounts for that year; and
- during the financial year, no request for an audit has been made by 10% of its members; and
- it includes certain prescribed statements on the balance sheet above the director's signature, to the effect that:
(a) For the year in question the company was entitled to exemption under section 480(2) of the Companies Act 2006.
(b) The members have not required the company to obtain an audit in accordance with section 476 (which permits 10% of members to make such a request).
(c) The directors acknowledge their responsibilities for complying with the Companies Act 2006 requirements for accounting records and preparation of accounts.
The filing of dormant accounts will still be necessary – this is true even if you have a registered society in the group that has transferred its engagements but is not yet capable of cancellation from the FCA Mutuals Society Register.
Our monthly review of regulatory upgrades/downgrades/regrades in the sector has highlighted the following themes:
- Breaches of the consumer standards resulting from:
- not having carried out remedial actions identified in fire risk assessments;
- not having up to date records of health and safety compliance in relation to gas, electrical asbestos and water safety; and
- not having an effective system in place to meet statutory health and safety responsibilities.
It’s been a slightly quieter month for sector gradings this month but we are expecting some movement in this area in the coming weeks. The deputy chief executive of the RSH, Jonathan Walters has recently confirmed that dozens of landlords are expected to be regraded from next month.
Have you booked your place?
The next in our Fit For Purpose webinar series will take place on 3 November, 11am - Midday. This webinar will look at Managing risk in diversified activities, with guest speakers from KPMG and Nottingham Community Housing Association. Book your place
Are you attending the NHF Audit & Risk Conference in Birmingham on 15-16 November? Sarah Greenhalgh, Partner in our governance team will be in attendance and would be delighted to organise a chat with you.