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ay
HM Treasury
Consolidated Budgeting Guidance:
2023-24
March 2023
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© Crown copyright 2023
This publication is licensed under the terms of the Open Government Licence v3.0 except
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Contents
Foreword
Chapter 1
Chapter 2
Chapter 3
Chapter 4
Chapter 5
Chapter 6
Chapter 7
Chapter 8
Chapter 9
Chapter 10
Chapter 11
Chapter 12
Chapter 13
Annex A
Annex B
Annex C
Annex D
Annex E
Annex F
Overview: Introduction to budgeting
Spending Control
Resource Budget
Income and the Resource Budget
Administration Budgets
Capital Budget
Income and the Capital Budget
Financial Transactions
Arm's Length Bodies
Support for Local Authorities
Public Corporations
Pensions
Leases and PPPs
Difference between Budgets and
Departmental Accounts
Debt Management Guidance
Guidance on Research and Development
under ESA 10
Treasury and other Contacts
Useful Links
Index
35
60
76
90
96
103
107
124
129
132
148
155
172
175
179
185
187
190
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Foreword
Context
This document sets out the principles and standards underpinning the
budgeting system mandated for use by all bodies classified as central
government, including departments, devolved administrations, and
arm’s length bodies. This budgeting system is a key part of the UK
public spending framework. It enables the Treasury to control public
spending, and appropriately incentivises departments to manage
spending effectively.
Years of applicability
This budgeting guidance applies to in-year control from 2023-24.
Substantive changes to the guidance for
2023-24:
This section sets out the main areas where the guidance has been
changed for 2023-24:
e The guidance on spending controls has been updated following
Autumn Statement 22 (AS22) and includes:
o Revised guidance on the sale of surplus assets and the
retention of capital DEL sale proceeds.
o Revised guidance on capital DEL (CDEL) to resource DEL
(RDEL) switches.
o Additional guidance on considering the implications and
benefits of policies on cross-government departmental
budgets, including cost sharing.
* Technical updates/clarifications have been made in the following
areas:
o Added guidance on budgeting for loan commitments
o Revised hedging guidance to clarify budgetary scoring,
particularly on AME scoring
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o Clarified guidance on inventory impairments
o Amended guidance on revaluations of impairments for
student loans
o Added guidance on depreciation when using one asset to
construct another in a contract/programme for sovereign
defence capability
o Updated fiscal rules
There are also other minor changes to clarify wording following
comments received during the year.
Which bodies does this guidance apply
to?
The budgeting guidance in this document applies to all bodies
classified by the ONS to central government.
The sector classification of bodies assessed by the ONS is published in
their Sector Classification Guide publication
The Treasury also publishes a guidance note on sector classification. In
broad terms, bodies are in central government if they are owned or
controlled by central government bodies and they are not a Public
Corporation (which is a separate ONS classification). A body will be
controlled, for example, if the sponsoring department appoints a
majority of board members. Sometimes a lesser degree of influence can
still be held to give control. The legal form of a body does not tell you
what sector it is in. For example, if an ALB sets up a wholly owned
subsidiary in the form of a limited company under the Companies Act,
that body would be classed as central government because it would be
wholly controlled by the ALB.
Subsidiaries, interests in associates and joint ventures classified to
central government are consolidated with parent bodies for budgeting.
So, if an ALB sets up a public sector body that is not a public
corporation, it will be part of the ALB’s DEL allocation from the parent
department.
Departments and public bodies who are in doubt about an actual or
proposed body's sector classification should approach the Treasury for
advice. The ONS should only be approached via the Treasury. That
restriction on direct access to the ONS is so that the Treasury can:
« advise departments on the interaction of classification and
policy (the ONS are independent and are not involved in policy
formulation);
« consider the implications for budgeting of any proposal and
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« provide the right information to ONS in the right way, without
lobbying, and respecting the ONS’ independence.
Departments that are setting up a new body should contact the
Treasury's budgeting and classification branch
(Classifications.Classificationg j with their proposals
for budgeting, accounting and recording the body. The Treasury will
pass the information on to the ONS, who will classify the new body.
The Cabinet Office has a separate process for classifying central
government bodies for accountability and governance purposes, using
their own criteria. Where departments are setting up a new body, they
should also contact the Cabinet Office to discuss the governance
arrangements. Throughout the rest of this document, the term ‘arm's
length bodies’ (ALBs) is used to refer to all bodies in a departmental
boundary that have been classified as central government by the ONS
and will not use the Cabinet Office-specific classifications (such as
NDPBs or executive agencies).
Departments should not spend money on consultancy advice on
national accounts sector classification and should discourage their
sponsored bodies from doing so. Sector classification is unlikely to be an
area where consultants have expertise. The Treasury will provide advice
on request.
Devolved administrations are part of central government for ONS
purposes.
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Chapter 1
Overview: Introduction to
budgeting
This document sets out the principles and standards
underpinning the budgeting system mandated for use in central
government.
This chapter provides a general overview of the budgeting
system. This includes an overview of:
« the purpose of the budgeting system (paragraphs 1.4-1.5)
* the interaction between budgets and the public spending
framework (paragraphs 1.6-1.32)
« the roles of budgeting system participants (paragraphs 1.33-
1.40)
« budgetary categories (paragraphs 1.41-1.53)
« adjustments to budgets (paragraphs 1.54-1.65)
¢ policies that affect other departments’ spending (paragraphs
1.66-1.74)
« budget exchange (paragraphs 1.75-1.96)
different presentations of total spending (paragraphs 1.97-1.105)
Further chapters in this document provide guidance on the
budgeting treatment for specific transactions. These chapters are
organised by types of budgetary category or types of
transactions.
Purpose of the budgeting system
1.4
15
The budgeting system set out in this document is the primary
means by which HM Treasury controls public spending.
The budgeting system has two main objectives:
« to provide a structure under which the Treasury can control
public spending. This supports the government in realising its
fiscal objectives, in return supporting macro-economic
stability; and
« to appropriately incentivise departments to manage spending
effectively. This supports the provision of high-quality public
services that offer value for money to citizens
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Interaction between budgets and the
public spending framework
1.6 The budgeting system is designed to support the Uk’s public
spending framework. It interacts with a number of different
elements of the public spending framework:
fiscal policy and national accounts
« departmental accounts
« Supply Estimates (‘Estimates’)
«cash requirements
17 Diagram 1.A provides a visual overview of the public spending
framework.
Diagram 1A - Public spending framework
National Accounts and ONS aggregates
Fiscal aggregates e.g. PSNB, PSND, PSCB and PSNI
Fiscal rules
Budgets and Estimates
Split into resource/capital and DEL/AME
Departmental Accounts
Feed into Whole of Government Accounts
The interaction between the budgeting system and each of
these elements of the public spending framework is explained in
more detail below.
Budgets, fiscal policy and national accounts
1.8 I The budgeting system is designed to support the specific
objectives for fiscal policy set by the government.
1.9 As confirmed at Autumn Statement 2022, fiscal policy decisions
for at least this Parliament will be guided by the following mandate:
+ to have public sector net debt (excluding the Bank of England)
as a percentage of GDP falling by the fifth year of the rolling
forecast period
1.10 The Treasury's mandate for fiscal policy is supplemented by:
+a target to ensure public sector net borrowing does not exceed
3 percent of GDP by the fifth year of the rolling forecast period
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1.12
1.13
To ensure that expenditure on welfare remains sustainable, the
Treasury's mandate for fiscal policy is further supplemented by:
+a target to ensure that expenditure on welfare is contained
within a predetermined cap and margin set by the Treasury
At the current time, while balance sheet statistics are still being
developed and analysed in the UK, the government's approach
will not be to target one specific metric but to aim to strengthen
over time a range of measures of the public sector balance sheet
such as public sector net debt, public sector net financial
liabilities and public sector net worth through effective
management of assets, liabilities and risks.”
These targets are measured with reference to fiscal aggregates,
including:
Public Sector Net Debt excluding the Bank of England (PSND
ex BoE), which is a balance sheet measure of debt liabilities (such
as UK gilts or loans), net of liquid assets, on a basis which
excludes the Bank of England from the public sector
Public Sector Current Budget (PSCB), which is a measure of the
difference between the government's current expenditure (total
expenditure excluding capital investment) and its current
receipts (principally tax receipts), plus depreciation costs
Public Sector Net Investment (PSNI), which is a measure of the
capital investment made by the government. This includes the
acquisition of fixed assets (such as hospitals or other
infrastructure), less any disposals, plus capital grants. This
measure is presented net of public sector depreciation costs
The PSND ex BoE, PSCB and PSNI aggregates, along with other
fiscal aggregates, are measured using the national accounts,
which are a set of accounts showing economic activity
throughout the UK, both in the public and private sector.
The Office for National Statistics (ONS), acting as an independent
agency, prepares the UK's national accounts in accordance with
the ‘European System of Accounts 2010’ (ESA10) framework and
the accompanying Manual on Government Deficit and Debt 2022
MGDD). ESA 10 in turn is consistent with the System of National
Accounts (SNAO8), is an internationally agreed standard adopted
by the United Nations and used globally. ESAI0 and SNAO8
provide a standardised international framework for preparing
national accounts.
In summary, the budgeting framework supports the
government's fiscal objectives, which are measured using fiscal
aggregates derived from the national accounts. Therefore, the
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budgeting rules, where possible, are consistent with the ESA1O
framework used to prepare national accounts.
Budgets and departmental accounts
1.17
Departmental accounts are the publicly available audited annual
report and accounts that report how departments have used the
resources at their disposal. They are based on International
Financial Reporting Standards (IFRS) as interpreted by the
Financial Reporting Manual (FReM) (which is produced by the
Treasury). The vast majority of transactions are treated in the
same way in departmental accounts and national accounts: for
example, pay is a current expense in any system of accounts.
Moreover, as part of the ‘Clear Line of Sight’ Treasury Alignment
Project, the budgeting framework was amended to substantially
align the treatment of transactions between budgets, Estimates
and departmental accounts. Most of the spending by
departments and their arm's length bodies (ALBs) scores in the
budgets and Estimates at the same value and with the same
timing as in departmental accounts. This ensures that financial
reporting is consistent, transparent, accurate and
straightforward, and keeps compliance costs down for
departments.
However, there are some differences between budgets and
departmental accounts. Most of these differences are largely due
to differences between the ESAI10 framework (on which national
accounts, and therefore budgets, are based) and the IFRS
framework (on which departmental accounts are based). For
example, ESAI10 has different rules regarding the treatment of
research and development costs as compared to IFRS.
Additionally, there are differences between budgets and
departmental accounts where controlling spending against
information in departmental accounts may not provide the right
incentives for departments. Annex A lists the main differences
between budgets and departmental accounts.
When there are differences between budgets and departmental
accounts, Estimates will normally follow the budgeting
treatment (see section on budgets and Estimates below).
Considering that budgets and departmental accounts are
substantially aligned, it will likely be most cost-effective for
departments to determine how to score a transaction for
budgeting purposes in the following way:
« start by considering the treatment of the transaction in
departmental accounts
« consider whether the budgeting treatment is the same as the
departmental account treatment or different, and so establish
the budgeting and Estimates treatment
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« as budgeting information generally feeds into national
accounts, once you know the budgeting treatment and how it
aligns with national accounts you can determine the fiscal
effect of the transaction. This document spells out where
budgeting information is not aligned to national accounts
In some places this budgeting guidance summarises or
describes the accounting treatments in departmental accounts.
This is done to provide context for the budgeting rules. However,
the only authoritative description of accounting treatments is in
the FReM.
Budgets and Estimates
1.24
1.27
Estimates are the mechanism by which Parliament authorises
departmental spending. Estimates are generally presented using
the budgetary framework in this document.
Estimates require Parliament to vote limits for different
budgetary categories of spending, as well as any voted spending
outside of budgets and the department’s Net Cash Requirement.
These voted limits may differ from the figures in departmental
budgets, as elements of the department's budgets may fall
within non-voted spending. The sum of voted and non-voted
spending in Estimates will equal the figures in departmental
budgets.
In the same way as budgets, Estimates are voted net of retained
income. Generally, any income retained in budgets will net off
against voted limits in the Estimate. This is discussed in more
detail in Chapter 4.
The Supply Estimates guidance manual contains full guidance on
Estimates.
Budgets and cash requirements
1.28
The budgeting system is based on accruals accounting rather
than cash accounting, consistent with both national accounts
and departmental accounts. Accruals accounting provides a
better basis for spending control, giving a more accurate picture
of the expense incurred by a department in any period.
Cash is, therefore, not controlled directly through the budgeting
system. Cash balances do not convey spending power and the
availability of cash does not translate into budget cover.
However, cash is controlled elsewhere in the public spending
framework. The Net Cash Requirement for Supply Expenditure is
controlled through the Estimates processes. The concept of
annuality is important in cash management; departments
cannot carry forward cash from year to year. Departments need
to surrender any unspent cash at the end of each financial year.
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1.31 Changes in the expected level of use of cash provide useful
monitoring information. For example, unexpected increases in
cash outflows can serve as a trigger to check whether spending
is rising above expectation. Departments should discuss the
reasons for planned increases in the level of cash spending with
their Treasury spending teams.
1.32 The Supply Estimates quidance manual provides more guidance
about the Net Cash Requirement and the process for
surrendering cash.
Summary of the interaction between this
uidance and other public spending framework
ocuments
1.33 This document only provides guidance on the budgeting
framework. As described above, there are a number of other
documents that provide guidance on other areas of the public
spending framework. Please refer to Annex E for a complete list
of other areas of guidance. Some of the most important pieces of
guidance are summarised below:
Table 1.4: Public spending framework documents
Topic Guidance
National accounts European System of Accounts
2010 (ESA10
Departmental accounts Financial Reporting Manual
FReM
Estimates Supply Estimates guidance
manual
Managing Public Money (i.e. guidance around Managing Public Money
accountability, governance, Parliamentary
reporting responsibilities, etc.)
Roles of budgeting system participants
1.34. There are two main participants in the budgeting system:
departments and the Treasury.
1.35 Throughout this document, references are made to
‘departments.’ This document generally applies to devolved
administrations as well; however, some unique budgeting
arrangements might be agreed between the Treasury and
devolved administrations. Further information on arrangements
for the devolved administrations is in the Statement of Funding
Policy.
Role of the department
1.36
The budgeting system aims to ensure that departments have
appropriate incentives to manage their business well, to prioritise
across areas of spend, and to obtain value for money (as defined
in the Green Book). Departments’ roles in improving spending
control are further set out in Chapter 2, and in Managing Public
Money.
Sometimes departments or public bodies commission
consultants to offer them suggestions for ways around the
spending control framework. The Treasury has no interest in such
schemes. Departments are asked to go with the spirit of the
spending control framework. If a transaction is clearly just a way
around the letter of the rules, then departments should follow
the spirit of the rules. If you are in doubt, talk to your Treasury
spending team.
Role of HM Treasury
1.38
1.40
The Treasury is responsible for the design of the budgeting
system and can offer advice and explanations in applying this
system. It is only the Treasury which may finally determine the
budgeting treatment of a transaction.
The guidance in this document cannot cover every case.
Sometimes it is deliberately kept simple for departments
because transactions are rare or typically small. There may be
cases where if a large instance of such a transaction were to take
place it would impact on the fiscal framework. In such cases the
Treasury will sometimes impose restrictions, even if the guidance
does not provide for them, to protect the fiscal framework or to
provide better incentives for departments. If departments face
new circumstances, which might lead to difficulties for the fiscal
framework or where the budgeting is unclear, they should
contact their Treasury spending team before they undertake the
transaction.
Treasury ministers have the right to modify the budgeting
guidance at any time, although in practice we try to keep
changes to a minimum and consult departments before making
significant changes.
Budgetary categories
1.41
1.42
The budgeting framework disaggregates a department’s budget
into a number of different budgetary categories, each with its
own control limit. These controls support the achievement of the
fiscal framework and provide management incentives for
departments. Each category, and the importance of spending
control, is summarised below.
Diagram 1.B provides an overall summary of the different
budgetary categories.
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Diagram 1.B - Budgeting framework
TME - Total Managed
Expenditure*
Resource ; Resource Capital
DEL Sepia. peL AME ‘AME
Programme/
admin Programme Admin Programme Programme Programme
Budgetary
ring.
fence**
DEL ROEL
CAME
ROEL Prog ROEL Admin coe
Spendtype Prog, ting Admin ring ee RAME we FA
fence fence fence nce
* Total Managed Expenditure is made up of DEL and AME, plus accounting adjustments
** Budgetary ring-fences (the depreciation and impairment resource budget ring-fence and the financial transactions capital budget ring-fence) are separate from
policy ring-fences, Not all departments are subject to the financial transactions ring-fence.
