Secretary of State for the Environment, Ex parte Council of the London Borough of Camden, R v.

The House of Lords considered the proper construction of the Secretary of State's annual subsidy determination under Part VI of the Local Government and Housing Act 1989, in particular the formulae for calculating the average rate of interest (the Consolidated Rate of Interest). The central question was whether a prior year adjustment (a "catch-up accrual") arising from a change from cash to accruals accounting was to be included in the interest figure used to compute the average rate for 1994/95.

The Lords held that the language of the determination required the calculation to take account only of interest payable on borrowings during the relevant year. The phrase "payable on the amount outstanding during the relevant year" is temporal and governs the interest to be included. Accountancy practice requiring prior year adjustments to be charged to revenue does not displace the clear wording of the determination. The House allowed the Secretary of State's appeal, remitted the matter for reconsideration of alternative remedies, and set aside the costs orders below.

Background and parties: The Council of the London Borough of Camden (Camden), a local housing authority subject to Part VI of the Local Government and Housing Act 1989, challenged the Secretary of State's 1994/95 HRA subsidy determination. The dispute focussed on the formulae used to calculate the average rate of interest (N) for the Housing Revenue Account subsidy and whether Camden's prior year adjustment for interest (arising on a change from cash to accruals accounting) should be included in that calculation.

Procedural history: Before Jowitt J in the High Court the Secretary of State succeeded on all points. On appeal the Court of Appeal (Roch L.J. leading) accepted Camden's construction of the determination and required inclusion of the prior year adjustment; the Secretary of State appealed to the House of Lords.

Nature of claim and relief sought: Camden sought (i) a declaration that the 1994/95 determination required inclusion of the prior year adjustment in the interest figure for calculating the average rate, (ii) alternatively a special determination under section 87 of the Act to the same effect, and (iii) a fresh subsidy determination if required.

Issues framed by the court:

• Whether the phrase in the determination "the average rate of interest . . . payable on the amount outstanding during the relevant year" requires inclusion of prior year adjustments in the interest figure.
• Whether "proper accountancy practices" (or the requirement to prepare accounts on an accruals basis) dictated inclusion of the catch-up accrual.
• Whether a special determination under section 87 should be made if the primary construction failed.

Court's reasoning and decision: The House of Lords gave controlling weight to the statutory language of the annual determination. The words require the interest which is payable on borrowings during the relevant year to be identified and averaged; they do not permit attributing interest that accrued in an earlier year to the later year for the purpose of producing the average. Although established accountancy practice required the prior year adjustment to be charged to revenue on changeover to accruals accounting for local authorities, that practice did not alter the clear temporal link between interest and the borrowings to which it relates in the determination. The House therefore allowed the Secretary of State's appeal, restored the relevant part of the High Court order, remitted the remaining issues to the Secretary of State to reconsider (including any special determination or subsidy issues in light of newly discovered departmental information), and ordered that each party bear its own costs of the proceedings in the House of Lords.

Appeal allowed. The House of Lords held that the determination's wording requires the calculation of the average rate of interest to be based on interest payable in the relevant year on borrowings outstanding in that year; prior year adjustments (catch-up accruals) arising from a change of accounting basis are not to be included by virtue of accountancy practice where the statutory language is clear. The matter was remitted to the Secretary of State to reconsider alternative reliefs; costs orders below were set aside and each party to bear its own costs.

High Court (Jowitt J): Secretary of State succeeded on all points; Court of Appeal (Roch L.J. leading): allowed Camden's challenge on construction of the determination; House of Lords: allowed Secretary of State's appeal and restored part of the High Court order. Citation at House of Lords: [1998] UKHL 10; [1998] 1 All ER 937; [1998] 1 WLR 615.