Six financial themes social housing will need to consider in 2021
The COVID-19 pandemic has have far-reaching consequences for social housing providers. We have been spending time speaking to social housing providers and six key themes are emerging that providers will need to consider in the second half of the year.
Financial modelling will be more important than usual. We recommend using scenario planning techniques where there are uncertainties. These allow you to stress test your “normal” model with the potential impact of, for example, a further lockdown, slow paying debtors, lack of assignment fees and lease extensions. If you prepare these in sufficient detail, you will be able to see quite quickly the sensitivity of the model to different assumptions.
Some Associations will have sufficient reserves to allow them to react comfortably to the crisis, whilst for others the economic impact could have an unsustainable outcome. It is crucial for Board members to know if they are in this position with sufficient time runway to be able to make important decisions.
As the crisis continues, the long-term impact on the UK and worldwide economy could mean that, debt collection becomes more difficult. Associations should ensure their credit control functions are more robust than ever and Board Members should decide on their policy to deal with non-payers arising from the impact of COVID-19 on their personal circumstances.
The current crisis has meant many changes in our working practices with fraudsters taking advantange of the COVID-19 pandemic. We would recommend that Associations review their operating policies and controls to ensure that they are still fit for the current environment and update where necessary. This is particularly important where teams are still working at home. Communication is more key than ever to ensure those double checks are still in place. Specific attention should be paid to the controls in place and whether they adequate to reduce the risk of fraud. There are some helpful virtual fraud training sessions available and it may be a good idea to ensure all the finance and executive team undertake one of these to remind them of the need to be constantly vigilant.
The sector was already moving towards paperless working, with documents stored digitally and accessed across the organisation. The lockdown has pushed forward the need to become completely paperless requiring robust document management systems. Communications are likely to become increasingly online and it is important that all Housing Associations review their data strategy to ensure it is serving the needs of the organisation (both internal and external) and is GDPR compliant.
It is likely many organisations will have evolved and adapted over the past 14 months. It is important for the Executive team and Board to re-visit the risk register to ensure it is still fit for purpose. The risk of a global pandemic, the potential impact on the organisation and mitigating actions were probably not on your risk register prior to March 2020. Make sure you spend time horizon scanning – think about any other risks which might be missing.
Gift aid from subsidiaries
We have previously highlighted the rules regarding the payment of gift aid from a trading subsidiary within 9 months of the year end in order to claim relief from corporation tax. This payment must be made in cash and there must be sufficient reserves to allow the subsidiary to make the payment. The consequences of COVID-19 could mean that there is a significant trading loss in the current period which means that the subsidiary no longer has sufficient reserves to make a donation to relieve the tax on prior year profits. In this instance, there are options available to the trading subsidiary, for example a carry back of trading losses to reduce the taxable profit in the previous period instead. However, these options do need to be carefully thought through to ensure the Association does not unwittingly end up in a position where it is lending funds which might not be seen as in the best interest of the not for profit entity. Each situation will be different, and we recommend the expected outcome is modelled carefully to ensure tax is not paid unnecessarily.
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