Departmental Expenditure Limits (DEL) and
Annually Managed Expenditure (AME)
1.43 Departmental budgets are first disaggregated into two different
categories:
« Departmental Expenditure Limits (DEL) -this budgetary
category captures spending that is subject to limits set in the
Spending Review (SR). Departments may not exceed the limits
that they have been set
e Annually Managed Expenditure (AME) -this budgetary
category captures spending that is subject to budgets set by
the Treasury. Departments need to monitor AME closely and
inform Treasury if they expect AME spending to rise above
forecast. Whilst Treasury accepts that in some areas of AME
inherent volatility may mean departments do not have the
ability to manage the spending within budgets in that
financial year, any expected increases in AME require Treasury
approval
1.44 Within both DEL and AME, departments are expected to pursue
efficiencies and prioritise expenditure in order to optimise value
for money (as defined in Box 18 of the Green Book).
1.45 The combination of the resource/capital budgetary categories
(described below) with the DEL/AME categories gives rise to a
number of separate budgetary control and planning totals (for
example capital DEL, resource AME). Departments and their
Treasury spending teams should at all times have a shared
understanding of what the control and planning totals are and
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1.46
how the department's spending matches up against them. See
Chapter 2 for a more detailed discussion of tracking control and
planning totals.
Appendix 2 to this chapter sets out the budgetary categories
diagrammatically. Appendix 3 sets out a list of a department's
control and planning totals.
Criteria for treatment in DEL or AME
1.47
1.48
1.49
The following paragraphs provide a brief overview of whether
transactions should be recorded in DEL or AME.
Generally, all areas of spend are in DEL unless the Chief Secretary
of the Treasury has determined that they should be in AME. The
Chief Secretary may agree to put areas of spend into AME if:
« they are not only demand-led but also exceptionally volatile in a
way that could not be controlled by the department and
where the areas of spend are so large that departments could
not be expected to absorb the effects of volatility in their DELs
(for example, most welfare spending) or
e for other reasons, they are not suitable for inclusion in firm
multi-year plans set in the SR. For example: lottery spending
funded by the National Lottery which may not be reprioritised
elsewhere. Certain levy-funded bodies, which serve particular
industries, are also in AME - Appendix 4 to this chapter sets out
the criteria determining whether levy-funded bodies should be
in AME
Additionally, transactions may score in AME when they do not
have an immediate impact on the fiscal aggregates (for example,
revaluations or provisions). This document provides detailed
guidance for these transactions.
The Treasury regularly reviews whether areas of spend in AME are
still suitable for AME treatment. Where appropriate these are
moved into DEL.
Normally, an area of spend will have both its resource and capital
budget impact in either DEL or AME, but there are some
exceptions. Where a department agrees an exception with
Treasury it should be included in their settlement letter during
the SR process.
Resource and capital budgets
1.52
In addition to being split into DEL or AME, departments’ budgets
are also split into resource and capital categories.
« Resource budgets capture current expenditure (including
depreciation, which is the current cost associated with fixed
assets). It is paramount for Treasury to retain control over the
level of current spending. Within the resource budget some
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transactions will have an immediate or near-immediate
impact on fiscal aggregates, for example pay and
procurement. Other transactions will only have an effect in
future periods, for example the take-up of provisions. Resource
budgets are discussed further in Chapters 3 and 4
« Capital budgets capture new investment and financial
transactions. It is important to control capital budgets
alongside resource budgets because spending in this budget
increases public sector net debt and government's borrowing
requirements. Capital budgets are discussed further in
Chapters 6 and 7
Programme and administration budgets
1.53
Resource budgets are further split into programme and
administration budgets.
« Programme budgets capture expenditure on front line services
e Administration budgets capture any expenditure not included
in programme budgets. They are controlled to ensure that as
much money as practicable is available for front line services.
Administration budgets are discussed further in Chapter S
Types of adjustments to budgets
1.54
Budgetary limits in each budgetary category are set at each SR.
However, there can be subsequent adjustments within or
between these budgetary limits. These adjustments fall into
three categories. In summary:
¢ Policy/plan adjustments reflect deliberate decisions by
departments to increase or decrease spending in a particular
policy area, or in the way a policy is delivered (for example
introducing a charging regime). These represent ‘real world’
changes in spending or plans. There are restrictions on the
adjustments that departments can make to budgetary limits
in this area; this is discussed further in paragraphs 1.60-1.63
below
¢ Classification adjustments reflect changes in budgetary totals
driven by changes in the way spending is classified rather than
by actual changes in the level of spending. For example,
changes in IFRS accounting standards or ESAI0 national
accounts standards that are implemented in the budgetary
framework are classification adjustments. Classification
adjustments also include Machinery of Government changes
where responsibility for spending moves from one central
government body to another. Accounting policy changes —
whether driven by the department or by the National Audit
Office - also count as classification changes; note that
accounting policy changes need the agreement of the
Treasury
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« Inter-departmental adjustments/budget cover transfers
reflect changes in spending plans as a result of an agreed
transfer of budgetary cover from one department to another.
Examples of where a transfer is appropriate include where
there is an allocation from a ‘shared pot’, or when a
department agrees to transfer cover to another department to
cover costs incurred as a result of a change in policy
The changes are implemented in different ways in budgets:
« Departments are expected to accommodate the effects of
policy/plan adjustments in their budgets, making offsetting
reductions in spending
¢ classification adjustments lead to budgets being restated,
normally across all the open years on the Online System for
Central Accounting and Reporting (OSCAR) system
« inter-departmental adjustments/budget cover transfers lead
to restated limits of the departments concerned
In addition, departments may record changes to their
expenditure numbers as budgetary outturn adjustments, which
are not a change to the budget - they are used to describe
changes against final budget allocations and are used for
recording outturn.
It is the Treasury that ultimately determines what type of
adjustment a change is. Departments that are in doubt should
contact their Treasury spending team.
Annex E sets out where to find further guidance on types of
adjustment. Appendix 4 to this chapter provides more guidance
on Prior Period Adjustments, i.e. adjustments to budgets in prior
periods.
Policy/plan adjustments and ‘switching’ across
categories
1.59
As stated previously, departments are expected to accommodate
policy/plan adjustments (which are real-world changes in spend)
in their existing budget limits. One way they can achieve this is if
spend increases in one area of a budgetary category (for
example, capital DEL), a department can reduce spend in
another area of that same budgetary category. Another way of
accommodating policy/plan switches is to ‘switch’ budget
provision from one budgetary category to another.
So that control totals are effective, departments are restricted in
the switches they may make between budgetary categories:
« departments may not switch provision from AME to DEL.
Departments may not exceed the DEL limits set in each SR;
they cannot avoid exceeding these limits by switching
provision from AME to DEL. Where the actions/inaction of a
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department increase AME, they are assumed to fund the
increases in AME by reductions in their DEL budgets
Departments may switch provision from resource budget DEL
to the capital budget DEL but not from ring-fenced elements of
those budgets
In the majority of cases, departments may not switch provision
from capital budgets to resource budgets; such switches would
mean that funding that had been earmarked for investment was
used for current spending. It is paramount for Treasury to retain
control over the level of current spending via the resource
budget; this control should not be risked via switches from
capital to resource budgets. However, the Treasury is willing to
consider some limited flexibility in relation to switches from
capital DEL budgets to resource DEL budgets. Departments may
bring proposals to the Treasury to switch provision from capital
budgets to resource budgets where:
the resource DEL budget is intended for: programmes that will
improve the productive capacity of the economy; expenditure on
prevention to reduce future costs; or IT systems that have been
funded as capital DEL but could be more future-proofed as
resource DEL; and
capital DEL surrenders come from cutting lower priority or lower
value-for-money programmes, rather than underspends that
would have anyway been returned to the Exchequer.
Departments wishing to make a capital DEL to resource DEL
switch should engage their spending teams as early in the year
as feasible. In all cases, departments will need to provide a
business case to support their request, and the following rules
will apply:
any capital DEL to resource DEL switch must be approved by the
Chief Secretary to the Treasury;
departments are not allowed to switch between their capital DEL
Financial Transaction ring-fenced budget to resource DEL, or
switch any capital DEL that does not hit the fiscal aggregates
(e.g. capital DEL for certain types of leases);
switches will not contribute to a department's baseline budget at
the next Spending Review;
departments will need to demonstrate that switching funding
from their capital programme budget does not take funding
away from necessary maintenance expenditure; and
departments are not allowed to make a capital DEL to resource
DEL switch if they are seeking capital DEL Reserve access in
parallel.
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Departments are expected to manage their resource budget DEL
as an integrated whole, optimising spending across different
areas (including areas managed by ALBs and those involving
Public Corporations). In order to encourage value for money and
to support achievement of the fiscal framework, there are some
general restrictions on the freedom to move provision across
resource DEL:
« departments may not switch from programme budgets to
administration budgets. Such switches would mean increasing
provision for back-office or policy staff at the expense of
frontline staff and programmes. Departments are free to
switch provision from administration budgets to programme
budgets
« depreciation and impairments of fixed assets are ring-fenced
within resource DEL (or exceptionally resource AME) and
budget cover may not be reprioritised from within the ring-
fence. Departments may freely switch provision from outside
of the ring-fence to depreciation and impairments costs
e finally, there are also restrictions on switching into and out of
support for local authorities
To relax any of the above restrictions could impact on the
government's fiscal mandate or its administration costs target
and would therefore need to be absorbed by the Reserve (see
Chapter 2). For this reason, any request to waive the above
restrictions is viewed in the same way as a request for support
from the Reserve and the same process (which is outlined below)
will be followed. Note that requests to switch budget cover out of
the resource DEL depreciation ring-fence will not be approved.
In addition, as part of the SR settlement or through subsequent
agreement, some spending might be subject to specific policy
ring-fences. If so, departments may not move money across
these ring-fences, except as specified in their SR settlement.
Ring-fences are normally set at the level of resource DEL or
capital DEL. However, closer controls (for example on
administration spending) may be set.
Policies that affect other departments’
spending
1.66
One department's policies may affect the spending of another
department. Sometimes the link is obvious, for example where
several departments have joint responsibility for a change to
outcomes. In other cases, the link may be less clear: for example,
the creation of a new offence may impose burdens on the police,
prosecutors, legal-aid, and offender-management budgets.
There is a long-standing set of general principles governing the
question of policy changes with resource implications affecting
more than one department. These include:
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« any department proposing new policies, in whatever context,
must always quantify the effects on public expenditure prior to
a policy decision being made. In doing so, it must assess the
effects not only on its own spending but also on the spending
of other government departments, the devolved
administrations for Scotland, Wales and Northern Ireland, and
local authorities
« decisions on how to finance a new proposal must be taken
simultaneously with the policy decision. It is for the
department proposing a change to consult those concerned
(including the Treasury and any other departments for which
there are dependencies that could have spending
implications) and agree new policy, including the finance of
that policy, before a proposal goes forward for collective
consideration
« the agreement on financing the downstream costs of new
policy on another department may provide either that the
costs be met by the originating department or that they be
met by the department on which those costs fall
« in the absence of explicit agreement to the contrary, the normal
presumption is that the originating department will absorb the
cost
e where consultation has not taken place, the default is that all
costs, including those affecting other departments, will be
absorbed within existing budgets by the department
responsible for the policy change that creates additional costs.
The Chief Secretary will not consider any requests to provide
further funding for pressures which arise as a result of
consultation not taking place
e where the originating department absorbs the cost, it should
make budget transfers to affected departments covering the
whole of the SR period
e where the costs fall, or come fully on stream, in the next SR
period, it is for the department(s) that will meet the costs to
conduct the SR discussions with the Treasury on funding in the
next SR period. Where that department is the originating
department, it should make budget transfers after the
conclusion of the SR
« these arrangements include cases where a department's
policies impact on the AME spending of another department.
The originating department may be expected to make DEL
offsets to cover increases in AME spending
« Treasury agreement is needed for all new policies with
expenditure implications (see Managing Public Money).
However, the Treasury does not arbitrate between
departments on the question of who should bear downstream
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costs and will not provide funding where no agreement has
been reached
Where a department introduces a policy that benefits another
department, it may seek a contribution to the costs to the
implementation of that policy, and this should be explored ahead
of any policy decision. Cost-sharing may only be appropriate in
some circumstances, but discussion between departments to
understand potential benefits, costs and dependencies should
support improved spending and policy decisions. This is to be
agreed between affected departments and again the Treasury
will not arbitrate.
The budget consequences of any new proposals, regardless of
where they originate, fall to the department responsible for
implementing the proposals.
Charging for services
1.70
Where a department introduces charges for a service previously
provided for free or moves from a subsidised service to full cost
recovery, it should normally transfer DEL cover to any customers
in the central government sector to leave them no better and no
worse off.
New burdens on local authorities
1.71
Where a department wishes to impose additional burdens on
local authorities, it is responsible for securing the necessary
resources and fully funding them. A new burden is defined as any
policy or initiative which increases the cost of providing local
authority services. This includes duties, powers, or any other
changes which may place an expectation on local authorities,
including new guidance.
The policy applies to any new burden imposed on local
authorities (including police and fire authorities) except for
policies which apply the same rules to local authorities and to
private sector bodies (for example a change in the rate of
employers’ National Insurance contributions).
Departments contemplating a potential new burden should
contact the Department for Levelling Up, Housing and
Communities (DLUHC) at the earliest possible stage to discuss
the procedures to be followed —
newburdens@communities.gov.uk
Transactions between departments
1.74
Transactions between public sector bodies should be
constructed simply. For example, where Department A buys an
asset from Department B, the purchase price should normally be
paid in full in cash on the day of completion. Departments should
not enter into or spend money on complex deals which do not
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have a clear justification in fairness or incentives as these are
unlikely to be good value for the public sector overall.
Departments should not seek to exploit differences in budgeting
rules between different public sector entities. Where
departments are unsure how best to construct a transaction with
a public sector body they should consult the Treasury.
Budget Exchange
1.75
1.79
Budget exchange is a mechanism that allows departments to
carry forward a forecast DEL underspend from one year to the
next. Budget exchange provides departments with flexibility to
manage their budgets, while strengthening spending control
and providing greater certainty in order to support effective
planning.
Under budget exchange, departments may surrender a forecast
DEL underspend in advance of the end of the financial year (by
means of a DEL reduction in the Supplementary Estimate) in
return for a corresponding DEL increase in the following year,
subject to a prudent limit.
There is no scope to carry forward underspends that are not
forecast in advance of the Supplementary Estimate.
Departments may not generally carry-forward an underspend if
they are simultaneously seeking to draw funds from the Reserve
(the Reserve is discussed in more detail in Chapter 2). As always,
Reserve support is subject to an assessment of need and so
emerging underspends should be deployed to meet pressures
before additional funding is sought. For example, a department
with a capital pressure and a resource underspend should not
seek to Budget exchange the latter. Budget exchange is
available on all DEL control totals (including non-voted DEL). This
is subject to the usual restrictions on switches discussed in
paragraphs 1.60-1.63.
Separate arrangements apply to the devolved administrations.
Approval process
1.80
1.81
Treasury approval is required for any increase to DELs. However,
it is intended that approval to utilise budget exchange will be
granted automatically up to a prescribed limit and subject to the
other conditions detailed below, though Treasury reserves the
right to withhold approval in exceptional circumstances.
The amounts that departments will be permitted to carry
forward are set out in the table below, where the limit is
expressed as a percentage of resource DEL and capital DELin
the year in which the underspend is forecast to occur. These
limits vary by size of department in recognition of the difficulties
faced by smaller departments in managing slippage between
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years and there are separate limits for resource DEL and capital
DEL.
Table 1.B: Budget Exchange Limits
Size of Department RDEL Limit CDEL Limit
Total DEL’ less than £2billion 2% 4%
Total DEL greater than £2billion 1% 2%
but less than £14billion
Total DEL greater than£l4billion 0.75% 15%
1.82. Resource DEL carried forward through budget exchange may
not be switched between administration and programme
budgets or between the ring-fences.
