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

An annual housing revenue determination requiring an average interest rate calculated on an accruals basis permits only interest accruing on the authority’s actual borrowings during the relevant year. It excludes a prior-year adjustment representing interest accrued on borrowings in an earlier year, even where proper local-authority accounting practice requires that adjustment to be charged to revenue in the year of transition.

Accounting practice cannot displace the language and purpose of the determination. Including earlier interest while disregarding the earlier borrowings would artificially increase the average rate. Any resulting conflict with the policy of protecting the Housing Revenue Account is a matter for the Secretary of State when considering a special determination under section 87 of the Local Government and Housing Act 1989.

Camden, a local housing authority, changed from cash-based accounting to accruals accounting in 1994–95. Proper local-authority accounting practice required a £20.9 million catch-up accrual for interest attributable to an earlier year to be charged to revenue in the year of change.

The Secretary of State’s annual determination prescribed an average interest rate for allocating borrowing costs to Camden’s Housing Revenue Account and calculating the corresponding subsidy. Jowitt J held that the formula excluded the prior-year adjustment. The Court of Appeal reversed that conclusion, holding that accounting practice required its inclusion.

The Secretary of State appealed. The central issue was whether the words of the 1994–95 determination permitted interest accrued in a previous year to enter the average-rate calculation for current-year borrowings. Camden also sought reconsideration of a special determination and consequential subsidy under sections 87 and 79 of the Local Government and Housing Act 1989.

1. The appeal was allowed unanimously. Lord Nolan delivered the principal speech. Lord Hoffmann gave concurring reasons, and Lord Browne-Wilkinson, Lord Clyde and Lord Hutton agreed with both speeches. The relevant part of Jowitt J’s order refusing the declaration sought by Camden was restored.

2. Per Lord Nolan, the annual determination sought a fair allocation of the authority’s interest burden between its accounts. Its formula required the average rate to be calculated from interest accruing, and therefore payable, on the authority’s actual borrowings during the relevant year. The words governing the year applied to both the interest and the borrowing. The relationship between interest and the borrowing on which it was payable was necessarily temporal.

3. Per Lord Nolan, the catch-up accrual represented interest which had accrued on borrowings in the preceding year. Including it in the 1994–95 numerator while using only 1994–95 borrowings would attribute more than one year’s interest to that year and artificially increase the average rate. The requirements of proper accounting practice could not alter the language or function of the determination.

4. Per Lord Hoffmann, the formula’s plain meaning required interest payable on borrowing outstanding during the relevant year to be expressed as an average percentage rate. A calculation which included earlier interest but ignored the earlier borrowings produced a quotient, not the average contemplated by the determination.

5. Per Lord Nolan, the possible effect on the statutory ring-fence around the Housing Revenue Account did not justify a different construction. That consequence could instead be considered by the Secretary of State when deciding whether to make a special determination under section 87 of the Local Government and Housing Act 1989 and whether to pay further subsidy.

6. The remaining forms of relief were remitted to the Secretary of State for reconsideration because his department’s mistaken understanding of the treatment of other authorities had emerged after the Court of Appeal hearing. The costs orders below were set aside, and each party was ordered to bear its own costs.

1. House of Lords: The Secretary of State’s appeal was allowed unanimously. The relevant part of Jowitt J’s order was restored, while Camden’s remaining requests were remitted to the Secretary of State for reconsideration.

2. Court of Appeal: The court reversed Jowitt J on the construction issue. Roch LJ, with Ward LJ concurring, held that the prior-year adjustment had to be included in the average-interest calculation. The remaining grounds therefore did not arise.

3. High Court: Jowitt J rejected each of Camden’s three grounds, including its proposed construction of the 1994–95 determination.