APPENDIX 2 DEVELOPING A LONGER TERM 'CORE' COSTS APPROACH
Why a longer term approach is required?
1. In sections 5- 7 in particular, the Guidance sets out the current approach to allocating HRA cost and income and proposes some incremental measures that will lead to greater transparency in the short-to-medium-term as required by the Scottish Social Housing Charter. However, a longer-term, more structured approach is highly desirable to 'normalise' transparency within housing revenue accounts. This approach could take many forms and this Guidance is effectively a starting point for further work on improving transparency to levels that all social housing tenants are entitled to under the Charter. We are including material in this appendix not to outline current policy but to bring forward dialogue between councils, tenants and other representative bodies as to what might be required in future to deliver further, significant and permanent improvements in financial transparency.
Building on existing research and ideas
2. Research carried out for the Department for Communities and Local Government ( DCLG) in England by the Housing Quality Network (HQN) could suggest a way forward Scotland. The work was done in the lead up to change from the long-established housing benefit subsidy system in England which involved a degree of financial inter-dependency between housing revenue accounts across England to the introduction of 'self-financing' HRAs (which commenced in April 2012). The research has adopted a three-way classification which could, with further refinement, be adopted and then adapted for Scotland.
3. This alternative approach uses the following classification as laid out in the research for DCLG:
i. 'Core' services/costs - this might include 'traditional' landlord services, including repair and maintenance, rent and service charge collection and arrears recovery, management of repairs, lettings and allocations of HRA properties
ii. 'Core plus' services/costs - where it is difficult to gain a consensus around a strict definition of 'core' HRA costs, it may be necessary to itemise a range of services where there is a general expectation that council landlords will provide a service and where a proportion of cost might be met from the HRA e.g. tenancy support, contributions to corporate anti-social behaviour services
iii. 'Non-core' services/costs - such services might include providing non-housing maintenance of tenant gardens - unless a separate HRA charge is made for the service, street lighting, personal care services, homelessness administration
4. Scottish Government would also propose a fourth class of housing costs however which mirrors the legal and accounting treatment outlined earlier in Section 7 of the Guidance but which may straddle the 'core plus' and 'non-core' categories:
iv. General Fund (housing) costs - these are clearly not the responsibility of tenants and include areas as laid out in Table 6 in Section 7 of the Guidance. This category includes such things as private sector renewal and housing support services (formerly Supporting People). The reason for their inclusion is to differentiate between costs that are clearly HRA (or part- HRA) and General Fund.
5. Appendix 2 Chart 1 illustrates the relationship (as judged by Scottish Government) between these costs though, equally, other parties may see different possible graphical representations emerging.
6. Chart 1 essentially shows two things. The left hand side in blue shows that the more core/core plus/non-core and (incorrectly assigned) general fund (housing) costs are attributed to the HRA (moving outwards from the dark blue circle (A) to the light blue shaded circle (D)) then the greater will be the total costs in the HRA. However, significantly, the rental income (or service charge income or other income) required to balance these total HRA costs is shown in the right-hand hand side of the diagram. Other things equal, admitting only core costs into the HRA will involve collecting rental (and other) income equivalent to Area A. However, if progressively more costs are admitted to the HRA, the rental (or other) income that will have to be charged to balance the HRA lie somewhere between Area A and Areas A+B+C+D, other things equal. Councils should know, and tenants will be expecting to know under the Scottish Social Housing Charter, the size of the areas A, B, C and D as that will explain the make-up of their weekly rents.
7. Though not currently a legal or an accounting requirement, Scottish Government believes a greater degree of HRA cost classification of this kind is very much in keeping with the principles outlined in the Charter. We are therefore content to adopt the principle of such a classification so that further work can be carried out by stakeholders. The eventual construction and publication of a standardised accessible HRA income and cost spread sheets or databases based on these categories (in conjunction with using the existing legislative, CIPFA and Scottish Government Statistical Bulletin cost and income categories) would help illustrate the necessary methodology changes and thus bring further transparency. Some of the costs in such a database will include the (perhaps complicated or necessarily subjective) charges the General Fund has made to the HRA for whatever goods and services are provided internally such as legal services, human resources, IT, and finance services in Table 7 of Section 7 of the Guidance as well as the more 'objective' cost categories listed in Tables 4, 5 and 6 in Section 7 of the Guidance.
Previous HRA cost research in Scotland
8. Scottish Government has previously looked into this wider subject area with a selection of social landlords. An activity-cost benchmarking pilot in Scotland ran from June 2010 until January 2011. The evaluation of the HouseMark Activity Cost Benchmark Pilot (2011) which involved a number of local authorities reported the following on the calculation of such costs in section 3.16 of the report  :
"Several of the pilot participants reported difficulties with capturing financial data on central charges, office costs, and the costs of IT. The pilot experience highlighted to several of the participants how little they knew about how charges for central services are put together and whether they represented good value for money for their tenants. Several of the participants, particularly from local authorities, indicated that in the light of this, they may wish to have discussions with their central teams about these charges."
9. Indeed, the local authority landlord can in some instances, be very well placed to provide wider services for neighbourhoods and communities that go beyond 'Core' HRA services but the issue is whether the HRA (tenants); the General Fund (council taxpayers and taxpayers); or specific groups of local residents ( e.g. owner-occupiers) should be paying. The previous research into the HRA management and costs in England (which have not yet been verified by research in Scotland) found that:
"A large and growing proportion of management costs, perhaps up to 40%, are being incurred in 'non-core' service areas and whilst a proportion of these costs are recovered through a diverse range of income streams including grants, service charges and other contributions, the net cost of these services is significant and growing." 
10. Given the geographical complexities of delivering council housing services as outlined in Section 3 of this Guidance, this implies a greater degree of accurate cost allocation is more necessary now than it was a generation ago. Further research (local or national) and on-going discussions between councils and their tenants and accounting best practice organisations like CIPFA is therefore imperative if the costs are to be understood and allocated appropriately.
11. As noted in paragraph 8 in this appendix, the HouseMark evaluation reported that significant challenges to disaggregate HRA staffing information and time apportionment data across corporate functions. The proposed 'core/core plus/non-core/general fund housing cost categorisation provides an opportunity or indeed a framework to classify/record some of the more complex or contentious cost apportionment or internal re-charge issues which can then be discussed and decided on by each local authority in consultation with tenants.
12. There is recognition that this may initially be a time consuming process in some cases given the (likely) variable practice in existing cost accounting arrangements. Scottish Government also recognises that process is made more complex by the recent removal of ring fencing of certain local government expenditure, the development of single outcome agreements for business improvement, more corporate business delivery models and mixed tenure subsidy models. All of these could be said to militate against the splitting of costs between the HRA and General Fund but once again, these are not reasons not to try and improve transparency in the HRA. Indeed, they make the objective of accuracy in apportioning costs even more important.
Moving to a clearer approach
13. Scottish Government's objective, and indeed on the balance of comments received from respondents when asked in the limited consultation, was that further research, evidence and clarification is required to reach a consensus between all local authorities on the cost items that would fall under each of these categories. This categorisation could have significant implications on how costs are currently recorded within individual HRAs but, whatever the outcome, it will require all local authorities to have a more detailed understanding of how HRA funded services are being delivered and to whom they are being delivered. Knowing these metrics will be of great value to each council and their tenants and is something that will be highly desirable, if not essential, under the Scottish Social Housing Charter.
Email: HRA Guidance