Preventing the accumulation of spending power
over time
1.83 To further ensure that the fiscal cost of budget exchange is
manageable, and that spending power is not allowed to
accumulate over time, budget exchange will only be permitted
from one year to the next. This works by any carry-forward from
the previous year being netted off the amount that can be
carried forward into the next year. A worked example is shown
below for a department with £1 billion DEL each year:
e inyear one the department forecast an underspend of £20
million. It reduces its year one DEL to £980 million and increases
its year two DEL by a corresponding amount to £1,020 million
e in year two the department forecasts an underspend of £30
million (against its new DEL of £1,020 million). It reduces its DEL
by this amount, to £990 million. However, the amount brought
forward from year one must be netted off the amount that the
department is allowed to carry into year three. Therefore, the
department is only allowed to increase its year three DEL by £10
million to £1,010 million
e in year three the department forecasts an underspend of £10
million (against its new DEL of £1,010 million) and reduces its
DEL by this amount, to £1,000 million. However, it cannot carry
anything forward to year 4 as the £10 million carried over from
year two is netted off
1.84 Inthe above example, we assume ail other budget exchange
rules are in effect.
1 Where total DEL = Resource DEL excluding depreciation + Capital DEL
21
Timing
1.85 The budget exchange process is run to a Supplementary
Estimates timetable. The exact timing will be confirmed in a PES
paper ahead of the Supplementary Estimate, but it is likely that
departments will need to inform the Treasury of the amounts
that they wish to carry forward by late November/early
December.
1.86 The in-year DEL reductions will be reflected in the
Supplementary Estimate, with the corresponding DEL increase
awarded at the time of the Main Estimate the following year.
Overspends
1.87. There is no scope to change DELs after the Supplementary
Estimate. Any department that uses budget exchange and then
subsequently breaches a DEL control total will be treated like any
other overspend and will be subject to the same process outlined
in Chapter 2. Departments will need to take this into
consideration when surrendering a forecast underspend.
Departments are under no obligation to surrender their entire
forecast underspend.
Flexibility for managing large capital projects
1.88 Managing large projects can pose significant challenges to
departments, who currently have to manage spending within
annual budgets which may have been set several years before
the start of the project.
1.89 To recognise this challenge, departments are offered greater
flexibility to carry-forward capital DEL underspends related to
significant investment programmes:
« to qualify for additional flexibility, the programme must have
a capital DEL budget of over £50 million in the year in
question
e carry forward will not count towards the standard capital DEL
budget exchange limits, but may not exceed 20% of the
programme's capital DEL budget in the year from which it is
being carried forward
e carry forward may be spread across multiple years
e this will be subject to the following conditions:
e the Treasury will consider each application on a case-by-case
basis, taking into account the overall value for money of the
programme and the likelihood of successful project delivery
being enhanced by the carry forward. Departments will be
expected to provide evidence to support their application
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e the programme in question must continue to be delivered to
the originally agreed timescale
e departments must notify their Treasury spending team 6
weeks ahead of the Supplementary Estimate if they wish to
take advantage of this flexibility, to allow time for the effect on
the fiscal aggregates to be assessed
Flexibility for the retention of income from asset
sales
1.90
It can be challenging for departments to match asset-sale
proceeds with capital expenditure perfectly on an annual basis.
Therefore, departments will automatically be allowed to carry
forward the capital DEL proceeds from the sale of surplus
property assets (i.e. assets no longer serving a policy purpose), in
line with any asset disposal targets. Departments can retain 100%
of capital DEL proceeds from asset sales, up to 1.5 times their
target and 50% between 1.5 and 5 times the target. Further
guidance on the scoring of asset disposal proceeds, including on
the treatment and retention of resource DEL profits/losses
recorded as a result of the sale, is covered in section 4.46-4.49.
Departments manage a range of asset types which are held for
policy purposes, such as financial assets, investments in public
corporations, and fixed assets. Departments should regularly
review assets on their balance sheets and explore potential for
disposals where assets are surplus or where there is no longer a
public interest rationale for ownership. In addition to the
flexibilities on surplus property assets above, the Treasury will
welcome proposals from departments regarding flexibility to
carry forward a proportion of the capital DEL proceeds from
other asset sales across multiple years. The flexibility will be
considered on a case-by-case basis, subject to the following
conditions:
« For sale of fixed assets, the department can demonstrate clearly
that it has approved capital projects in subsequent years on
which to spend these receipts
« the asset sale in question must have been completed before
budgets will be adjusted and
* receipts may not be switched between the general and
financial transaction capital DEL boundaries, without prior
agreement from the Treasury.
In some cases, departments may prefer to share the resource
benefit that results from the Exchequer using asset-sale
proceeds to pay down debt and hence reduce interest payments.
Therefore, instead of keeping the proceeds from a fixed asset
sale, departments may surrender the proceeds in full to the
Exchequer in exchange for a resource DEL uplift equivalent to
3.5% of the proceeds surrendered. This would be a non-baselined
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uplift in each year of the period for which resource DEL budgets
had been set. The Treasury will consider each application ona
case-by case basis.
In order that the Treasury can monitor the overall effect of these
policies on the fiscal aggregates, departments should notify their
Treasury spending team 6 weeks ahead of a fiscal event if they
envisage using either of these flexibilities on asset sales in that
financial year.
These flexibilities do not affect any other rules around the
retention and utilisation of asset sale income.
For areas of protected spend, the Treasury may not be able to
offer the asset-sale flexibilities above. Departments should
discuss asset sales in areas of protected spend with their Treasury
spending team directly.
Cascading Budget Exchange
1.96
Departments are responsible for deciding whether to cascade
budget exchange, or an alternative system for carrying forward
underspends, to their ALBs. Departments will be responsible for
managing any pressures this would create within their DEL.
Presentation of total spending
1.97
Budgetary information can be used to present figures about
central government spending in a number of different ways. The
primary budgetary presentations of spending are summarised
below.
Total Managed Expenditure
1.98
1.99
The government's main measure for reporting overall public
spending is Total Managed Expenditure (TME), a measure drawn
from the national accounts. TME may be defined as the sum of
the public sector's current and capital expenditure. Current
expenditure is presented net of sales of goods and services while
capital expenditure is presented as net of asset sales.
The composition of TME is discussed in more detail in the Public
Expenditure Statistical Analyses (PESA) document.
Resource and capital budgets
1.100 Adepartment’s resource budget is the sum of resource DEL and
1.101
resource AME. The capital budget is the sum of capital DEL and
capital AME.
Neither the resource budget nor the capital budget is a control
total, since departments may not make switches from AME to.
DEL. They are still useful numbers to present since they show the
total current and capital spending in the budgets of the
department.
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Total DEL
1.102 In addition to the control totals, there is a presentational
aggregate; Total DEL. Total DEL is not a control total. It isa
standard way of showing total current and capital spending in
DEL. It is defined as:
* resource budget: DEL
e plus capital budget: DEL
« less depreciation in DEL
1.103 Depreciation here includes DEL impairments.
1.104 Depreciation is excluded from total DEL because adding
together depreciation and investment may be seen by some as
double counting the cost of assets.
Tax impacts on departmental budgets
1.105 Budgets will not be changed as a result of changes in tax
treatment. This includes where the Chancellor announces tax
increases at a fiscal event that impact on departments.
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Appendix 1 to Chapter 1: Summary
content of budgets
1.106 This table summarises the main standard contents of resource
and capital budgets.
Table 1.C: Content of budgets
Resource budget
Capital budget
Department's I Expenditure on an accruals basis,
own including administration costs, pay,
transactions superannuation liability charges and
with the private I other pensions contributions or current
sector service pensions costs, grants to
individuals, subsidies to private sector
companies.
Take up of provisions, movements in
value of provisions, and release of
provisions (as well as the expenditure
offset by the release of the provision —
except provisions related to capital
expenditure).
Profit/loss on disposal of assets.
Depreciation and impairments on the
department's assets.
Less income retained in DEL/AME, for
example sale of services.
Note: Excludes revaluations charged to
revaluation reserve.
Expenditure on new fixed
assets on an accruals basis;
includes leases and other
transactions that are in
substance borrowing (i.e. on-
balance sheet PPP deals).
Less Net book value of sales
of fixed assets.
Net policy lending to the
private sector.
Capital grants to the private
sector.
Research and Development
expenditure (per ESA10)
ALB As the department.
transactions
with the private Note: the department's grant in aid to
As the department
sector ALBs is excluded from budgets.
NHS Trusts As the department As the department
(England)
Support for Current grants to local authorities Capital grants to local
local authorities Supported
authorities Capital Expenditure
(revenue)
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Public Subsidies paid to Public Corporations Investment grants paid to
Corporations Public Corporations
Less interest and dividends received from
Public Corporations Net lending to Public
Corporations (Voted and
NLF)
Public Corporations’ market
and overseas borrowing
(including on balance sheet
Ppp)
Less equity withdrawals
from Public Corporations
27
Appendix 2to Chapter1: The
department’s control and planning totals.
1.107 Departments and their Treasury spending teams should at all
times have a shared understanding of what their control and
planning totals are, whether the department’s spending is on
track to stay within limits, and what the risks are.
1.108 The control totals are:
« resource DEL (broken down into the non-ringfenced and
depreciation ringfenced budgets)
e administration budget
« capital DEL (for some departments, broken down into the non-
ringfenced and financial transaction ringfenced budgets)
* any department-specific policy ring-fences
1.109 The planning totals are:
* resource AME
« capital AME
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Appendix 3 to Chapter 1: Criteria for AME
treatment of levy-funded bodies
1.110 The Chief Secretary has determined that the spending of a
number of levy-funded bodies should be in AME rather than DEL.
The Chief Secretary takes such decisions case by case using the
criteria below. The AME treatment of individual bodies is kept
under review.
1.111. Where an AME treatment has been approved for spending, the
income from the levy must also be recorded in AME by the body.
1.112 While the Treasury has no plan to recommend to the Chief
Secretary that any further levy-funded bodies should have AME
treatment, the criteria that the Chief Secretary uses are set out
below.
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Box 1.A: Criteria for deciding whether a levy-funded body should
score in AME
© the body should in broad terms provide services ("‘services” could include a
compensation fund) to an industry or group of industries or the workforce in
that industry
othe body should be wholly or mainly funded by a levy on the industry. There
should be substantial industry consensus involved in the setting of the levy or
the direction of the expenditure or both
othe expenditure must be suitably ring-fenced. Normally, that would mean that
the whole body should fall into this category
othe body should be self-financing in cash terms. With no recourse to
departmental grants or subsidies. Where, exceptionally, grants or subsidies are
paid, the expenditure funded by those grants would score in DEL
o draw-down of reserves should be permitted and normal short-term modest
size overdrafts. But the bodies should not normally borrow long term. Where,
exceptionally, borrowing other than short-term overdrafts, finances
expenditure, it would normally score in DEL
o the body should meet relevant efficiency and other criteria:
e the licence or levy is appropriate, i.e. applied in the economically most
advantageous way in the circumstances
e introducing the levy or licence should not materially restrict the
government's fiscal policy
e there should be adequate efficiency regimes in place to keep costs down,
including stretching targets and regular efficiency reviews
e suitable arrangements should exist to prevent the body from abusing its
power to set the level of the levy. For example, the levy might need
approval by the minister
e there will be periodic reviews involving the Treasury of the operation of the
levies, including whether they should exist at all, what scale of activity is
appropriate, and the level of charges set
Appendix 4 to Chapter 1: Prior Period
Adjustments
1.113 Prior period adjustments (PPAs) are adjustments where data for
an earlier year needs to be restated. PPAs are primarily an
accounting concept. They negate the need to re-open accounts
where a material error or omission is found from previous years,
or where a department makes a material change to its
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accounting policies. All PPAs should be discussed with the
auditor at the earliest possible opportunity.
PPAs in Estimates
1.114 Although PPAs are primarily an accounting concept, they also
impact Estimates. From an Estimates perspective PPAs fall into
two categories:
* a restatement of outturn data following a change in accounting
standards or other changes to accounting policy outside the
department's control or
« the correction of an error or omission in the previously recorded
data, or a change in accounting policy under the department’s
control
1.115 Where a PPA results from a change in accounting standards, this
is treated as a classification adjustment for budgets. There is
therefore no need to seek Parliamentary authority, but the
change and its impact should be identified in “Note F Accounting
Policy changes” in the next available Supply Estimate.
1.116 Where a PPA results from the correction of an error, or a
department's choice to change accounting policy, it has the
potential to change net budgets and thus the reported outturn
for previous years. In such cases the Treasury believes it is proper
that Parliamentary authority is sought for the budgetary cover
that should have been sought previously had the expenditure
been identified correctly. Such PPAs must therefore be included
as non-budget expenditure in an Estimate.
1.117 This is required even when the department was in a position to
fund the expenditure from budget cover if it had been
recognised in the correct year initially (i.e. there were
underspends in previous years).
Materiality
1.118 PPAs can only be made for genuine and material errors or
changes in accounting policy. Budgetary and Estimates cover is
only appropriate for known and costed PPA's. Cover should not
be requested for PPA's that have not specifically been discovered
but may come to light before the end of the financial year. Whilst
there is no such concept of materiality in budgets (the database
goes down to the nearest £1,000) if the NAO have accepted at the
time of the preparation of the annual report and accounts that a
PPA as being not material in accounting terms, to be absorbed in
that year’s budgets, then HMT will follow suit.
Excess Votes
1.119 Normally departments do not have any non-budget provision
unless a genuine PPA is identified before the Supplementary
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1.120
Estimates are finalised. If the need for a PPA is discovered whilst
departmental accounts are being compiled, it will be allocated to
the non-budget section of the Statement of Parliamentary
Supply (SoPS). The PPA should reflect the prior-year data only but
capped by the start of resource accounting in government (i.e.
departments should not seek cover for events prior to 2001-02,
the first full year of resource accounting).
If there is insufficient non-budget provision in the Estimate for
the PPA, then it will lead to an Excess Vote. The normal process
for regulating Excesses will then be followed.
Negative PPAs: no need for approval
1.121
Whilst it is possible to have negative PPAs in accountancy terms,
Supply does not require Parliament to approve a smaller number.
Parliament approves a ceiling for expenditure against which
departments are judged; it has no need to vote something which
is already within an approved limit.
Re-recording budgets on the database
1.122
Once the year in which the PPA features has passed,
departments should re-state budgets to reflect the corrected
budgetary outturn (DEL or AME, resource or capital) in the years
affected on the OSCAR database. Note that the database will only
hold outturn for five previous years; any impact beyond that
cannot be captured electronically but should be reported in the
departmental accounts and noted in the Estimate.
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Appendix 5 to Chapter 1: Machinery of
Government Change (MOG)
1.123 A Machinery of Government (MOG) change occurs when there is
1.124
1.125
a transfer of function between one (or more) government
departments and there is a resulting change in the
Departmental Accounting Officer responsibility. Departments
should begin the process of agreeing amounts and budgets to
be transferred as soon as a MOG has been announced. In
accounting a MOG change would be treated as a ‘Transfer by
Merger’. Departments should refer to the MOG guidance, but
should be aware of the following key points when reflecting a
MOG change:
ea MOG in isolation should not affect the spending power of
either the transferring or receiving department (i.e., no
department should be left better or worse off as a result of the
transfer of the budget)
« the transfer must completely net out between the two (or
more) departments, (for example DEL budget being
transferred by one department must be recorded as DEL by
the receiving department). Each department involved in the
MOG should ensure that the information being provided by
them is checked and agrees with that being provided by the
other department to ensure that information provided is
complete, consistent and correct
« should the function (following the transfer) require provision in
excess of the amount being transferred, the additional
provision will not be part of the MOG, and the receiving
department may seek additional budget. As normal, access to
the Reserve will only be given in exceptional circumstances.
The Accounting Officer in the transferring department will have
formal responsibility for the transferred function up until the
relevant Supply Estimate and related legislation has received
Parliamentary approval. From that point onward, the Accounting
Officer in the receiving department will be fully accountable for
the transferred function (i.e. not only in the current and future
year but also for the historical period). It is therefore essential that
the Accounting Officer in the receiving department seeks
assurance about the values of transferred items and that they
receive all documentation relating to the function from the
transferring department.
Other transfers of functions within the public sector, for example,
transfers between ALBs within a single departmental group,
(regarded as transfer by absorption in accounts) will not require
historic restatement. The net impact of assets and liabilities
transferring should not affect the spending power of the
transferring or receiving department. The FReM provides further
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guidance on the accounting treatment for all business
combinations under common control.
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Chapter 2
Spending Control
Introduction
24
2.2
2.3
This chapter provides an overview of the overall spending control
framework that allows the government to manage public money
effectively. The budgetary framework is an important part of
spending control.
At a high level, spending control is achieved through robust
spending plans, set at Spending Reviews (SRs), and supported by
a framework for delivering the government's priority outcomes.
