Durham City Homes Non-Executive Board meeting 31 March 2014

Durham City Homes
Non-Executive Board
Monday 31st March 2014
4.30pm,
Thomas House, Meadowfield
Agenda
Report Type
Page
Number
3 - 12
1
Apologies
2
Constitutional forms for Stock transfer
Bill Fullen
Decision
3
Draft Offer Document
Marie Roe
Exempt item –
13 - 67
not for publication
4
Code of Governance
Bill Fullen
Decision
6
AOB
69 - 78
Date and Time of next meeting:
19th May 2014
Thomas House, Meadowfield
1
2
Agenda Item 1
Durham City Homes NonExecutive Board
31st March 2014
Constitutional Forms for Stock
Transfer
Report of Bill Fullen, Interim Managing Director
This Report is for: Decision
1. Purpose of the report
1.1. To seek shadow board agreement that the parent company is established
as an Industrial and Provident Society (IPS) with charitable rules, and
1.2. To recommend to the boards of East Durham Homes (EDH) and Dale &
Valley Homes (DVH) that they convert to IPS’s with charitable rules
1.3. To recommend to the Council that Durham City Homes (DCH) is
established as an IPS with charitable rules.
2. Background
2.1. The parent and the subsidiary organisations will need to adopt the
appropriate constitutional forms to enable the transfer of properties to the
new group and to ensure that the group adopts the most financially
beneficial arrangements.
2.2. The parent could be either a Company Limited by guarantee or an IPS.
There is no need for the parent to be a charity if it is not the landlord.
2.3. There are two realistic options for the subsidiary companies:
•
•
Charitable companies limited by guarantee, registered with the Charity
Commission
Charitable industrial and provident society (IPS), with charitable rules.
2.4. In any event constitutional changes of some form will be required by the
subsidiaries as a result of stock transfer.
3
2.5. The shadow board at its meeting in February received a presentation from
Trowers and Hamlin on the advantages and disadvantages of the various
constitutional forms. A report prepared by Trowers and Hamlin based on the
discussion at the board meeting is attached at Appendix 1.
2.6. This was followed up with a joint session with all 4 boards on 10 March
2014.
3. Charitable Status
3.1. There are a number of benefits deriving from having charitable status
particularly in the stock transfer context. Many of these are specifically
related to taxation matters.
3.2. Charitable organisations are exempt from corporation tax on income from
their charitable activities. They also benefit from being exempt from Stamp
Duty Land Tax (although Registered Providers have this exemption whether
or not they are a charity) and having 80% relief from Non Domestic Rates.
3.3. One of the key elements of the Durham stock transfer is the use of a VAT
shelter. The background to the VAT Shelter is set out below:
• Registered Providers (RPs) formed through stock transfer were unable to
recover VAT payable on services received, including major works and
maintenance contracts. In 2003 a VAT Shelter scheme was devised to
enable RPs to benefit from local authorities’ VAT position. The scheme
has had the support of Government and the HMRC since that time.
• When a Council transfers its stock to an RP the sale contract refers to
“transfer of refurbished stock in a modern or good state of repair”. If this
state of repair has not been achieved prior to the transfer taking place,
the new RP transfer would take the stock with a contract obligation for
the modernisation at the Council’s expense:
i. This arrangement usually extends over the first fifteen years of the
new RPs Business Plan. This reflects the length of time the Council
would enter into an agreement with the new group of landlords.
ii. The new RP does not have to include the costs of the enhancement
works in its Business Plan and the purchase price of the stock is
effectively increased (as the stock appears to be in better condition)
with the Council receiving a higher receipt for its stock to pay down
its debt.
iii. The Council appoints the new RP to deliver enhancement works.
iv. Invoices raised by RP includes VAT which the Council can then
reclaim.
v. RP reclaims the VAT charged by contractors for the delivery of
enhanced works (Council and RP share the VAT shelter).
4
3.4. Given that a charity is not associated with profit making there may be a
reputational benefit in as much as there is clarity that any surpluses are
used in furtherance of the organisations aims.
3.5. There are however, some potential issues resulting from having charitable
status not least the need to be registered with the Charity Commission.
