Thursday, 6 August 2015

how will 'social' market rents work?

how will 'social' market rents work?

Implementing market rents for social tenants will be a complex process.  There needs to be a consultation on how it will work and then  an implementation process that may well involve some complex computing issues.  l'd put money on the earliest start date being April 2017.  A go live date of April 2018 or later wouldn't surprise me though!

What are the issues?

Firstly, who is going to be affected - who could see their social rent move to a market rent?

What we don't know at the moment is whether we are talking about individuals (the main bread winner at the property) being the driver for triggering a market rent or not. 

Even if the scenario was the named tenant on the tenancy agreement the market rate trigger was based on, what if it was a joint tenancy?  Would it be both the named tenants or just one of them?  Would it be an average of the two?

Also what if the named tenant was not the main bread winner but someone else on a higher income lived at the property, either temporarily or permanently, what would happen then?

If l was having a punt, I'd speculate that it will be a concept of the two main incomes or total income coming into the property being the trigger for market rents.

This is on the basis that the whole idea of moving properties to market rents must be either to encourage right to buy or to get a better return on public assets or both.  So a model that sees more addresses impacted by the policy is likely to be the model of choice at the end of the day.

Consequently, l think the £30,000 income threshold will be based on either the 2 highest incomes or total household income.  The original consultation leading to council's having the discretion to introduce market rents for households with income over £60,000 included this 2 highest incomes as the trigger. 

To my mind, when a £30,000 income figure is quoted it makes you think of top end skilled manual workers and experienced teachers.  However the net for moving social tenants onto market rents could be much wider than this if we are talking about household incomes rather than individual incomes.  The model with the widest impact would be based on TOTAL household income.  It might surprise many to find that potentially it could lead to market rents being enforced for households on minimum wage.
The national living wage will be paid to all workers aged 25 and above. Initially, it will be set at £7.20 an hour from April 2016.  There is a target of it reaching more than £9 an hour by 2020. Both part-time and full-time workers will get it.  Pretty much any full time working couple in social housing would find themselves paying a market rent based on these figures.
When you think about it £30,000 / 2 is an income of £15,000 per year.  Based on a 50 week year this is £300 per week.  Two people working a 40 hour week on only £7.50 per hour would trigger a £30,000 market rent in this scenario.  Please remember the living wage will be £7.20 next year but it will move to £9 by 2020.  It wouldn't be an exaggeration to say any full time working couple could trigger a market rent if it were based on a combined income of £30,000.

Even with the current minimum wage, the national minimum wage for workers over 21 is £6.50 per hour.  If the market rent assessment is based on joint incomes it would impact on anyone earning £1 per hour over minimum wage based on these figures.
Even on current minimum wages the 'hard working' family working long hours, often spoken about by politicians, could easily top a family income of £30,000 per year.

But what are the logistics of implementing market rents?


Firstly, Council's and housing associations currently don't know what people earn.  so they couldn't implement this on their own or without changes.

The simple option would be self-assessment and declaration of income by tenants. It could be done by making tenants legally responsible for declaring if they earn over £30K either individually or jointly depending on whether the £30K is a joint / family figure or a top earner figure.  There would be a risk of non-disclosure people might be confused as to what they earn on an annual basis.  They could be confused about whether it is based for example on this year or last year or a rolling year or on how to allow for over time, contractual or otherwise and the timing of annual bonuses.  Then you have potentially a new cottage industry of identifying and prosecuting deliberate non-disclosure.  I don't think government will go down this route.

I see two options
Option 1

Option 1 or a variant on it, is the only option if the calculation has to be based on household rather than individual incomes rather than couples or families.
In this scenario the council / housing association supplies HMRC (the tax man) with details of who lives in all the properties, essentially their names and national insurance numbers. 
HMRC would then have to data match with income figures.  I think they'd then look at income in the last twelve months or for self-employed what it was on their last tax return.

Individuals / couples (depending on the rules) earning over £30K would then go on a list sent back to the council.

The council would notify people of higher charges, make the extra charge and then send the extra back to HMRC.

Obviously there would need to be national standards for software for the file transfers and software both for the housing providers and HMRC would need to be written.

An obvious problem would be people dipping in and out of the £30K limit.  When incomes changed I'd imagine this would have to be taken up with HMRC like a tax code query.  The housing provider would have to keep charging the higher rent until told to do otherwise by HMRC.  This would put financial pressure on people forced to pay the higher rent until the provider was authorised to make the adjustments.
Refunds may prove complicated.  it would be an overpayment of rent by the tenant, and an overpayment by the housing provider to the revenue.  Who would be responsible for sorting things out?
You could easily see people caused problems by this if their income dropped.  They could end up not paying the rent or not paying the extra until the mess was sorted out.  This would lead to arrears chasing and costs to tenants and housing providers.

Clearly there will be a whole new layer of rent changes having to be undertaken by providers, and extra admin work caused by the new system as people moved in and out of arrears?  If market rents aren't paid in full who would be deemed not to have been paid, the housing provider or the treasury?  We'll need rules to cover this too.

A simpler option, which probably only works if the £30K figure is applied to the main bread winner would be to do it through the tax code.  There could be a second suffix applied to the code.  For example rather than a code of 200L all codes could have a second suffix 'M', e.g. 200LM.  If someone has an 'M' after their code they pay the market rent rent.  However, without a national file transfer system letting the housing providers know the tax codes the system would have to rely on tenants telling providers if their tax code has changed. 

The Market Rent by default option

What about the option of putting everyone on a market rent unless they can prove that their income in the household is below £30k?
Historically, HMRC have always been reluctant to give up any information; there are around 60% to 70% of tenants on benefits so their income is known, that leaves a little under a million households nationally who could fall into the market rent category.  An option in legislative terms would be to put their rents up and let them prove whether or not they should not be charged.  HMRC could even calculate how much they expect from every council with an HRAs on a quarterly basis.  As for non-collection (see also below) HMRC could build a collection rent into the figures.  Failure to hit the target would then be a problem for the council not HMRC.  Councils could find themselves on the sharp end of a financial loss if they failed to collect as much as had been specified!

What will the market rents be?

Again this will require new work, new software and new link ups between local and national systems.  I'd imagine it would be the local valuations offices (District Valuer) who would have to make the calculations across the country.  There might be scope for appeals, which would be a new level of bureaucracy, as people contest market rents set against their homes.

Housing providers will need to provide the district valuer with lists of addresses.  The DV will have to carry out the valuations and inform the provider.  The provider will have to load the 'shadow' rents and then apply them based on the information from the revenue if a market rent was triggered.

All the above will require new software, new administrative processes and extra administration staff and legal action for non-payment of market rents across the country.

What happens with arrears?
Will housing providers be liable to pay HMRC when the debit is raised or when the rent is paid?  If it is the former the provider might be liable to hand money over to HMRC even if the tenant hasn't paid the rent!  Could we end up with credits going back and forth between providers and the HMRC.  Money could be paid over by providers, refunded by HMRC and then paid back by the provider if the rent is successfully chased at the end of the day.

I think the conclusion is the execution of the idea will be way more complex than the idea itself, and having got to the end of this I've reached the following conclusions:
  • If the £30K limit is applied to households rather than individuals it is likely to impact on a high proportion of all households with two full time earners
  • Irrespective of all the housing and policy issues, I think it will generate masses of administrative work for social housing providers, the HMRC and the District Valuer
  • tenants losing overtime or jobs will have the double blow of waiting for their rent to go back to social rent levels, adding to budgeting problems
  • arrears are likely to go up as housing providers will have to chase higher rents

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