Delivering these plans requires efforts in each of the following
areas:
Monitoring spending: ensuring there is accurate and timely
management information about what is being spent in all parts
of the public sector. This allows the government to monitor
progress and intervene when plans go off track (see paragraphs
2.4-2.25)
Managing spending: improving capacity and capability to
manage spending and ensure that efficient and sustainable
choices are made about how public funds are used. This requires
systems and processes that allow the government to act to
mitigate risks, and where risks do materialise, managing them
within the spending limits set at SRs (see paragraphs 2.26-2.64)
Delivering priority outcomes: ensuring that policy proposals are
aligned to priority outcomes based on evidence of what works,
there is a plan for prioritising key outcomes, aligning activity
towards delivering them and using data on progress against
priority outcomes to drive improved delivery (see paragraphs
2.65-2.72)
Governance, scrutiny and oversight: from those responsible for
managing public money at Ministerial and Official level and on
Departmental Boards, to ensure that progress and practice is
regularly reviewed and challenged (see paragraphs 2.73-2.101)
Each of these areas is summarised in this chapter, with a
summary checklist at the end of each section for departments to
consider. Additionally, refer to the Government Finance Function
Strategy document for more detail on how efforts are being
made to improve each of these areas across government.
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Monitoring spending
24
2.5
2.6
27
2.8
2.9
The public sector, on behalf of the citizens, manages over £900
billion of public spending a year. It is essential that the
government has good information about what it plans to spend,
and what it actually spends. This information should be:
e Robust and reliable: so that data is accurate, and forecasts
are as good as they can be
e Consistent: within and between organisations and
e Timely: so that data is provided on a monthly basis and
with minimum delay
This is a prerequisite for effective spending control and is the
kind of information that any well-run organisation should have in
any case. It enables the government to monitor spending;
intervening where necessary to ensure the government delivers
its plans.
All organisations that are part of the central government have
the same responsibilities to produce and share robust, timely
financial information to support the management of the public
finances. Working with the Treasury, departments should agree
with their ALBs how this need will be met. This duty is entirely
consistent with the freedoms and flexibilities that departments
and ALBs have to manage their money.
Departments and devolved administrations provide financial
information to the Treasury via the Online System for Central
Accounting and Reporting II (OSCAR II).
This information is published in a number of reports for
Parliament and the public, providing the main source of central
government expenditure data for the Budget, Supply Estimates,
Public Expenditure Statistical Analyses (PESA), monthly Public
Sector Finances and the national accounts.
Additionally, this information should be used in evaluation plans
for new and existing programmes of spend (discussed in more
detail below).
The Government Finance Function has also established a set of
principles! for the design of reporting processes, systems and
technology, with departments should refer to.
Robust, relevant data
2.11
Decisions about the management of public money must be
made on the basis of robust and relevant information. This
information must allow frontline organisations, departments and
the Treasury to assess whether spending control totals will be
met based on current plans and on actual spend to date. And it
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must allow risks to spending control to be identified and
mitigated.
For the purposes of on-going spending control, all departments
and devolved administrations must monitor and share spending
information with the Treasury on a monthly basis.
Departments and the Treasury must agree what information will
be provided, focusing on the core information needed to manage
the public finances. The exact requirements for each department
will be agreed with the Treasury, but will, at a minimum, include
accurate information on actual and planned spend. This should
include robust forecasts of full year spend, and a breakdown of
monthly spend, every month from the beginning of the financial
year. Forecasts should be based on departments’ best
information and an assessment of risks.
This is necessary to provide information to ministers about
forecast levels of public spending, both to enable them to
monitor the overall fiscal position but also to take spending
decisions and to ensure expenditure is allocated in a way that
provides value for money. Sound forecasts enable the
government to ensure that departments are not overspending
but also to identify in good time, and then reallocate, any
underspends.
Departments and devolved administrations should confirm the
accuracy of their OSCAR data by reconciling it to internal
management information. Good practice is to have OSCAR fully
aligned at every level or to be able to explain any differences.
The Treasury will support departments and devolved
administrations by providing clear and comprehensive guidance
on the classification of public spending data, and by providing a
robust system (OSCAR) to collect, analyse and report this
information.
Where the information currently provided is insufficient to
monitor public spending effectively, the Treasury will agree with
departments the steps needed to rectify this and how the
department can be supported to achieve this. In addition to data
on actual and planned spend, departments should provide detail
on how SR plans will be implemented and achieved.
Where departments have a good track record of providing
accurate and timely information, OSCAR data will already mirror
internal management information, and flexibilities such as
Budget Exchange will be fully available to these departments
within the rules set out in this document.
For departments who produce or share less accurate or
incomplete information, the Chief Secretary may take steps to
minimise the risk to the public finances and to incentivise
improvement. These may include restrictions of access to Budget
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Exchange and other budgetary flexibilities, lowered delegated
authorities and mandating Departmental Unallocated Provision
(DUP).
Consistent data
2.20
There must be consistent information about what the
government is spending, both within and between organisations.
Data should not be withheld. This ensures that decisions are
taken on the basis of financial information that is as accurate and
comparable as possible. Data supplied should be consistent with
rules as set out in this document, and with definitions as stated in
the Treasury Chart of Accounts.
Sharing of information must also be consistent. Departments
should under no circumstances withhold basic data about public
spending. The public has a right to know how its money is being
spent. The Treasury is responsible for ensuring that spending is
managed effectively, on behalf of citizens and Parliament. This
fundamental role on behalf cannot be fulfilled without complete
transparency about what is being spent.
Timely data
2.22
2.23
Without timely information, the government cannot take action
to prevent plans going off track before it is too late.
A minimum of monthly data should be the presumption for
spending departments and devolved administrations, and it
should usually be available no more than one month in arrears.
Evaluation plan
2.24
As part of monitoring spending, everyone involved in the
implementation of a new policy or programme should
understand what its success or failure would look like. This makes
it necessary to reach agreement on appropriate metrics for
evaluating impact at the start, which can only be measured
accurately if implementation is designed to facilitate collection of
that specific data.
Bids for new projects and programmes (and preferably legacy
spend) should have robust evaluation plans included. Business
case approval will not be secured without commitment to some
measuring impact, an understanding of which is best gained
through rigorous experimentation, for example a randomised
control trial. Data collection and evaluation of this standard
should be carried out throughout the policy’s life - which should
in the first instance be a pilot, with continuation subject to
meeting the agreed success level against the observed metric.
Please refer to the Green Book for more detail on business cases
and spending bids.
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Box 2.A: Monitoring spending checklist
1 All departments and devolved administrations must monitor and
share spending information with the Treasury on a monthly basis.
Departments and the Treasury must agree what information will be
provided, focusing on the core information needed to manage the
public finances. All organisations that are part of the public sector
have the same duty to produce and share robust, timely financial
information. The exact requirements for each department will be
agreed with the Treasury, but will, at a minimum, include accurate
information on actual and planned spend. Departments and devolved
administrations should confirm the accuracy of their OSCAR data by
reconciling it to internal management information. Good practice will
be to have OSCAR fully aligned at every level or to be able to explain
any differences.
2 The Treasury will support departments and devolved administrations
by providing clear and comprehensive guidance on the classification
of public spending data, and by providing a robust system (OSCAR) to
collect, analyse and report this information.
3 Departments and devolved administrations must provide robust
forecasts of full year spend, and a breakdown of monthly spend, every
month from the beginning of the financial year, which reconciles with
their internal management information.
4 The data provided to the Treasury must be consistent with the data
departments use for internal management purposes, so that
decisions are taken on the same basis and there is an agreed position
on what departments are spending.
Departments and devolved administrations should therefore confirm
the accuracy of their OSCAR data each month by reconciling it to their
internal management information.
5 Departmental Boards, supported by their Non-Executive Directors, are
responsible for ensuring that the data provided to the Treasury is
consistent with the information used internally.
6 Aminimum of monthly data should be the presumption for spending
departments and devolved administrations, and it should usually be
available no more than one month in arrears.
7 All new programme spend (and ideally legacy spend) must have an
evaluation plan.
Managing spending
2.26 Good business planning is an essential part of managing
spending. Each public sector organisation should plan to use the
limited budget that it has to achieve good value for money and
ensure that efficient and sustainable choices are made about
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how public funds are used. This means keeping an eye on the
medium- and long-term picture, re-assessing risks and
evaluating alternative ways of achieving policy objectives.
Departments must follow the principles and methodology laid
out in the Green Book when determining whether a prospective
proposal would be value for money.
In order to manage spending, departments need to assess risks
and change priorities effectively. Key to this is:
* good risk management
* arobust approach to contingency so that when risks do
materialise, they can be managed within existing budgets
e having the right skills and embedding spending control in the
culture of public sector organisations
« controlling spending throughout the year and
« efficient cash management
Risk management
2.28
The Treasury has a range of risk management processes, based
on its principle of devolving responsibility for managing spending
as far as possible. In particular:
« Treasury spending teams work closely with their respective
departments to identify and monitor risks to delivering SR
plans
« those risks of the highest order, which would have a significant
impact on the government's overall fiscal position, are
monitored by the Chief Secretary on a monthly basis, when the
latest intelligence on likelihood and scale of risks, and
departments’ plans to mitigate these are scrutinised
e the Chief Secretary conducts a programme of bi-laterals with
the relevant departments on a regular basis, to discuss how
these risks are being managed and
e the Chief Secretary updates the Chancellor on a regular basis,
ensuring oversight of the top-level risks
Complementing this process, departments are expected to have:
* a rigorous approach to assessing risk, conducting an evidence-
based assessment of the likelihood and scale of risks occurring,
and sharing this with the Treasury. To support this,
departments should regularly review their departmental
financial risk management systems in discussion with the
Treasury, agreeing priorities for improvement
*® a proactive and collaborative approach to risk management:
Public sector organisations, departments and the Treasury
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(u 045083)
2.30
should work together to mitigate risks before they hit the
public finances, using early warning systems to intervene ina
timely way. Departments should share their in-depth
assessment of spending risks with the Treasury on a monthly
basis, agreeing mitigating actions and monitoring systems as
presented to departmental boards and
« a process for continually monitoring AME, with an
understanding of the volatility of the area of spending should
be used to identify when spending is off track and where
interventions should be made to bring costs back to planned
levels so that forecasts are met
Please refer to the Orange Book for a more detailed description
of risk management across government.
Approach to contingency
2.31
Apart from in a small number of exceptional cases, departments
are expected to manage new pressures within their existing
budgets. Departments are therefore expected to have a robust
approach to contingency.
All departments must identify around 5 per cent of their
allocated DEL that could be reprioritised to fund unforeseen
pressures in their area of responsibility, and to share these plans
with the Treasury. This amount can be made up either by having
a list of contingency plans for how the department could
reprioritise resources should this ever be necessary, or by a DUP,
or a combination of the two.
While recognising the differences between DEL and AME,
departments with particularly large non-pension AME spending
should consider options for reprioritisation across Total Managed
Expenditure.
Bi-laterals with the Chief Secretary to the Treasury will provide
the opportunity for departments to discuss contingency plans
with the Treasury. The level of assurance required by the Treasury
on this will depend on the Spending Team's judgement of the
level of risk presented to the Exchequer.
Departmental unallocated provision (DUP)
2.35
Departments are encouraged not to allocate their DELs fully
against their programmes at the start of a financial year but to
hold some provision back to deal with unforeseen pressures that
emerge subsequently, including utilisation of provisions. This
unallocated budget is referred to as the DUP.
DUP is reported in the Main Estimate as the difference between
budgetary limits and the amounts allocated to specific functions;
it is included within its own separate Estimate Line (within voted
DEL) but cannot be spent by the department unless it is
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subsequently reallocated to appropriate functions in the
Supplementary Estimate. Note that there is no such concept as
negative DUP: this is a way of disguising over-programming and
is forbidden.
The Reserve
2.37
2.40
Departments are expected to manage their DEL budgets so as to
stay within them. If pressures arise in one part of a DEL,
departments should respond by:
* managing the pressures down
e using their DUP
e re-prioritising and making offsetting savings elsewhere in the
budget
e deferring spending elsewhere in the budget and
e transferring provision from resource DEL to capital DEL (if the
pressure is in capital DEL)
Exceptionally, a department may seek support from the Reserve.
As part of the spending plans announced in SRs, the government
allocates a Reserve for genuinely unforeseen contingencies that
departments cannot absorb within their DELs. Separate Reserves
are held for resource and capital DEL; both are small. Support
from the Reserve to departments’ resource or capital DELs is
non-recurrent i.e. it will be stripped out when baselines are
agreed for SRs. The failure to hold sufficient contingency will
count against the department when decisions about granting
support from the Reserve are taken.
The Reserve can only be used for genuinely unforeseen,
unaffordable and unavoidable pressures, or certain special cases
of expenditure that would otherwise be difficult to manage, as
agreed with the Chief Secretary.
Unless otherwise agreed with the Chief Secretary, the Reserve
cannot be used for
« Spending that was known during the course of the Spending
Review but could not be accommodated in the allocation at
that time
« Spending increases due to tariff adjustments or price increases
e Spending that could be delayed until such time that it is
affordable in department's budgets, or can be considered as
part of the next Spending Review
¢ Spending that is recurrent, or could lead to increased spending
in future years which is not affordable in department's budgets
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2.41
2.42
2.43
2.44
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If the Chief Secretary agrees to provide support to a department
from the Reserve, then the amount may be repayable the
following year by means of a reduction in the department's DEL.
The drawdown of funding from the Reserve is subject to an
assessment of need, realism and affordability at the time at
which the funds are released. Reserve claims approved by the
Chief Secretary must be voted in Estimates and should normally
be voted at Supplementary Estimates when such an assessment
can most easily be made.
Departments that think they might require support from the
Reserve should contact their Treasury spending team early so
that alternative courses of action can be fully discussed while
there is still time to put them into effect. Departments’ proposals
should set out:
e the size of the pressure
« the cause of the pressure and why it was unforeseen
e the offsetting actions that have been taken and could be taken
to manage the pressure and to absorb it, including cutting
costs, cutting inefficiencies, cutting unnecessary programmes
and cutting lower priority budgets
e the residual pressure, split into capital and resource, and the
administration costs and programme elements and
« the corrective actions they mean to take if support from the
Reserve is agreed, as regards the substance of the policy,
improved financial management, and paying back the amount
provided
If, after discussions have concluded, and no alternative courses of
action are identified, departments should submit a formal
application requesting access to the Reserve. This should be with
the full agreement of the relevant Treasury Spending Principal.
All formal applications for Reserve funding should be sent to the
Treasury in the form of a Ministerial letter to the Chief Secretary
at the time of the request.
In addition:
e the Chief Secretary may ask for a lessons learned review in
each case where Reserve support is approved. This review will
be an independent or peer review as appropriate
« the process for assessing Reserve claims will take account of
the department's or devolved administration's capability and
past performance. This will include an assessment of the
amount of Reserve funding allocated in the past, the number
of Reserve applications received, and any cases where Reserve
funding has been allocated and gone unspent in previous
years
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2.46
2.47
* particular conditions and/or penalties will be applied to
Reserve claims that relate to failures of financial management,
and inappropriate Reserve claims will be rejected
The Chief Secretary may also consider further remedial action for
those who break the rules or clearly fall below expectations. This
may include asking the NAO to investigate the value for money
that the department achieves, conducting a financial
management review, reducing delegated authorities, removing
access to Budget Exchange and/or making deductions to
administration budgets. In all cases, the Treasury retains the right
to apply whatever penalties are appropriate to incentivise good
financial management and value for money.
All additional funding from the Exchequer should be presumed
to be a Reserve claim, except where agreed as part of the Budget
Exchange system or explicitly stated otherwise in writing by the
Chief Secretary.
The Reserve and contingent liabilities
2.48
Departments are required to report contingent liabilities to
Parliament. This process is separate from budgeting. The
recording of contingent liabilities does not guarantee
departments’ access to the Reserve. If a contingent liability
crystallises, the normal budgeting procedures apply. That is,
departments are expected to cover the costs by making
offsetting savings as normal.
Keeping track of the numbers
2.49
Departments are expected to keep track of their authorised
control totals on OSCAR, including any changes from Machinery
of Government changes, other classification and transfer
changes, issues from central funds, authorised transfers to
resource DEL, and - exceptionally — issues from the Reserve.
Departments and spending teams should at all times use OSCAR
to have a mutual understanding of the authorised levels of:
« resource DEL (broken down into the non-ringfenced and
depreciation ringfenced budgets)
e¢ administration budget
« capital DEL (for some departments, broken down into the non-
ringfenced and financial transaction ringfenced budgets)
Departments and spending teams should also have a mutual
understanding of the planned levels, and risks of variance to
plans, of
* resource AME
e capital AME
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2.51
Departments are expected to monitor spending against plan and
to share information with their Treasury spending team (via
bilaterally agreed information supply) and the Treasury
collectively (via OSCAR).