Charitable organisations are limited in terms of their activities and can only
carry out work that is consistent with its stated charitable aims. In addition
some tenants may have a negative perception if they are seen as
beneficiaries of a charity. Having said this, the majority of Registered Social
Landlords are charitable organisations and perhaps the significant financial
benefits arising from charitable status outweigh these issues.
3.6. In governance terms there are added responsibilities. Firstly once the
charity is established this is irreversible. Secondly there are enhanced legal
duties for directors which would give rise to additional training implications
around financial and legal matters.
3.7. Given the taxation benefits deriving from charitable status and the need to
maximise the use of the VAT shelter, establishing charitable status for the
subsidiaries would be recommended.
3.8. For the parent organisation there is no specific requirement for it to be a
charity and there may be some benefits for the group from having a profit
making entity. However having the parent as a charity can make the transfer
of services between the parent and subsidiaries and vice versa more
straightforward. There would also be the taxation advantages deriving from
being a charity. A number of established Registered Providers who were
initially non – charitable have converted to charitable organisations.
Primarily for the taxation advantages and the easier transactional
relationships.
3.9. This does not preclude the parent from establishing a non- charitable entity
to for example develop homes for market rent or sale at the appropriate
time.
4. Constitutional forms
4.1. Should the principle of charitable status be accepted then then both the
parent and subsidiaries will need to consider the most appropriate
constitutional form.
4.2. There are primarily two constitutional forms appropriate for a registered
provider:
•
•
Industrial and Provident Society (IPS)
Company Limited by Guarantee (CLG).
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4.3. The different treatment by the charity commission between an IPS and CLG
will impact on the most appropriate constitutional form.
4.4. An IPS is considered by the charity commission to be an exempt charity and
the registration requirements are significantly less onerous than for a CLG.
Registration for an IPS takes around 3-6 weeks as opposed to 3-6 months
for a CLG. On the face of it then, becoming an IPS with exempt charity
status is relatively straightforward.
4.5. The advantages and disadvantages of becoming a charitable IPS are as
follows:
•
Advantages




•
Common form for RP’s
Not for profit
No requirement for registration with the charity commission if an RP
Avoids dual registration
Disadvantages
 Conversion/establishment costs
 Registration with the FCA (3-6 weeks)
 Represents a change to the current form
4.6. The advantages and disadvantages relating to a charitable CLG are as
follows:
•
Advantages
 Keeps the same constitutional form as currently (for EDH and DVH)
 More widely understood than IPS’s
 Constitutional and Governance features are flexible
•
Disadvantages
 The need for dual registration with companies house and the charity
commission
 Registration with the charity commission - which can take 3 – 6
months
4.7. Clearly it would appear beneficial to have a consistent approach and there
are clear advantages to becoming an IPS as opposed to remaining or
establishing as a CLG. EDH and DVH would be required to convert from
their current status as CLG’s to an IPS. The parent and DCH would both
need to become established as IPS’s.
4.8. There are formal processes to be carried out in converting or establishing an
IPS along with registering as an exempt charity and we would be guided
6
through this process by legal advisors.
4.9. Clearly though, the timetable for achieving transfer is tight and in practical
terms the incorporation of County Durham Housing Group and DCH along
with the changes to EDH and DVH would not take place until after a positive
ballot result was achieved, thus leaving around six months to achieve
incorporation/conversion and charitable status. Given the lengthy time to
formally register with the charity commission if the CLG route is adopted any
delays would create a significant risk of the transfer deadline being missed.
4.10. At the meeting of all four boards on 10 March 2014 the advice from Trowers
and Hamlin was that the appropriate form of constitution for all four
organisations was an IPS with charitable rules.
5. The Direct Labour Organisation (DLO)
5.1. The Council is expected to discuss in May 2014 the principle that the
housing DLO should transfer in to the new group. The transfer could be
either in to the parent company or to one of the subsidiary organisations.
Should the DLO ultimately provide services to all subsidiary organisations
then there would be some merit in the DLO being part of the parent. Further
reports concerning the DLO will be submitted to the board in due course.
