Compensation from overcharging rent may wipe out council's reserves
An estimated £1.8 million might need to be paid out
The potential compensation related to an error in rents charged to social housing tenants in Mid Devon could wipe out most of one part of the district council’s financial reserves.
An estimated £1.8 million pounds might be needed to compensate council tenants who were overcharged rent because of an historic error.
The council revealed last month that it had mistakenly overcharged around 1,200 tenants and undercharged more than 1,600. It referred itself to a watchdog over the issue.
The compensation for people overcharged will likely be paid out of reserves in the council’s housing-related finances. Its housing revenue account – or HRA – is kept entirely separate to a general fund that pays for its other services, and has its own reserves.
At present, the housing reserve pot stands at £2 million, meaning most of it could be used up if the prediction is correct about how much it owes tenants. The council isn’t seeking to recoup money from those who were undercharged.
It does have other housing-related reserves amounting to more than £21 million, but these are classified as ‘earmarked’.
The paper will be discussed at next Wednesday’s cabinet meeting. It acknowledges that the £1.8 million is “just within the boundary of the current HRA reserve balance.”
It continued: “But we would clearly need to agree a strategic recovery programme, within future budgets, in order to replenish this reserve over the coming years.”
The issue over the error was discussed at Mid Devon District Council’s audit committee this week.
The council said an external audit had revealed the problem, and in a scheduled report about how the council functions. auditors Bishop Fleming have highlighted it as a “significant weakness”.
However, representatives from the firm, which became Mid Devon’s auditor this year, told the authority’s audit committee that the ‘red’ rating for governance was because of the “quite specific issue of social rents.
“This is one of only two improvement recommendations, they are the only significant weaknesses, so the committee can take assurance that we have not identified any other issues,” said Mark Bartlett from Bishop Fleming.
He added that the council had taken action to rectify the rent issue as well as legal advice.
“We have also put management in touch with a team from a housing association where we know this has occurred so they can give Mid Devon some help in overcoming it,” Mr Bartlett said.
Mr Bartlett’s colleague, Craig Sullivan, said he had seen similar rent-related issues in housing associations before and that he was “comfortable with the approach” being taken by Mid Devon to deal with it.
He added that the issue came to light because Bishop Fleming undertook a more detailed assessment of Mid Devon’s operations because it was the first time it had audited the authority.
“As we don’t have full assurance of what happened before, we do more testing in year one and so we picked up a larger sample of social housing rents and identified a number of anomalies,” Mr Sullivan said.
“We gave the information back to the council’s officers, who investigated it further and identified issues, and we worked with management around the approach to take.”
Paul Deal, head of finance, property and climate resilience at the council, said he hoped the next audit for the 2024/25 financial year would “take into consideration our actions to resolve the issue”.
Mr Deal added that the council had a recommended minimum of £2 million in reserves in its general fund, which it was currently above, and that the same applied to its HRA reserves, with any additional cash above that being put into a maintenance fund to help ensure its housing stock is kept to a good standard.