Breaches of budgetary limits
2.52
Any breach of a budgetary limit is treated seriously, and
departments need to take remedial action. Note that breaches
can arise as a result of past errors treated as Prior Period
Adjustments (PPAs) in accounts. See Chapter 1 for more details of
how PPAs should be treated in budgets.
This passage sets out the process to follow where a department's
final outturn breaches the final level set for any of the following
limits:
« resource DEL (including the ringfenced and non-ringfenced
limits, and the administration budget)
e capital DEL (including the financial transactions ringfence)
* resource AME
e capital AME
* non-budget expenditure
Note that there are separate Parliamentary consequences of
breaching budget control totals described in the Supply Estimates
uidance manual.
2.54 For breaches in DEL the responsible minister should write to the
2.55
Chief Secretary as soon as practicable after the end of the year
setting out:
« the size of the breach
e why it occurred and
e the remedial action that the department is proposing,
including
¢ improvements in financial management to deal with the
specific cause of the breach
e improvements in financial management to improve overall
forecasting and control of the department's control totals
and
e information that will be provided to the Departmental
Board and to the Treasury to demonstrate these
improvements
The Treasury may also request a similar process for any
ringfences set within the limits listed above.
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2.56 When departments overspend against their control totals, there
may be an offsetting reduction in the corresponding control total
in the following year.
2.57. Breaches in departmental AME do not automatically incur a
penalty (although they may result in an Excess Vote if the Voted
limit is exceeded—see the Supply Estimates quidance manual! for
further details). However, unforeseen changes in spending may
indicate poor financial management by departments. The
department should therefore write to their Treasury spending
team providing the same information as set out for breaches in
DEL above. This should include the options for offsetting the
higher spending through savings elsewhere in either the
department's DEL or AME.
2.58 Departments should discuss with their Treasury spending teams
their proposals before their Minister writes to the Chief Secretary.
Box 2.B: The process for making Reserve claims
Departments and devolved administrations should contact their spending
team at the earliest possible opportunity if they are considering applying for
Reserve support, to ensure they have sufficient time to present their case.
Where a decision is required urgently, and convincing evidence has not been
provided, the presumption will be that the pressure can be managed by the
Department or devolved administration.
Applications for Reserve support must be supported by written evidence,
which includes a credible and detailed assessment of offsetting actions that
have been taken and could be taken to manage the pressure and absorb it.
More detail is set out in this chapter.
The drawdown of funding from the Reserve is subject to an assessment of
need, realism and affordability at the time at which the funds are released. The
final draw down of Reserve claims approved by the Chief Secretary will
therefore be decided, and voted on, at
Supplementary Estimates when such an assessment can most easily be made.
In most cases Reserve claims must be repaid the following year by means of a
reduction in the Department's, or devolved administration's, DEL.
Controlling spending through the year
2.59 Good spending control demands that public sector organisations
monitor performance against objectives through the year and
make adjustments to stay on track. This requires prompt and
accurate management information systems coupled with active
top management engagement.
2.60 There is no place for excess expenditure or low-value spending in
the last quarter of the financial year. Any evidence of excessive
spending at the year-end in areas that will not generate savings
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in future years will be taken into consideration in future decisions
on spending issues, including the allocation of funding.
2.61 Spending must be properly managed throughout the year and
Accounting Officers are in breach of their duties if they permit
expenditure to be incurred without the due approvals in place.
Cash management
2.62 Together, public sector organisations handle a great deal of
public money and carry out many financial transactions every
working day. It is essential that these are handled in a way that is
efficient and safe for the Exchequer as a whole. Accounting
Officers are responsible for the credit risk to which public funds
are exposed when held in commercial banks. It is important that
they manage this risk actively, so that it is kept toa minimum.
2.63 For most public sector organisations, this in practice means
using the Government Banking Service (GBS). Any excess cash is
automatically entered into the Exchequer accounts at the Bank
of England, both during and at the end of each working day. This
enables the Debt Management Office (DMO) to manage the
Exchequer’s cash position efficiently by financing any net
government overnight debt or investing any overnight balance.
Any other arrangement would expose the government to
increased credit risk and mean greater government borrowing,
costing the Exchequer more overall.
2.64 Each public sector organisation should run its cash management
and money transmission policies to minimise the cost to the
Exchequer as a whole. This would normally mean using the
Government Banking Service.
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Box 2.C: Controlling spending checklist
Risk management
1. To support risk management, departments should regularly review their
departmental financial risk management systems in discussion with the
Treasury, agreeing priorities for improvement. Departments should share
their in-depth assessment of spending risks with the Treasury on a
monthly basis, agreeing mitigating actions and monitoring systems as
presented to departmental boards.
Contingency
2. All major spending departments will be asked to identify around 5 per
cent of their allocated DEL that could be reprioritised to fund unforeseen
pressures in their area of responsibility and to share these plans with the
Treasury. This amount can be made up either by contingency plans or by
a DUP, or a combination of the two. While recognising the differences
between DEL and AME, departments with particularly large non-pension
AME spending should consider options for reprioritisation across Total
Managed Expenditure.
The Reserve
3 The Chief Secretary may ask for a lessons learned review in each case
where Reserve support is approved. This review will be an independent or
peer review as appropriate.
4 The process for assessing Reserve claims will take account of the
department's or devolved administration's capability and past
performance. This will include an assessment of the amount of Reserve
funding allocated in the past, the number of Reserve applications
received, and any cases where Reserve funding has been allocated and
gone unspent in previous years.
5 Particular conditions and/or penalties will be applied to Reserve claims
that relate to failures of financial management or are inappropriate.
6 Departments may be expected to pay back Reserve funding in the
following year.
7 The Chief Secretary may consider further remedial action for departments
who break the rules or clearly fall below expectations.
Controlling spending throughout the year
8 Any evidence of excessive spending at the year-end in areas that will not
generate savings in future years will be taken into consideration in future
decisions on spending issues, including allocation of funding.
Cash management
9 Each public sector organisation should run its cash management and
money transmission policies to minimise the cost to the Exchequer as a
whole. This would normally mean using the Government Banking Service.
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Delivering Public Value
2.65
The government is committed to ensuring spending decisions
maximise value for taxpayers and place a strong emphasis on
real-world outcomes for citizens. These outcomes should be
reflected in the business case for policy proposals — in line with
the Green Book and accompanying business case guidance.
Spending Review 2021 (SR21) supported this commitment by
publishing an updated set of priority outcomes and metrics for
government departments covering 2022-25, as part of
implementing the Public Value Framework.
It also placed a stronger focus on the strategic goals of proposals
by requiring departments to demonstrate how each of their bids
would support their priority outcomes — including an estimate of
the impact on their metrics — based on evidence of what works.
This information was used to inform decisions by Ministers on
bids.
In line with this approach, departments are expected going
forward to align their policy proposals to their priority outcomes,
and to explain and evidence how proposals would contribute to
them. For each proposal, departments should:
e Identify the priority outcome(s) the proposal would contribute
to. This can include cross-cutting outcomes led by other
departments where relevant
« Summarise the case for change for the proposal, its scope and
key constraints. Where relevant, the case for change should be
supported by data on historical performance against priority
outcome metrics for the outcome
e Set out the key priority outcome metrics the proposal is
expected to affect, providing a quantitative assessment of
expected impact(s) where feasible, and a qualitative
assessment where not. In cases where the proposal is expected
to affect an agreed trajectory and/or target for a metric,
departments should specify its expected quantitative impact
in relation to that trajectory and/or target
e¢ Explain how and why the bid will have the impact you have
estimated. This should draw on the theory of change in your
department’s Outcome Delivery Plan (ODP) where appropriate
« Summarise any important evidence to support the expected
impact on the outcome, provide an assessment of the
strengths of that evidence and summarise plans to improve
the evidence base. This should draw on the Magenta Book
where appropriate
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2.69
This information should be reflected in the strategic case of the
business case for policy proposals — in line with the Green Book
and accompanying business case guidance. This updated
approach will allow departments to link spending decisions more
closely to real-world outcomes for citizens and will drive greater
accountability and improved delivery across government.
To support the implementation of this approach, departments
are encouraged to use the Infrastructure and Projects Authority's
Project/Programme Outcome Profile going forward. This tool
has been developed with input from departments and provides a
framework for linking business cases for programmes and
projects to priority outcomes on an ongoing basis.
The updated priority outcomes and metrics published at SR21 will
form the basis for updated ODPs, covering 2022-2025.
Departments are required as part of SR21 settlements to report
on a quarterly basis to HMT and Cabinet Office on performance
against these plans, including their latest data for agreed priority
outcome metrics.
Information on performance will be used by Ministers and
officials to identify where delivery against priority outcomes may
be under pressure, as well as which programmes are not
delivering expected results. The government will then be able to
take prompt action to improve performance and make better-
evidenced decisions on future spending. The No. 10 Delivery Unit
will also provide delivery support to departments in the PM's
mission areas, by tracking performance and undertaking regular
deep dives into complex policy areas.
Governance, scrutiny and oversight
2.73
Robust governance, scrutiny and oversight are integral to
ensuring that spending is controlled effectively. This means
ensuring that:
the authorities for departments to spend or commit public funds
without prior Treasury approval are delegated in a way that
reflects the level of risk to the Exchequer and
mechanisms are in place through which those accountable for
managing public money at ministerial and official level can
ensure that the government's spending control objectives are
delivered
Delegated authorities and approvals
2.74
The Treasury controls public expenditure. Parliament looks to the
Treasury to make sure that:
e departments use their powers only as it has intended and
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* revenue is raised, and the resources so raised spent, only within
agreed limits
This means that formally, Treasury consent is required for all
commitments to expenditure.
Without it, expenditure is irregular. This applies to both resource
and capital spending.
Treasury approval:
« must be confirmed in writing, even where initially given orally
* cannot be implied in the absence of a reply and
* must be sought in good time to allow reasonable
consideration before decisions are required
In practice, however, the Treasury delegates authority to
departments to enter into commitments and to spend within
predefined limits without specific prior approval. This is
important for ensuring that those closest to the decisions on the
ground have the authority to manage public money efficiently
and effectively.
The Treasury agrees these delegated authorities in writing with
each department, so there is clarity about where Treasury
approval is required. Authorities are considered carefully to
ensure they strike the right balance between the need for the
Treasury to account to Parliament for the use of public money,
and for the government to function efficiently. These authorities
are subject to regular review.
In order to secure approvals, it is essential that big projects are
appraised critically as business propositions. For large spending
projects, there is a standardised process that all projects needing
Treasury approval must follow.
e The Treasury Approval Process (TAP) process applies to all
spending proposals related to projects and programmes
that are above Delegated Authority Limits (DAL) set by the
Treasury. See Box 1.A of the TAP Guidance for a list of the
characteristics of a major project or programme that
qualifies for the Treasury approval process
e Departments should engage with HMT, Infrastructure and
Projects Authority (IPA) and Cabinet Office in a timely
manner where a proposal will be subject to the Treasury
Approval process, particularly through early agreement of
an Integrated Assurance and Approval Plan (IAAP)
e Programmes must have a programme business case which
is reviewed as a minimum annually. Treasury approval is
required at a minimum of each updated programme
business case
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2.81
e Many projects are part of an overarching programme. The
classic model for project development, scrutiny and
approval consists of three stages, which are Strategic
Outline Case; Outline Business Case; and Full Business Case.
Treasury approval is required at each stage as agreed in an
Integrated Assurance and Approval Plan. The Treasury will
not normally approve business cases unless an assessment
of delivery confidence has been carried out by the IPA, or
before receiving an up-to-date Approval and Assurance Plan
Treasury will decide the level of scrutiny appropriate for each
project/programme approval under the Treasury Approval
Process Framework, full details of which can be found here
Ministerial governance
2.82
It is for Secretaries of State to ensure delivery of their own
spending plans. The Treasury has a role in scrutinising these
plans, ensuring that the overall plan is delivered.
The Chief Secretary conducts a rolling programme of bilateral
meetings with the main spending departments, discussing
progress in delivering their plans and the steps departments are
taking to strengthen their approach to spending control. The
Chief Secretary reports to the Cabinet, which oversees progress
at the highest level.
Official level governance
2.84
The Accounting Officer role is a strength of the UK budgeting
system and ensures that every public sector organisation has
someone whom Parliament may call to account for the
stewardship of the resources within its control. Accounting
Officers are responsible for ensuring their organisation meets
specific standards, as set out in Chapter 3 of Managing Public
Money. These standards include:
* respecting Treasury spending limits and achieving sustainable
spending plans
« ensuring that forward spending plans are sustainable in the
medium term
* operating effective management information systems so that
the department can give timely, accurate and realistic reports
of its business to the Treasury
« acting within the law and meeting Parliament's expectations
about transparency
e avoiding fraud, waste and other misuse of public funds and
e securing good value for the use of public money in the
furtherance of ministers’ objectives
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Accounting Officers in departments are appointed by the
Treasury. The Chief Secretary will write to the Secretaries of State
and the Head of the Civil Service where they are concerned that
Accounting Officers may fall short in fulfilling their
responsibilities for managing public money.
In relation to the devolved administrations in Scotland, Wales
and Northern Ireland, the Treasury will continue to explore
opportunities to promote the sharing of best practice.
Departmental Boards
2.87
Each department is led by a Board chaired by the senior Minister
in the department and supported by several Non-Executives with
relevant business experience. The board guides the Permanent
Secretary in implementation of the department's policies and
spending plans. Members of the board are expected to challenge
the department constructively to ensure that plans are robust
and effective. They also seek to assess the more remote or subtle
risks the department faces so that contingency plans can be put
in place.
An effective board is able to view the department's business in a
broad context, enabling it to improve its delivery, its readiness for
exogenous shocks and its resilience. Such support for the
permanent staff underpins the department's capability,
including its ability to live within its budget.
Non-Executive Directors have a significant role to play in good
management within departments including strengthening
spending control through supporting and challenging the
executive's decisions around the management of the
department's business. The senior Non-Executives from each
department form a network, which enables good practice to be
propagated and can promote accurate delivery of spending
plans. Lead Non-Executive Directors give a high priority to
improving management information and risk management
systems within departments, and work closely with their
departmental boards to drive changes in these areas.
Scrutiny
2.90
It is important that departments secure good value for money for
the resources they deploy. It is good practice to work
cooperatively with the NAO, where studies of particular areas of
departments’ business can suggest greater efficiency or other
improvements.
Departments that do not operate effective control and
management systems, or which achieve poor value for money,
can expect censure from the NAO.
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Box 2.D: Governance, scrutiny and oversight checklist
Ministerial governance
with the main spending departments.
Official level governance
short in fulfilling their responsibilities for managing public money.
1 The Chief Secretary conducts a rolling programme of bilateral meetings
2 The Chief Secretary will write to the Secretaries of State and the Head of
the Civil Service where he is concerned that Accounting Officers may fall
Minimising the risk to public finances and
incentivising improvements
2.92 To ensure taxpayer money is spent well, Parliament continues to
look to HM Treasury to make sure departments use their
spending powers only as intended, and ensure resources are
spent only within the agreed limits. Therefore, HM Treasury must
continue to set the ground rules for the administration of public
money and account to Parliament for doing so.
2.93 Departments and arms’ length bodies are expected to follow the
letter and spirit of the spending control framework, as set out
earlier in this chapter and in Managing Public Money. All
accounting officers must make sure the actions of the public
organisation they lead meet the four accounting officer
standards of regularity, propriety, value for money and feasibility
expected by Parliament and the public for use of public
resources.
2.94 The Treasury expects ministerial departments to monitor the
activities of their arms’ length bodies, and to take the necessary
steps to ensure compliance. If a department or one of their arms’
length bodies fails to comply, the Treasury may take steps to
minimise the risk to public finances and to incentivise
improvements.
Actions that do not comply with the spending
control framework
2.95 Actions that do not comply with the spending control framework
may be identified during the course of the year, or as part of the
annual Accounting Officer appraisal exercise. Examples of poor
performance include, but are not limited to:
e Failure to provide the information the Treasury needs to
monitor public spending effectively, including accurate
information on actual and planned spending, based on
54
departments’ best information and an assessment of risks,
fully aligned to internal management information (or with
differences explained)
e Failure to hold sufficient contingency to manage pressures
within budgets
e Repeated requests for access to the Reserve, or failure to
spend funding granted from the Reserve in previous years
e Failure of financial management, including regarding
compliance with Treasury conditions attached to funding
or project approvals
e Failure to obtain appropriate Treasury authorities in
accordance with delegated authority limits and the
contingent liability approval framework, or seeking
Treasury approval retrospectively
e Overspending against control totals or Treasury ringfences
e Presenting estimates to parliament which are not taut and
realistic, resulting in significant underspending against
control totals or Treasury ringfences
e Incorrect classifications of expenditure (for example
treating administration spending as programme).