6. Recommendations
The Shadow Board met on 19/03/2014 and agreed::
6.1. that the parent company is established as an Industrial and Provident
Society (IPS) with charitable rules
6.2. to recommend to the boards of East Durham Homes and Dale & Valley
Homes that they convert to Industrial and Provident Societies with charitable
rules.
6.3. to recommend to the Council that Durham City Homes is established as an
Industrial and Provident Society with charitable rules.
Durham City Homes Non-Executive Board is recommended to:
6.4 agree that Durham City Homes is established as an Industrial and Provident
Society with charitable rules.
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Appendix 1: Implications
Finance – The financial implications are dealt with in the main body of the report
Staffing – there no direct implications.
Equality and Diversity – there are no direct implications
Accommodation – there are no direct implications for accommodation.
Crime and Disorder – there are no direct implications
Sustainability – there are no direct implications
Human Rights – there are no direct implications
Consultation – there are no direct implications
Procurement – there are no direct implications.
Disability Discrimination Act – there are no direct implications
8
Appendix 2
dated 6 March 2014
Durham County Council
Constitutional forms for the stock transfer landlords and
the proposed new parent
Trowers & Hamlins LLP
3 Bunhill Row
London
EC1Y 8YZ
t +44 (0)20 7423 8000
f +44 (0)20 7423 8001
www.trowers.com
1
9
Constitutional forms for the stock transfer landlords and the
proposed new parent
Introduction
At its meeting on 26 February the shadow parent board considered a
report and presentation on the constitutional forms for the new group
parent organisation and each of its three subsidiaries. The presentation
from Trowers & Hamlins highlighted a number of advantages, both
financial and practical, which led the shadow parent board to formulate
an 'in principle' decision that it favoured each of the proposed
subsidiaries and the parent organisation itself being incorporated as
industrial and provident societies with charitable rules. The shadow
parent board will be recommended to finalise that decision at its
meeting on 19 March. The purpose of this report is to briefly repeat, as
highlighted in the presentation at the 26 February meeting, the
advantages of the charitable IPS model for both the subsidiaries and for
the parent.
The subsidiaries
Charitable status
There are potentially significant financial advantages associated with
the subsidiaries being charities (registered with the Charity Commission
if taking the form of a company or currently exempt from registration
with the Charity Commission if taking the form of an industrial an
provident society). These are:
•
exemption from Corporation Tax on primary purpose charitable
trading;
•
charitable status is required in order safely to realise the benefit
of a VAT shelter;
•
mandatory relief at 80% of national non-domestic rates.
The key disadvantages of being a charity are the limitation on the
activities of the charity to only those activities in furtherance of the
charitable objects - but as discussed at the meeting on 26 February this
is unlikely to create any practical issues for the subsidiaries for their
present and anticipated future business activities and any future "non10
charitable" activities could be carried out through a trading subsidiary.
The other disadvantage is the enhanced duties for directors of a charity.
IPS or CLG
The main disadvantage of choosing a company limited by guarantee
corporate form is the potential delay in registration with the Charity
Commission which could take anywhere between three and six months
(although an industrial and provident society will still need to secure
clearance with HMRC).
The parent
IPS or CLG
If the parent is to be a charity then the potential delay in registration
referred to above would apply equally to the parent as it does to the
subsidiaries. Additionally there is merit in adopting a consistent
corporate form amongst all members of the group.
Parent as a charity or not
In addition to the general advantages set out above in connection with
charitable status for the subsidiaries there are a number of specific
reasons why the parent of a group of charitable registered providers
might also wish to be a charity and these are:
Transactions/relationships between group members is easier. Where
the parent is non-charitable, the subsidiaries always have to consider
whether the proposed transaction/relationship is appropriate between a
charity and a non-charity – for example, should the subsidiaries'
employees be providing services for a non-charity or should the charity
enter into a contract (service level agreement, for example) with a noncharity. Although the answer is almost always 'yes', the subsidiaries
need to be constantly aware of any potential issues arising, which
would not necessarily be the case if the contracts/relationships were
between charitable entities.
Often subsidiaries are called upon to give guarantees on behalf of a
non-asset owning parent company - for example, in relation to pensions
and contracts. This is an example of transactions between the noncharitable and a charitable subsidiary being made more complicated.
