Over the years, private non-profit registered providers of social housing (PNPRPs) have looked at ways of diversifying their businesses to generate additional revenue. For many, this has led to the establishment of a commercial subsidiary to undertake market sale development activity.
Usually, a company limited by shares is incorporated and each year any profits generated by the subsidiary are gift aided to the PNPRP as a way of mitigating potential corporation tax liabilities, with those gift aided monies being used by the PNPRP to further its own charitable activities.
This is a tried and tested route but there is no denying that the recent downturn in the market has seen the number of open market sales decrease and with the current economic headwinds it is difficult to know when this might improve so the financial viability of a commercial subsidiary is now an issue being faced by many PNPRPs and it is also something that features in the Regulator of Social Housing's latest sector risk profile 2023.
More than ever boards of PNPRPs need to scrutinise the business plans of its subsidiaries and closely monitor the progress of any developments (whilst allowing the commercial subsidiary to operate independently) but is there anything else that the PNPRP parent and subsidiary can consider doing to weather the storm?
Some clients are considering "stock swaps" with a number of the unsold open market sale properties being converted into affordable units which are then acquired by the parent PNPRP. This can provide the subsidiary with an injection of liquidity that it requires and also gives the PNPRP the opportunity to increase its stock.
Others have taken steps to wind down the subsidiary's business with undeveloped sites being sold and only sites where development has commenced being retained. This allows the subsidiary to concentrate on a smaller number of developments and selling a fewer number of units. Once the remaining units have been sold steps are then taken to wind up the subsidiary.
The decrease in sales is causing delays to development programmes which can impact a subsidiary's ability to repay finance it may have obtained (either from its parent or external third party providers) and so reviewing and, where necessary, updating business plans will be key to ensure that appropriate measures are put in place meaning that the subsidiary has sufficient funds to be able to repay funds when due. The making of the gift aid payment for the previous year's profits is also causing an issue for some clients with the subsidiary having insufficient funds to make the payment due to a lack of sales receipts in the following year. Whilst the financial viability of a subsidiary may not be of concern to some PNPRPs at the moment, business plans should nevertheless be reviewed on a frequent basis (including undertaking stress tests) and, where thought appropriate, updated to include contingencies in the event the current market does impact the subsidiary's business.