Steps the Treasury may take to address non-
compliance
2.96 Where department actions do not comply with spending control
expectations, the Treasury will discuss with departments the
steps needed to rectify this and how the department can be
supported to achieve improved performance.
2.97 In all cases, the Treasury retains the right to apply whatever
penalties are appropriate to incentivise good financial
management and value for money. The Chief Secretary may
consider remedial action for those who break the rules or clearly
fall below expectations, including but not limited to:
e Restricting access to the Reserve, Budget Exchange, and
other budgetary flexibilities
e Increased scrutiny of activities, including through the
lowering of delegated authorities
e Mandating Departmental Unallocated Provision (DUP)
e Referring proposals to further review under the Treasury
Approvals Process
e Asking the NAO to investigate the value for money that the
department achieves on specific programmes or projects
e Conducting a financial management review
e Making deductions to administration budgets
e Requiring an — internal or independent - lessons learnt review,
or Accounting Officer assessment of the financial
management control environment
e Requesting additional bilateral meetings with the relevant
Secretary of State to discuss progress in delivering their plans
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and the steps departments are taking to strengthen their
approach to spending control
2.98 If the Treasury Director General of Public Spending is concerned
that Accounting Officers may fall short in fulfilling their
responsibilities for managing public money, they may address
their concerns through the Accounting Officer appraisal process.
2.99 Departments that do not operate effective control and
management systems, or which achieve poor value for money,
can also expect censure from the NAO and Parliament.
Incentives for high performing departments
2.100 The Treasury will continue to explore opportunities to promote
the sharing of best practice across departments, and to reward
high performance. This includes recognising the strength of
performance through the Accounting Officer appraisal process.
Forecasting case study
HM Treasury expects all departments and their arms’ length bodies to provide
robust and accurate forecast. This is required to enable the Treasury to monitor
public spending effectively. Inaccurate forecasts risk:
« Borrowing more than we needed to or paying more to borrow at
short notice. Borrowing excess debt, or more expensive debt,
significantly adds to the rising costs of debt servicing. Higher debt costs
roll forward to future years, reducing the budgets available for
departmental settlements.
« Inefficient allocations of funding. Basing spending plans on forecasts
that aren't as good as they could be stops the Treasury allocating money
properly across departments.
« Failure to meet Parliament's expectations. Parliament expects to be
presented with taut and realistic spending plans; where spending plans
are based on inaccurate forecasts, they are not taut and realistic.
Guidance for improving forecasts
To help departments improve their forecasts, the Government Finance Function
has published principles for forecasting, setting out leading practice examples of
how departments could prepare and adjust forecasts and manage risks. The
Finance Board Pack Reporting Project materials also set out how departments
can improve the quality and consistency of financial information, including
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forecasts, in board packs. These principles and materials are available on
OneFinance.2
In addition to these principles, departments are expected to:
e Avoid including contingency in their forecasts, particularly when
central spending scenarios have changed since budgets were
awarded
e Ensure forecasts reflect the best understanding of how much
departments think they will actually spend over the entirety of the
financial year, rather than size of their current budgets (or current
budgets amended for anticipated budget adjustments)
e Ensure all data shared with the Treasury is robust and reliable,
consistent with the information shared within organisations, and
provided on a timely basis with minimum delay
e Avoid unnecessarily inflating forecasts to provide a buffer in Estimates
in case of unexpected additions
Forecasting actions that do not comply with Treasury expectations
Departments that do not comply with Treasury expectations on forecasting will
be identified through the end-of-year benchmarking process of forecasts against
outturn. They may also be identified in-year through reviews of monthly
forecasts. Examples of poor performance include, but are not limited to:
e¢ Being in the bottom quartile of departments in the benchmarking
process, or otherwise not forecasting to within 1% of their eventual
outturn in Period 6 of the financial year
e Presenting estimates to Parliament which are not taut and realistic,
resulting in significant underspending against control totals or
Treasury ringfences
e Failing to provide on a monthly basis the information the Treasury
needs to monitor public spending effectively, including producing or
sharing less accurate or incomplete forecast or year-to-date spending
information
e Significant and unexplained fluctuations in forecasts or year-to-date
spending
e Overspending against control totals or Treasury ringfences
Of course, there may be some circumstances where it is not possible to forecast
the impact of large, one-off transactions, particularly those planned for around
the end of the financial year. In such circumstances, departments should speak
to Treasury spending teams about how best to manage these transactions to
ensure value for money.
2 Forecasting principles: https://aff.civilservice. gov.uk/global-design-principles- 1/finance-processes/reporting/processes/forecasting/
Finance Board Pack Reporting Project: https://aff.civilservice. gov.uk/standards-policy-and-procedures/finance-insight/finance-board-
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Steps the Treasury may take in response to poor forecasting
Departments that forecast poorly will be asked to set out a plan to the Treasury
on how they intend to improve their forecasting. The Treasury will take their
forecasting performance into account in future decisions around access to the
Reserve and other budgetary flexibilities.
Given the impact of departmental forecasting on the Office for Budget
Responsibility's (OBR's) forecasts, departments may also be asked to meet with
the OBR to explain their forecasts and how they intend to improve these. The
Treasury may also apply other penalties.
2.101 Where departments have a good track record of complying with
Treasury expectations, flexibilities such as Budget Exchange will
be fully available within the rules set out in this document.
Compliance with the public spending framework is also the
Treasury's key consideration in the determination of delegated
authorities.
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Appendix 1 to Chapter 2: The annual
spending control cycle
Monthly recurring actions:
¢ OSCAR returns
¢ Publication of the Public Sector Finances statistical bulletin.
vO
ay
Estimates
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Chapter 3
Resource Budget
Introduction
3.1
3.2
3.3
3.4
Current expenditure by government is one of the most targeted
areas of spending control. The Public Sector Current Expenditure
(PSCE) fiscal aggregate specifically monitors current expenditure.
Current expenditure is also a key component of Public Sector
Current Budget (PSCB) and Public Sector Net Borrowing (PSNB).
Current expenditure is controlled through the resource budget.
The resource budget includes expenditure on pay; current
procurement; current grants and subsidies; depreciation; and the
creation, revaluation and release of provisions. The resource
budget contains both transactions that have an immediate
impact on the fiscal position (for example pay and procurement),
and those that will have an impact in the future (for example
impairments and provisions).
Since the resource budget includes the resource consequences
of acquiring and owning assets (for example, depreciation and
maintenance), departments should consider the inter-
relationship of the resource and capital budgets when planning
and monitoring expenditure. That consideration should help
departments manage their entire asset base as well as
considering annual changes to the asset base through new
investments or disposals.
This chapter covers in detail the treatment of some specific areas
of expenditure in the resource budget. This chapter provides
guidance on the following areas:
e Grants and subsidies (paragraphs 3.7-3.15)
e Fixed assets (including depreciation, impairment and
revaluation) (paragraphs 3.16-3.48)
e Current assets and liabilities (including inventory, trade debtors
(receivables), and accounts payable) (paragraphs 3.49-3.64)
e Employee benefits (paragraphs 3.65-3.66)
« Provisions (paragraphs 3.67-3.79)
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3.5
3.6
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« Other miscellaneous areas (insurance, tax credits, notional
audit fees and European Union spending) (paragraphs 3.80 —
3.96)
See Chapter 4 for the treatment of income in resource budgets.
See also Chapter 5 for the rules governing the division of the
resource budget into administration and programme totals. See
separate chapters for the resource budget implications of
financial transactions, leases, PPP deals, pensions, support for
local authorities and support for public corporations.
For elements of current expenditure not specifically referenced in
this document, departments should assume that this
expenditure scores in the resource budget at the same value and
with the same timing as in the Statement of Comprehensive Net
Expenditure (SoCNE) in the departmental accounts. Consult the
Treasury with any queries.
Grants and subsidies
Overview
3.7
3.8
3.9
Departments may make unrequited transfer payments to
businesses or individuals for a number of reasons. These
payments must be classified for budgetary purposes as either
capital grants, current grants or subsidies. Current grants and
subsidies score in the resource budget; capital grants score in the
capital budget.
There is a misalignment between departmental accounts and
the national accounts in terms of accounting for grants and
subsidies. The budgeting requirements in this area align with the
national accounts framework.
The national accounts distinguish between current grants,
subsidies and capital grants. Current grants and subsidies are
recorded as current expenditure in the national accounts while
capital grants form part of capital expenditure; as such, they
affect the Public Sector Net Investment (PSNI) fiscal aggregate.
Departmental accounts do not distinguish between current
grants, subsidies and capital grants. All grants and subsidies
score as an expense in the departmental accounts and there is
no associated capital impact.
Distinction between capital grants, current
grants and subsidies
3.11
Capital grants are unrequited transfer payments, which the
recipient must use to either:
e buy fixed assets (land, buildings, machinery etc.)
e buy inventory
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« repay debt (but not to pay early repayment debt interest
premia) or
* acquire long-term financial assets, or financial assets used to
generate a long-term return
* undertake R&D activities which meet the criteria for
capitalisation in budgets, where the recipient is a private sector
body (refer to Annex C for guidance on the criteria)
Payments of compensation to owners of capital goods destroyed
or damaged by acts of war or natural disasters should be
classified as capital grants. Major payments in compensation for
extensive damage or serious injuries not covered by insurance
policies may also count as capital grants - departments should
consult the Treasury regarding these payments.
Subsidies are current payments paid to profit-making bodies
designed to influence levels of production, prices or wages.
Where an unrequited payment does not meet the descriptions in
paragraphs 3.11-3.13, it should be treated as a current grant.
Where grants are paid that may be used at the recipient's
discretion either on capital or on current expenditure they should
be treated as current grants. Capital grants, current grants and
subsidies should be recognised when the payment is due to be
made.
Fixed assets
Overview
3.16
3.18
Tangible (for example land, buildings, IT systems) and intangible
(for example patents, IT software, trademarks) assets are referred
to collectively in this document as ‘fixed assets’. Fixed assets do
not include financial assets such as investments (see Chapter 8
for their budgeting treatment).
Fixed assets impact on the resource budget mainly in terms of
their subsequent measurement after they are acquired: through
depreciation, maintenance costs and impairments. This chapter
provides more guidance on these areas, including whether these
elements should score in DEL or AME.
Chapter 4 sets out the resource budget impact of gains or losses
on the disposal of fixed assets. Chapters 6 and 7 provide further
guidance on the capital budget impact of new spending on fixed
assets and their disposal.
Depreciation
3.19
Depreciation is a way of allocating the cost of an asset over its
useful life. It is a measure of the decline in value of a fixed asset,
as a result of normal wear and tear or obsolescence.
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Depreciation is charged on fixed assets annually and scores in
the resource budget. Depreciation is charged in budgets so that
departments are held to account for the current cost associated
with ownership of an asset.
Depreciation is a feature of both departmental accounts and
national accounts. In national accounts, it is known as
consumption of fixed capital, and impacts a number of fiscal
aggregates.
Departmental accounts and national accounts use different
methods to calculate depreciation. For budgetary purposes,
depreciation values from departmental accounts should be used
even though these do not affect fiscal aggregates. These will
depend on the accounting policies and estimation techniques
used by departments. Departments should consult with the
Treasury before changing significant accounting policies and
estimation techniques where it appears that there could be a
potential impact on budgets.
Within the resource DEL budget, depreciation scores to
administration or programme depending on whether the
underlying assets are used to support administration or
programme delivery.
Departmental accounts use the phrase depreciation for tangible
assets, and amortisation for intangible assets—budgets refer to
depreciation for all fixed assets.
Depreciation is usually an expense in departmental accounts.
Depreciation can in certain circumstances be capitalised under
accounting standards where the future economic benefits of one
asset (a producing asset) are absorbed in producing another
asset (the produced asset).
In departmental budgets, where a contract or programme
involving the development of a sovereign defence capability
gives rise to the recognition of assets (producing assets) that are
used solely in the production of assets (produced assets) under
the same contract/programme, depreciation on the producing
assets will be outside of budgets. The other general rules on
depreciation scoring set out within this manual would apply,
including when scoring depreciation on the produced assets,
and this treatment does not affect the financial reporting
requirements under the FReM.
DEL vs. AME
3.27
The general rule is that depreciation scores to DEL. The Treasury
will agree that depreciation should score to AME only in
exceptional cases.
Some of these cases include:
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3.29
e where the purchase of assets is funded from the Lottery, from
a capital grant, or from the private sector;
* an asset is a donation in kind;
* anasset is purchased using the proceeds from a donation ; or
e a right-of-use asset in a donated or peppercorn lease
In these cases, the depreciation should be recorded in AME rather
than DEL. Where an asset is part-funded through a capital grant,
only that element of the depreciation that relates to the grant will
be recorded in AME, the rest of the depreciation will be in DEL as
normal.
The intention of this exceptional treatment is to ensure
departments have appropriate incentives and budgetary
flexibility to accept grants. Chapter 7 contains further detail on
the budgeting for receiving capital grants.
Depreciation ring-fence
3.30
As discussed in Chapter 1, the budgets for fixed asset
depreciation and impairments scoring in DEL are within a ring-
fenced part of the resource DEL budget!. Departments should
have a shared understanding with Treasury of what part of their
resource DEL budget is within this ring-fence. Resource DEL
budget can be switched freely into the ring-fence, but this ring-
fenced cover cannot be moved out to fund other resource or
capital DEL spending.
The same principles apply in the exceptional cases where
Treasury has agreed that the depreciation scores to AME
budgets.
Impairment
Overview
3.32
Impairment is used to measure declines in value of fixed assets
that are not captured by depreciation (for example, due to
unforeseen damage or obsolescence that was not built into a
depreciation schedule). Impairments of fixed assets score to the
resource budget so that departments are held to account for the
cost associated with these declines in value.
Impairments of fixed assets are recognised at the same time, and
at the same amount, in budgets as in departmental accounts.
The concept of impairment is not recognised in national
accounts.
Impairments for fixed assets are scored in a ring-fenced budget
with depreciation, as described above.
1 in rare cases, depreciation of fixed assets may score outside the ringfence with Treasury approval.
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DEL vs. AME
3.35 When a tangible fixed asset is impaired, the scoring of the
impairment to AME or DEL is dependent on the reason for
incurring the impairment. The same principles apply to
intangible fixed assets, but where a department believes an
intangible fixed asset is subject to one of the categories of
impairment below it should first contact the Treasury.
3.36 The general principle used to distinguish whether an impairment
scores to AME or DEL is whether the reason for the impairment is
in a department's control (in which case, an impairment should
score to DEL). In order to provide support for departments’
management decisions, impairments are split into six different
categories, some of which score in AME and the others in DEL.
The below categories are based on descriptions of impairment in
the FReM.
3.37 The following types of impairment score in DEL budgets:
loss or damage resulting from normal business operations. The
department has a choice about how it manages assets to
reduce the risk of damage, accident and theft
abandonment of projects. Abandonment results from
managerial decisions, and can be an indicator that a stronger
project approval process and business case evaluation is
necessary
gold plating. Gold plating is the unnecessary over specification
of assets; this could be prevented through improved control
processes. Construction to a necessarily high standard for
legitimate reasons (security for example) should not be
considered gold plating
3.38 The following types of impairment score in AME budgets:
loss caused by a catastrophe. This sort of loss is outside the
normal experience of a department, so the only tradeoffs that
should be made are between the capital cost of replacing this
asset and doing other capital work. Where a department
believes, an impairment should score as catastrophic loss it
should first contact the Treasury, as these are rare events
unforeseen obsolescence. Where the asset has been rendered
obsolete by the acquisition of a new technologically advanced
asset, the investment appraisal of the new asset should have
covered the option of continuing to use the old one.
Unforeseen obsolescence can also arise as a result of changes
to legislation. When a department believes an impairment
should score as unforeseen obsolescence it should first contact
the Treasury.