This is because in giving the guarantee the charitable subsidiary will
11
always have to be satisfied that the guarantee is being given in
furtherance of its own charitable objectives, bearing in mind the noncharitable status of the parent. If both the subsidiary and the parent
were charitable with identical objects then that decision-making process
would be much more straightforward.
Transfer pricing. Intragroup services supplied by a non-charitable
parent to its charitable subsidiaries will be subject to the transfer pricing
regime so that the parent is treated as receiving an arm's length fee for
Corporation Tax purposes. Therefore, although the parent might only
charge services at cost, for tax purposes it is treated as receiving full
fee which may give rise to a profit. The Corporation Tax rate is
currently 23% but is being reduced to 21% from April 2014 and 20%
from April 2015. If the parent were a charity then it may be able to
claim an exemption from any Corporation Tax arising.
Conclusion
There are a number of reasons why it would be appropriate for the
subsidiary organisations and the parent all to be industrial and provident
societies with wholly charitable rules.
Trowers & Hamlins LLP
6 March 2014
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Agenda Item 3
Durham City Homes NonExecutive Board
31st March 2014
Code of Governance
Report of Bill Fullen, Interim Managing Director
This Report is for: Decision
1. Purpose of the report
1.1. To recommend to the shadow board that the parent body adopts the
National Housing Federation’s Code of Governance.
2. Background
2.1. Reports elsewhere on this agenda have indicated the need for the parent
and proposed subsidiaries to adopt a recognised constitutional form to
enable transfer to happen and to enable registration with the Homes and
Communities Agency.
2.2. The Regulatory Framework for Social Housing suggests that providers
should adopt and comply with an appropriate code of Governance.
Governance arrangements should establish and maintain clear roles,
responsibilities and accountabilities for their board, chair and chief
executive and ensure appropriate probity arrangements are in place.
Areas of non-compliance with the chosen governance code should be
explained. Provider boards should assess the effectiveness of their
governance arrangements at least once a year.
2.3. Currently, both Dale & Valley Homes (DVH) and East Durham Homes
(EDH) comply with the National Housing Federation (NHF) Code of
Governance and as part of this compliance carry out an annual selfassessment and board appraisal.
2.4. To ensure a consistent approach across all organisations it would be
sensible if all adopted the same code of governance. The NHF code of
governance has been developed to specifically reflect the needs of
housing organisations and whilst there are other codes of governance
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which the board could adopt, the NHF code would appear to be the code
most used by housing organisations.
2.5. Given that DVH and EDH currently comply with the NHF code it would
appear sensible for all organisations within the County Durham Housing
Group to adopt the NHF code of Governance and to adopt this as a
framework for preparing for HCA registration. This would also enable the
Governance and Registration work-stream and task group to consider the
governing documentation required to comply with the code.
3. The National Housing Federation Code of Governance
3.1. The NHF code of governance is designed to support its members in being
excellent at governing their organisations and being accountable,
independent and diverse. First published in 1995 and most recently
revised in 2010, the code has been widely acclaimed as an example of
best practice.
3.2. The code is based on nine principles of good governance and sets out a
main principle and specific provisions for each of 12 aspects of board
behaviour and approach. Housing organisations who adopt the code are
expected to put the code into practice in a way that is appropriate to their
size and profile, and to provide explanations about any areas where they
do not comply. The code also contains extensive good practice guidance.
3.3. The nine principles included in the code of governance are:
•
•
•
•
•
•
•
•
•
Ethics
Accountability
Customer first
Openness
Diversity and inclusion
Review and Renewal
Clarity
Control
Structures
3.4. A copy of “Excellence in governance – Code for members and good
practice guidance” (NHF) is attached as an appendix to the report.
4. Preparing for HCA registration
4.1. Part of the HCA Registration criteria is that an applicant must meet or
demonstrate a reasonable path to meeting the governance requirements
14
of the Governance and Financial Viability standard.
4.2. In assessing what is a 'reasonable path' to compliance the HCA will take
a risk-based view on the level of compliance already demonstrated, the
nature of the actions needed to achieve compliance and the proposed
timescale for completing these actions. They will consider risk from the
perspective of tenants and also in terms of safeguarding public assets.