« other - Scores as AME. This category includes:
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e changes in market price (in some cases—see paragraph
below)
© write downs where an asset is to be used for a lower
specification purpose than originally intended
e write downs as result of asset being seized without
compensation provided (usually by other governments)
e When a department believes an impairment should score in
the ‘other’ category and it is not included on this list they
should contact the Treasury
An impairment due to changes in market price will not
automatically score in budgets. To the extent such an
impairment can be offset against any revaluation reserve in the
departmental accounts for the asset in question (see paragraphs
3.39-3.43 on revaluation), there is no budgetary impact. Once that
element of the reserve is exhausted, impairments due to
changes in market prices should score in AME (as they score to
net expenditure in departmental accounts). This category of
impairments includes:
« write-downs of development land to open-market value
« write-downs of specialised properties held at depreciated
replacement cost to open-market value immediately prior to
sale (where a nonspecialised asset is to be written down it
should be treated as accelerated depreciation or profit/loss on
disposal as appropriate) and
e write-downs of newly constructed specialised properties to
depreciated replacement cost on the initial professional
valuation
Theft
3.40
Theft of assets is treated as a write-off or impairment of fixed
assets or inventory, depending on what is stolen. Either way, the
write-off or impairment will score to resource DEL (under the
category of loss or damage resulting from normal business
operations).
Revaluation
3.41
3.42
Revaluation involves periodically remeasuring fixed assets to
ensure they are measured at a current value after taking into
account impairment and depreciation (as opposed to a historical
cost model). Revaluation can reflect both increases and
decreases in the value of an asset.
In departmental accounts, some revaluation changes impact net
expenditure; it is only these revaluations that score in resource
budgets. In the national accounts, revaluations of fixed assets are
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3.43
3.44
3.45
reflected as a balance sheet change and do not impact current
expenditure.
Where a revaluation results in a fall in value of an asset it will be
necessary to establish whether any of the fall in value is as a
result of:
* consumption of economic benefit (for example physical
damage) or a deterioration in the quality of service provided by
the asset or
e achange in market price
A fall in value relating to consumption of economic benefit or
deterioration in the quality of service provided by the asset
should be treated as an impairment, recognised in net
expenditure in the departmental accounts, and would score in
DEL or AME depending on the cause of impairment (see earlier
section on impairments). A fall in value relating to changes in
market price should first be offset against a revaluation reserve
(for the asset in question), and once that element of the reserve is
exhausted the fall in value should be recognised in net
expenditure in the departmental accounts and will score in AME.
Revaluations that result in an increase in the value of an asset will
not score in budgets, as these are not recognised as part of net
expenditure in departmental accounts.
Write-offs
3.46
3.47
3.48
Fixed assets are usually disposed of when they are sold to
another party or when the department has consumed all of the
economic benefits embedded in that asset and has depreciated
or impaired the value of the asset to zero.
In some cases, fixed assets will need to be derecognised, even
when there has been no sale, or the value of the asset has not yet
been depreciated or impaired to zero. This is referred to as a
‘write-off.’
Write-offs of fixed assets should be recognised in the resource
budget in the opposite category as where they were originally
scored (for example, if the purchase of the asset originally scored
in DEL, the write-off should be scored in AME and vice versa).
Current assets and liabilities
Inventories
Overview
3.49
Inventories are assets held for sale or assets used in production
of goods and services for sale. In general terms, inventories will
impact on the budget only when they are consumed, impaired
(reduced in value) or written-off, when they are scored to
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resource DEL. In exceptional instances, certain purchases treated
as increases in inventory are included in the capital budget - see
Chapter 6.
This is consistent with the national accounts framework; the
consumption of inventory scores to current expenditure and
affects fiscal aggregates accordingly. In the departmental
accounts, inventory is recognised as a current asset as it is
purchased, and an expense is recognised when it is consumed.
For purposes of calculating a potential impairment of inventories,
they should be valued at the lower of cost and Net Realisable
Value (i.e. the actual or estimated net sale proceeds).
Impairment
3.52
The impairment of inventories always scores to the resource
budget. Whether this impairment scores inside the fixed asset
depreciation and impairment ringfence, and whether it scores to
AME or DEL, depends on the initial budgeting treatment:
e the normal budgeting treatment of inventories is that
inventory acquisition does not score in budgets, but use,
impairments and write-off do score. In this case, all impairment
of inventory would score in non-ringfenced DEL whatever the
cause
exceptionally, the acquisition of some inventory scores in capital
budgets (again, see Chapter 6). In that case, inventories are
generally analogous to tangible fixed assets, meaning
impairments would score within the fixed asset depreciation and
impairment ringfence, and the rules for the DEL/AME treatment
of impairments would follow the treatment for tangible fixed
assets For theft of inventories, refer to the theft subsection within
the fixed assets guidance in Chapter 3.
Trade debtors (receivables) and prepayments
3.54
Departments can create current assets when they have delivered
goods and services but are yet to receive payment (these assets
are referred to as ‘trade debtors (receivables)' in this document),
or they have prepaid for goods or services. These assets generally
represent a movement in working capital, and only impact the
budgeting framework through expected credit losses and write-
offs.
Expected credit losses and write-offs
3.55
The expected credit loss (ECL) framework described in Chapter 8
applies to trade debtors (receivables). However, ECL is recognised
in resource AME for trade debtors (receivables), as opposed to
resource DEL for loans.
For National Accounts and budgeting there is a need to
distinguish between trade debtors (receivables) written off by
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“mutual consent” and those extinguished unilaterally. Although
some trade debtors (receivables) are termed as being written off
by “mutual consent” there does not need to be a formal
agreement with the debtor. It is enough for the department to
not pursue a debt that could economically be recovered.
3.57. The table below summarises the position.
Table 3.A: Budgeting treatment of a write-off
Expenditure/accru Type of write-off Original scoring Write-off
ed income
Expenditure Unilateral write-off DEL AME
I
AME DEL
Mutual consent DEL AME
write-off AME DEL
Accrued Income Unilateral write-off DEL DEL
AME AME
Mutual consent DEL DEL
write-off AME AME
3.58 The effect on the fiscal position of a debt written off by mutual
consent is the same as the effect of a unilateral debt write-off, the
government's debt position is worse off relative to what it would
have been had the debt been received.
3.59 Where a write-off scores in DEL, any previous ECLs recognised in
AME must also be reflected in DEL to the full value of the write-
off.
3.60 The recording on OSCAR also reflects the distinction between
debts being written-off by mutual consent and those regarded as
being unilateral write-offs, with the latter simply recorded as
being a bad debt written off.
Long-term debtors (receivables) and prepayments
3.61 In certain cases, these types of transactions are more akin to net
lending, for example in complex contractual scenarios over an
extended timeframe (that is, more than one year). In these cases,
the budgeting system scores these transactions as financial
transactions in the capital budget of the department concerned.
That scoring is intended to capture and control the impact of
what is in effect lending.
3.62. Accordingly, departments should treat the whole amount of
transactions that meet both of the following criteria as financial
transactions in their capital DEL budgets:
e first, the transaction is either
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3.63
¢ along-term debtor (receivable) or prepayment (that is a
debtor (receivable)that will last over 12 months at the point
that the prepayment is made) or
e ashort-term debtor (receivable) or prepayment where there
is an expectation that it will be renewed so that it is in effect
long-term
* second, the total value of the debtor (receivable)/prepayment
involved is above £20 million (where there is a related group of
prepayments, the £20 million limit applies to the group)
There is further guidance on the treatment of these long-term
debtors (receivables) and prepayments in Chapter 8.
Creditors (accounts payable)
3.64
Similar to current assets, departments can create current
liabilities where they have not yet paid for goods or services
consumed, or they have received payment in advance of
providing the goods or services to which the payment relates.
These liabilities are referred to as ‘creditors (accounts payable)’ in
this document. These liabilities are treated as changes in working
capital in the budget.
Employee benefits
3.65
3.66
Under departmental accounting requirements, accrued
employee benefits must be recognised on the balance sheet.
This includes any untaken staff leave of employees as a liability
and prepayments of employee compensation as an asset. Net
changes in the balance sheet position of accrued employee
benefits will go through the SoCNE in the departmental
accounts.
The net changes in the SoCNE will be reflected in budgets as a
resource cost in DEL.
Provisions
Overview
3.67
A provision is a liability of uncertain timing or amount. A provision
is recognised in the departmental accounts when:
« adepartment has a present obligation (legal or constructive)
as a result of a past event,
e itis probable that a transfer of economic benefits will be
required to settle this obligation, and
* areliable estimate can be made of the amount of the
obligation (for example early retirement costs) but where there
is some uncertainty, either as to the amount or timing
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3.68
For further guidance on when provisions should be recognised
and how to value them please refer to the FReM.
The resource budget recognises the creation of a provision in
AME at the same time that the departmental accounts do and in
DEL when the provision is utilised. When recording provisions in
the resource budget there are three key stages:
e the initial recognition, and any revaluation of the provision
(such as the unwinding of the discount, or writing back down
of the liability), score in resource AME
« the release of the provision scores as an equal and opposite
(negative) amount in resource AME.
e ifthe provision is released because it is utilised, the
corresponding recognition of a certain liability or the
payment of cash scores in the resource DEL budget
The release and utilisation of a provision will net to zero in the
resource budget. However, any utilisation of the provision does
not net to zero within DEL. The additional budgetary impact from
the release is to be absorbed within existing DEL budgets.
3.69 In rare cases, for example when the underlying spend scores in
AME, the third bullet above will score in AME rather than DEL.
Rationale
3.70 In departmental accounts the drawdown of the provision and the
release of the provision are simply a movement on the Statement
of Financial Position (SoFP) (debit liabilities and credit accrued
liabilities or cash).
However, the budgeting system recognises these entries as well
as the initial recognition and any revaluations that appear in the
SoCNE.
This dual recognition is because in the national accounts the
initial recognition of the provision does not score, rather the
actual transfer scores when the liability becomes certain. Scoring
the separate elements to the transaction in this way ensures that
the information required for the national accounts is available
and allows the Treasury to control spending in support of the
fiscal framework.
This need to support the fiscal framework is a key consideration
when looking at the impact of provisions in resource budgets.
Scoring examples
3.74
The example below illustrates the scoring of provisions and
related expenditure, in the case of making a payment. Note that
the transactions in provisions are scored in AME and the
associated expenditure is normally in DEL.
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Table 3.B: Example of standard provision in respect of
DEL spending
Resource Year] Year 2 Year 3
budget Impact
Recognition of I +£10 Resource AME
provision
Revalue +£2 Resource AME
provision
upwards
Utilisation of £12 Resource AME
provision
Makea +£12 Resource DEL
payment
Exceptions to general treatment
3.75. Certain provisions in respect of capital spending score in capital
budgets - see Chapter 6.
3.76 Regulators that are wholly or substantially funded from income
will exceptionally score all provisions in DEL.
3.77 These rules do not apply to provisions in respect of student loans,
whose treatment is set out in Chapter 8.
Contingent liabilities
3.78 Acontingent liability is a liability that may be incurred depending
on the outcome of a future event. Amounts for contingent
liabilities are not included in the resource budget, nor recognised
as actual liabilities on the department’s SoFP, but are disclosed in
notes to their accounts. Departments should consider in the
course of drawing up their budget whether any contingent
liabilities are likely to crystallise and plan to absorb the impact of
such a risk within the existing budget.
3.79 Departments should refer to the requirements within Managing
Public Money and the Contingent Liabilities Approvals
Eramework when considering taking on any contingent
liabilities.
Insurance
3.80 Generally, departments and public sector bodies do not insure
because government as a whole is well placed to absorb the risk,
rather than paying to transfer that risk to the private sector.
However, in certain circumstances departments will have
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3.82
insurance. Payments of insurance premia are current costs in
resource DEL.
Where an insured asset is lost, stolen or otherwise written-off, a
charge will be recognised in the SoCNE and resource budget to
reflect that cost. The subsequent payment from the insurance
company should be recognised as income in the SoCNE and
resource DEL in the accounting period in which it was
recognised.
Replacement of the asset will require the appropriate (most likely
capital) budgetary cover.
Notional insurance payments
3.83
Under standards set out in the FReM, notional insurance should
not be shown in the SoCNE or the Estimate. Any department that
is recording notional insurance should therefore remove it.
If any department believes that it should record notional
insurance in the SoCNE or the Estimate or the budget, they are
asked to write to their normal Treasury spending team explaining
the circumstances in order to obtain agreement before
submitting data.
Tax credits
3.85
Tax credits are transfers of resources made through the tax
system. The recording of tax credits is complicated by the
different demands for information in the national accounts and
in departmental accounts. Classification of tax credits is based on
two criteria:
Integral to the tax system. Tax credits must be classified to
determine whether they are a refund of tax or are more akin to
payments made through the benefits system. The national
accounts judge this, in part based on whether the credit is
integrated into the tax system or the benefits system.
Determinants of whether the credits should be treated as
“integral” include alignment of measures of income with tax
system, underpinning definition from tax system or benefits
system, whether the credit evolved out of existing benefits, etc.
Payable vs. non-payable. Payable tax credits are those where
the credits a) may exceed the tax liability, and b) if they do
exceed the liability, will be paid anyway. If a credit is designed
that it may not exceed the tax liability, then it is classified as non-
payable.
The classification of tax credits, based on the above criteria, and
the subsequent reporting is set out in the table below:
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Departmenta Other AME TME Departmen Trust
I Budget tal Stateme
(usually AME) accounts nt
‘Tax Credits treated as integral part of the Tax System for national accounts
Non-Payable Tax Credit O ia} in} ia} o
Payable Tax Credit o in} in} ia} o
Tax Credits not treated as integral part of the Tax System for national accounts
Non-Payable Tax Credit O in} in} oO Qo
Payable Tax Credit o in} in} in} o
Those credits which are treated as public expenditure add to TME. The other credits which are recorded as a
refund of tax net off government's income.
Notional audit fees
3.89 Notional audit fees score in the department's DEL as resource
expenditure within administration costs. The expenditure needs
to be separately identifiable on the Online System for Central
Accounting and Reporting (OSCAR) database in order that it can
be removed in the AME accounting adjustments to line up with
Total Managed Expenditure as measured in the national
accounts.
Costs of European Union spending under
the Withdrawal Agreement
3.90 Under the Withdrawal Agreement the UK makes residual
financial contributions to the EU budget and receives funding
covering a variety of policy areas under the 2014-20 Multiannual
Financial Framework (MFF). This creates a cost to the Exchequer,
through increasing the UK's gross contribution to the budget
and reducing the UK's abatement.
3.91 In order to maintain sound incentives on departments, the
Treasury expects departments to be responsible for any
additional costs to the Exchequer that arise from changes to EU
spending proposals. In all cases, departments should engage
with the Treasury at as early a stage as possible.
Annual budget negotiations
3.92. Annual budget negotiations for the 2014-2020 MFF have now
ended. However, there may be further changes to budgets
through, for example, receipt of fines or adjustments to budget
calculations. For financial year 2022-23, the mechanics of
accounting for the receipt and costs of additional EU spending
and income depends whether the department in question
4
IM_045083}
receives the EU funding directly. However, whether EU funding is
included inside or outside departmental accounts, the principle
that departments may be held responsible for additional costs to
the Exchequer remains.
Funding inside departmental accounts
3.93
In most cases where the EU provides funding for activities under
the 2014-2020 MFF, it will be by way of a grant to the department.
This grant will be recorded as income in departmental accounts.
In order to make the costs of additional income explicit the
Treasury may adjust departmental DEL downwards, equivalent
to the cost to the Exchequer of additional income from the EU.
This will take place at the next appropriate Estimates. In some
circumstances, the cost may be greater than the income.
Funding outside departmental accounts
3.95
Where departments do not include EU funding in their
departmental accounts, it will typically be for one of two reasons:
« while the department is responsible for an area of EU
spending, the funds are distributed directly by the EU and
never go to the department or
e the funding passes straight through the department, which is
determined to be acting only as an agent in accounting terms
In such circumstances the budgeting follows the accounting,
and these transactions will be outside of budgets. Such income
and spending will nonetheless incur a cost to the UK under the
financial settlement, including through the impact on the
abatement. The Treasury may choose to reflect this cost through
a charge within DEL that reflects the cost to the Exchequer of
any changes in EU spending.
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Chapter 4
Income and the Resource
Budget
Introduction
41
4.2
43
44
Departments will sometimes earn income, for example from the
sale of assets, providing services, or from licenses or levies. In the
budgetary context, there is an important question about whether
or not this income should be retained in budgets and used to
manage control totals via being set against gross expenditure.
Generally, departments and ALBs may not retain income in
budgets except where permitted (for example where retaining
this income was agreed at the Spending Review).
This chapter specifically talks about the treatment of income in
the resource budget.