Applicants must demonstrate that they meet this standard, detailing the
action being taken to address this and any timescale for implementation.
This should include information on the code of governance the applicant
proposes to adopt and comply with and explaining where there are any
areas of non-compliance with the chosen code and any plans to secure
compliance.
4.3. Both DVH and EDH carry out an annual board appraisal and this has
enabled them to gain an external viewpoint of their governance
arrangements and using this as an opportunity to continuously improve. It
would be appropriate at this stage for all four boards to conduct a full
board appraisal, with a view to this supporting the HCA registration
process.
5. Timescales
5.1. Should the board accept the proposals contained in this report the
intention would be to conduct the board appraisal at the May 2014 board
meeting, with the results being reported to the July 2014 board.
5.2. The governance and registration work-stream has recommended that the
2014 board appraisal should be conducted with all four boards with a
view to supporting the registration process.
5.3. A key element of this work would be the production of an action plan to
provide all four boards with a “reasonable path” to meeting the
Governance standard.
5.4. EDH has agreed to carry out a procurement exercise to appoint an
organisation to complete the full board appraisal, on behalf of all four
boards (appendix 2). Costs will be shared between all four organisations.
6. Recommendations
6.1. The Non-Executive board is recommended to:
•
Adopt the NHF code of governance
15
•
Agree to complete a full board appraisal
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Appendix 1: Implications
Finance – The financial implications are dealt with in the main body of the report
Staffing – there no direct implications.
Equality and Diversity – there are no direct implications
Accommodation – there are no direct implications for accommodation.
Crime and Disorder – there are no direct implications
Sustainability – there are no direct implications
Human Rights – there are no direct implications
Consultation – there are no direct implications
Procurement – there are no direct implications.
Disability Discrimination Act – there are no direct implications
17
Appendix 2
County Durham Housing Group
Full Board Appraisal
Support Required
Introduction
Durham County Council (DCC) currently manages its housing stock using three
organisations:
•
•
•
Dale & Valley Homes (an Arms Length Management Organisation
(ALMO));
Durham City Homes (a department of DCC);
East Durham Homes (an ALMO).
DCC are proposing to transfer ownership of its housing stock to County Durham
Housing Group, which will consist of 4 legal entities:
•
•
•
•
County Durham Housing Group (CDHG) (Parent)
Dale & Valley Homes (DVH);
Durham City Homes (DCH); and
East Durham Homes (EDH).
To support the transfer, work is on-going to further develop the governance
arrangements of DVH and EDH and establish the governance arrangements for
CDHG and DCH. One aspect of this work will be to achieve registration with the
HCA.
A shadow board has been established for CDHG, which consists of 13 members:
•
•
•
•
4 independent members;
3 tenant members (one from each geographical area);
3 council nominations (one from each geographical area);
The Chairs of DVH, DCH and EDH
The shadow board has been meeting on a monthly basis since January 2014.
The governance arrangements of the existing three housing providers are as
follows:
Dale & Valley Homes
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DVH is an ALMO of DCC, incorporated in 2006, managing and maintaining
approximately 4,200 properties within the former district area of Wear Valley.
Its Board has 15 Directors (5 tenant/leaseholders; 5 independents and 5 council
nominations).
DVH endeavour to comply with the National Housing Federation Code of
Governance and have an annual full Board appraisal conducted externally.
Durham City Homes
DCH is the in-house housing service for Durham County Council and as such
does not have the same governance arrangements as the other organisations.
As the in-house provider Durham City Homes currently manages approximately
6,000 properties within the former Durham City Council administrative area.
The Non-Executive Board is a non-decision making body and is made up of 12
members (4 independent, 4 tenant and 4 elected members). As part of the stock
transfer process Durham City Homes is working in partnership with the Stock
Transfer team to ensure that its governance arrangements are registerable and
meet the requirements of the NHF Code of Good Governance.
East Durham Homes
EDH is an ALMO, managing and maintaining the housing stock owned by
Durham County Council within the geographical area of the former District of
Easington Council, approximately 8,300 properties.
The Board of EDH is made up of 15 Board Directors (5 tenant/leaseholders; 5
independents and 5 council nominations).
EDH endeavour to comply with the National Housing Federation Code of
Governance and have an annual full Board appraisal conducted externally.
Appraisal of the Four Boards
In preparation for the process of achieving registration as registered providers,
each board would like to assess its performance through gathering information
by an external assessor observing the Board at the following meetings:
•
•
•
•
CDHG – 7 May 2014 (commencing 6pm);
DCH – 19 May 2014 (commencing 4.30pm);
DVH – 20 May 2014 (commencing 6pm);
EDH – 22 May 2014 (commencing 6pm)
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and by asking individual Board Directors to complete a questionnaire on their
view-point of 3 to 4 key issues, including:
• Being the board/parent board of a registered provider(s);
• Gaining assurance the organisation is operating effectively; and
• The developing relationships between the four boards.
It is intended the observation of the Board would allow an assessment to be
made regarding:
•
•
•
•
•
•
•
•
•
Debate taking place (quality and quantity);
Venue/location/environment for the Board meeting;
Quality of papers provided;
Input from officers at the meeting;
Time given to presentation of reports compared to the time to
debate/discuss the content of the reports;
Assessment of how time can be used most efficiently at Board meetings to
ensure the meetings are not too long;
Assessment of how effective Board Directors are in gaining assurance;
Assessment of how Board Directors provide effective challenge;
Assessment of how effectively the meeting is Chaired;
The Support Required
We require the following support with this task:
To facilitate the full Board appraisal, including:
• Preparation and distribution of materials to all Board Directors of the 4
Boards outlining the process to be followed;
• Observation of the 4 Boards at the meetings outlined above;
• Collation of questionnaires;
• Meeting with individual Board Directors if necessary, based upon the
information included within the questionnaires;
• Preparation of a report for each Board and an over-arching report
detailing the results of the Board appraisals, making recommendations
on improvements and actions required to achieve registration ;
• Presentation of the reports to the Board on:
• CDHG – 9 July 2014;
• DCH – 21 July 2014;
• DVH – 15 July 2014;
• EDH – 17 July 2014
The venue for the Board meetings are as follows:
CDHG
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•
•
7 May 2014 – Glebe Centre, Murton
9 July 2014 – County Hall, Durham
DCH
•
•
19 May 2014 – Durham City Homes, Thomas House, Meadowfield, DH7
8XL
21 July 2014 – Committee Room 1A, County Hall, Durham
DVH
The meetings on 20 May 2014 and 15 July 2014 will be held at:
Dale & Valley Homes, 27 Longfield Road, South Church Enterprise Park, Bishop
Auckland, Co Durham, DL14 6XB
EDH
•
•
22 May 2014 – Greenhills Centre, Wheatley Hill
17 July 2014 – Wingate Community Centre, Wingate
Responses Required
Please provide the following information in response to this brief:
a.
b.
c.
d.
e.
The name and job role of the person(s) who would be providing this support
Confirmation of availability for the Board meetings outlined above
Details of the work which has been completed on other similar assignments
Details of how you propose the support would be delivered
The costs of the support, please specify whether the costs are inclusive of
VAT and how expenses will be dealt with. Please specify how the costs will
be split by the four organisations.
Please forward your response to Rachel Taylor by Thursday 17 April 2014, in a
plain envelope marked “Quotation for Full Board Appraisal – Private and
Confidential”.
Evaluation Criteria
The responses will be evaluated on the basis of 50% cost and 50% quality.
The lowest cost will receive maximum points i.e. 50 points and others will be
calculated pro-rata of the lowest cost. For Example, the lowest cost is £8000 for
the assignment, the highest is £15000. The points will be calculated as follows:
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8000/50=160 (for each £160 more than the lowest submission, 1 point will be
deducted for the maximum 50 points). Therefore, in this example the lowest
bidder will be awarded 50 points and the highest bidder will be awarded 6 points.
The quality assessment will be scored as follows:
Criteria
Experience of individuals who will be completing the assessments of
performing full Board Appraisals within the social housing sector
Maximum
Score
20
Knowledge and experience of the HCA registration process by the
individuals completing the assessments
15
Approach to delivering this assignment, in terms of how it will support
the 4 organisations to demonstrate effective governance and support
the achievement of HCA registration
15
Total
50
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