This chapter provides:
« an overview of resource budget income, including Estimates
and national accounts treatment of that income (paragraphs
45-4115)
* an overview of the different mechanisms by which income can
be retained in the resource budget (paragraphs 4.16-4.25)
e further guidance on individual types of income, including:
e sales of goods and services (paragraphs 4.26-4.27)
e royalties and rents (paragraphs 4.28-4.38)
e income where special Chief Secretary permission is required
for retention in the resource DEL budget (paragraphs 4.39-
4.45)
e profit or loss on disposal of assets (paragraphs 4.46-4.49)
e other income (donations, National Lottery distributing
bodies, and VAT) (paragraphs 4.50-4.58)
e the requirements around the retention of resource DEL
income beyond what was agreed in Spending Review (SR)
settlements (paragraphs 4.59-4.71)
See Chapter 7 for guidance on income in the capital budget;
Chapter 8 for guidance on income from financial transactions;
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and Chapter 11 on departments’ income from public
corporations.
Overview
45
4.6
47
48
When considering whether income should be retained in the
resource budget, the general principle is that income that passes
through the Statement of Comprehensive Net Expenditure
(SOCNE) in the departmental accounts should normally be
retained in resource budgets, at the same value and with the
same timing.
Income passing through a department's Trust Statement is
normally outside of budgets.
If income is retained in resource budgets, it means that it can be
offset against gross expenditure and, therefore, can be used as a
means of managing a department's resource budget control
total. Resource budget income and expenditure are generally
presented separately in Estimates but are used to arrive at a
single net resource budget control total.
Although income can be used as a means of managing the
resource budget control total, there are restrictions over the
amount of income that a department is allowed to retain beyond
what was agreed in their SR settlements. This is discussed in
more detail in paragraphs 4.59-4.71.
Estimates treatment
4.9
4.10
4.12
Generally, Estimates follow the budget treatment. So, income
that can be retained in the resource budget can also be retained
in Estimates and will reduce the voted limits. Additionally, some
income may be recorded in Estimates that is not recorded in
budgets (‘non-budget income’).
In some cases, there will be exceptions to the above where
income is retained in budgets, but the associated cash must be
returned to the Consolidated Fund in the Estimate. These
exceptions are referred to as Consolidated Fund Extra Receipts
(CFERs).
Within Estimates, income is usually shown in an income column,
except in certain circumstances, for example income from ALBs
or where the department is acting as an agent, where it is netted
off from gross spending.
See the Supply Estimates quidance manual for further details.
National accounts treatment
4.13 The presentation of income in budgets is different from their
treatment in national accounts. This different presentation has
no fiscal effect.
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4.14 Although presentation of income is different in budgets and
national accounts, national accounts criteria are relevant for
determining the budgetary classification of income in some
cases, such as sales of goods or services and taxes. These areas
are discussed in more detail later in this chapter.
4.15 Itis the Office for National Statistics (ONS) acting as an
independent agency that determines the treatment of income in
the national accounts. Annex E gives links to some guidance
notes describing the national accounts treatment of income. If
you are in any doubt about the national accounts treatment or
the budgeting treatment you should approach HM Treasury.
Budgetary classification of income
4.16 When determining the budgetary treatment of income there are
two important questions to answer:
« Can the income be retained in budgets?
« How should the income be presented?
4.17 The diagram below gives an overview of the different budgetary
classifications of income, based on the above questions.
Diagram 4.A - Budgetary classification of income
How should retained
income be presented?
(CBG 4.22)
Can income be retained in the
resource budget? si
Income is either retained to a ‘netting off” agreement
in capital budgets (CBG 4.23)
(Chapter 7) or outside of
budgets
4.18 The following paragraphs provide more detail on how to answer
the above questions by identifying the types of income that fall
into different budgetary classification categories:
78
Income retained in the resource budget and
presented separately from expenditure
4.19
The following forms of departmental income are retained and
presented separately from expenditure in resource budgets:
e sales of goods and services (paragraphs 4.26-4.27)
« royalties and associated payments for use of Intellectual
Property Rights (paragraphs 4.28-4.35)
* sales of some licences where the ONS has determined that
there is a significant degree of service to the individual
applicant
e income from insurance payments
« income in respect of compensation (where the ONS treat the
income as impacting on the current budget)
« income from operating leases of property, plant and
equipment (rental income) (paragraphs 4.36-4.38)
* those donations that are treated as current in the national
accounts (donations can be capital as well) (paragraphs 4.50-
4.53)
« income obtained from National Lottery distributing bodies
that finances current expenditure (paragraphs 4.54-4.55)
* some income associated with financial transactions, such as
interest and dividends (see Chapter 8 for further details)
« income from the EU that finances current expenditure (see
Chapter 3 for further details).
DEL vs AME
4.20
By default, income which is recognised in the resource budget
will score in DEL in budgets. Income will score in AME where the
associated programme or body responsible for the income is also
recorded in AME. Income associated with fair value changes for
financial assets will also score in AME.
Departments and ALBs may find that some of the expenditure
incurred in generating income will fall in AME due to its
transaction type (for example provisions, revaluations etc.). This
does not mean that the income, or even a portion of the income,
should be recorded in AME.
Income retained and presented as negative
expenditure in resource budgets
4.22
Profit on disposal of fixed assets is treated as negative
expenditure in resource budgets. That is, it reduces the resource
expenditure total rather than being presented separately as
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income. Profit on disposal of fixed assets is discussed in more
detail later in this chapter in paragraphs 4.46-4.49.
Income retained and subject to a ‘netting off’
agreement in resource budgets
4.23
Income from levies and licenses treated as tax in national
accounts, and fines and penalties, is normally not retained in the
resource budget. However, this income can be retained where
the Chief Secretary to the Treasury has explicitly agreed this
through a ‘netting off agreement. This is discussed in more
detail in paragraphs 4.39-4.44.
Income that may not be retained in resource
budgets
4.24
4.25
The following income may not be retained in resource budgets:
e taxes, licence fees treated as tax in the National Accounts and
levies, unless the Chief Secretary has specifically agreed to
retain this income (see paragraphs 4.39-4.44)
e fines and penalties, unless the Chief Secretary has agreed to
retain this income (see paragraphs 4.39-4.44)
e economic rents, other than those classed as rent of land
« income treated as capital (see Chapter 7 for further details),
including
e developer contributions that are capital in nature
e income from the EU that finances capital expenditure
¢ equity withdrawals/super dividends
The first three bullets above would normally be recorded in a
Trust Statement by the department with responsibility for
collecting the money (or the department with policy lead by
agreement). There is an exception to this however, where
Treasury agrees this income may be netted-off of expenditure
the income will be recorded as in DEL budgets and within the
SOCNE (see paragraphs 4.39-4.44).
Further guidance on individual types of
income
Sales of goods and services
4.26
Sales of goods and services can be retained as income in
resource budgets provided, they meet the criteria to score as
sales of goods or services in national accounts. In brief:
e there is a clear and direct link between the payment of the
charge and the acquisition by the payer of specific goods and
charges. The issue of regulatory licences may count as the sale
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4.27
of a service if there is a direct benefit to the person paying for
the licence such as providing them with an objective measure
of fitness or suitability and
e unless the good or service is being sold in an open competitive
market, the price should not exceed the cost of production (on
a full cost basis, including depreciation but excluding capital
expenditure)
The Treasury has provided a guidance note on when transactions
are sales of goods and services in the national accounts.
Royalties and rents
Royalties
4.28
4.29
4.30
Royalties, as defined in national accounts, are retained as income
in resource budgets. Appendix E contains a link to a guidance
note on the national accounts treatment.
In brief, royalties are payments for the right to use produced
assets made and sold in an open market, such as inventions
given patent protection, computer software, copyright material,
artistic and literary originals, and the income from allowing use of
a government agency's logo by a commercial organisation.
For something to be a produced asset, it should be an intangible
asset of a sort that is or could be produced by the private sector.
So, an invention made in a government scientific laboratory
could be an open market asset, since a private sector firm could
have run such a laboratory and made the invention, even if in
practice firms do not do research in this area. But if the
government has for example a legal monopoly, which has led to
the creation of the asset, then it is less likely to be seen as an
open market asset.
The market value of the royalty should be the value recognised as
income- in essence, what the market will pay. So the whole of
the amount received for the royalty should be treated as income.
Resource or capital
4.32
4.33
There are scenarios where it is difficult to tell whether the income
associated with intangible assets is a royalty (which is treated as
current income in national accounts, and therefore in the
resource budget), or a sale of the underlying intangible asset
(which is treated as capital income in national accounts, and
therefore in the capital budget). This is particularly the case when
a single payment covers a number of years or a payment is
spread over a number of years.
The tests used by departmental accounts will be a guide as to
whether an intangible asset has been sold, or is earning royalties.
For more material cases, departments should consult the
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4.34
Treasury to ensure that they are treating the income in
accordance with the national accounts.
In general:
* resource income - royalty for the use of an asset - would be an
arrangement offering the user a right to use the asset for a
period of time, where underlying ownership of the asset or
resource stays with the vendor. Changes in the value of the
asset would not normally affect the buyer as they would not be
able to sell on their rights
* capital income - sale of an asset - would be when the buyer
had obtained
e all significant rights or other access to benefits relating to
that asset and
e all significant exposure to the risks inherent in those benefits
Economic rents and other cases that are not royalties
4.35
The term “royalty” may be used in a number of cases other than
as defined in national accounts. Such income is normally
classified as economic rent in national accounts and is outside of
budgets—it is not retained. This income includes:
« “royalties”, sales, or rents in respect of assets created in nature,
for example North Sea Oil, the radio spectrum, or water
(however, see rent of land in paragraph 4.36 below)
e “royalties” or sales in respect of concessions or franchises given
by the government to run a commercial or government
operation
Rent of property, plant and equipment
4.36
4.37
4.38
Where a lessor has an operating lease in departmental accounts,
rental income from leases of property, plant and equipment
scores to and is retained in the resource budget. Property in this
case includes buildings and land. For more information about
receipts associated with operating and finance leases, please
refer to the IFRS 16 supplementary budgeting guidance.
Where the owners of inland waters and rivers receive rental
payments for the right to exploit such waters for recreational and
other purposes, these should also score to and be retained in the
resource budget. This category does not include rents on sub-soil
assets, or of other natural assets (spectrum, etc.), which are
generally recognised as economic rents and are outside of
budgets.
Any proposal to retain income from rents of natural assets needs
explicit Treasury agreement.
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Chief Secretary agreements for income retention
and netting-off: tax, licences, levies, fines and
penalties
4.39 National accounts define taxes as ‘compulsory, unrequited
payments’ to government. This definition includes some licenses
and levies, and fines and penalties. “Unrequited” means that the
payer obtains nothing personal in return. That includes not only
obvious taxes like income tax, but also cases where a tax is
hypothecated, perhaps to provide services generally for business
in an area, or to recover costs from businesses that are in general
the cause of some harm that needs to be remedied (for example
pollution).
4.40 Generally, taxes should not be retained as income in budgets.
However, in exceptional cases, the Chief Secretary to the Treasury
may agree that this income can be retained as resource DEL
income. Such agreements are called ‘netting-off agreements.
4.41. The Chief Secretary will bear in mind the criteria below when
considering applications (there are separate criteria for licenses
and levies, and fines and penalties):
ae Criteria to be applied to applications for new licences and
evies
1 the service delivered should be closely linked to the payer of the
licence or levy, either because they are the beneficiaries of the service,
or because they are the cause of the expenditure being incurred
2 the licence or levy is appropriate, i.e. applied in the economically most
advantageous way in the circumstances
3 introducing the levy or licence should not materially restrict the
government's fiscal policy (as measured by Public Sector Net Debt)
4 the activity financed by the levy or licence must further the
government's economic goals
5 netting off the income would improve the efficiency with which
resources are allocated, for example because of a difficulty in matching
resources to unpredictable changes in externally driven demand. There
needs to be a clear advantage over simply increasing DEL funding
6 where appropriate, charges should be set up using the principles of
Treasury's Managing Public Money guide, and surpluses would have to
be surrendered
7 there should be adequate efficiency regimes in place to keep costs
down, including stretching targets and regular efficiency reviews, often
tied in with a SR
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8 day-to-day decisions on the level of charges and an efficient level of
costs should be taken separately from the body raising the levy, to
prevent abuse of its monopoly power. Normally this would be by the
departmental minister
9 there will be periodic reviews involving the Treasury, of all the operation
of the licences and levies, including: whether they should exist at all;
whether netting off remains the most appropriate means of funding;
what scale of activity is appropriate; and the level of charges set. The
periodicity of the review shall be set as part of the agreement to allow
netting off
Box 4.B: Criteria to be applied to applications for new fines and
penalties
1. will performance against policy objectives, for example crime fighting
and prevention, be likely to be improved
2 are arrangements in place which will ensure that the activity will not
lead to the abuse of fine and penalty collection as a method of revenue
raising, and that operational priorities will remain undistorted
3 will revenues always be sufficient to meet future costs, with any excess
revenues over costs being surrendered
4 can costs of administering the programme be readily identified and
apportioned without undue bureaucracy, and with interdepartmental
and inter-agency agreement, where necessary
5 can savings be achieved through the change (from a normal DEL
funding regime to a netting-off regime) and are adequate efficiency
regimes in place to control costs, including regular efficiency reviews.
The periodicity of the review shall be set as part of the agreement to
allow netting-off and will involve the Treasury. It will consider whether
the fines and penalties should exist at all; whether netting-off remains
the most appropriate means of funding; what scale of activity is
appropriate; and the level of fine set
4.42 Departments who wish to propose that the above income be
retained and netted off expenditure should contact their
Treasury spending team for advice.
4.43 Consideration of netting-off proposals should normally be linked
to SR discussions. Where this is not possible Treasury will
consider proposals as they arise, but the strong presumption
must be that any agreement on netting-off will not alter the level
of funding agreed to in the last SR. As such an agreement to net-
off income will be reached alongside an agreement to reduce the
department's resource DEL budget by a compensatory amount.
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4.44
Transactions treated as tax in the national accounts are normally
recorded in a Trust Statement by the relevant department.
However, where Treasury agrees to a netting-off treatment the
accounting will follow the budgeting, and the tax will be
recorded as income in the department’s SOCNE.
Imputed tax and spend
4.45
The ONS has classified certain obligation-based levy-funded
schemes as taxation and public spending in the national
accounts and impute these economic flows through the public
sector. Tax and spend arising from these types of schemes should
be monitored and controlled like any other departmental
spending and included in departmental budgets. Departments
should seek guidance from HM Treasury on the classification and
budgeting treatment of such schemes and on the mechanism
for reporting to Parliament. They should also consult Managing
Public Money and their Treasury spending team when
considering the design of new schemes.
Profit/loss on disposal of fixed assets
4.46
4.47
4.48
4.49
Departmental accounts divide the proceeds from the sale of a
fixed asset into an element that covers net book value and a
profit or loss on disposal.
The net book value scores as capital income (discussed further in
Chapter 7). The profit/loss on sale scores in the resource budget.
Any income associated with profit on sale is presented as
negative expenditure—that is, it directly reduces a department's
expenditure rather than being presented separately from
expenditure with other retained income.
The level of profit on disposal scoring retained in resource DEL is
limited to a maximum of £20 million, or 5% of the net book value
of the disposal, whichever is the lower. In cases where profit
exceeds this maximum departments should contact Treasury to
discuss the treatment; Treasury may require some or all of the
additional profit to be retained in capital DEL.
The treatment described above is different from national
accounts treatment. In national accounts, capital expenditure is
recorded net of income from sales of assets. National accounts
do not separate the profit/loss on disposal from the net book
value element of sales income. Both of those components of the
transaction are taken through the capital account of national
accounts. In other words, the disposal at open market value
reduces total capital expenditure in aggregate.
Donations
4.50
Donations received may benefit either resource or capital
budgets. Donated assets and donations in kind are recognised in
the capital budget and are dealt with in Chapter 7. Other
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donations should be treated as income in the resource budget if
they meet the description below.
4.51 Donations must be entirely voluntary. They must be unrequited —
that is the donor should receive no direct benefit in return. They
also must come genuinely from outside the body that receives
them, i.e. not be financed or backed in some way by the recipient.
4.52. Donations that are made to finance expenditure for the common
good and that are directed by the donor to a specific project,
programme or body should be retained as income in the
resource budget. The following are examples of such donations:
e agift left in the collection box of an individual museum to be
spent at that museum's discretion
* sponsorship funds raised for a specific venture to the benefit of
the public
4.53 There are certain types of donations that should be excluded
from budgets. Examples of donations that may not be retained in
budgets include:
e donations related to income that would otherwise be classified
as revenue anyway, for example, conscience money (people
guiltily and voluntarily paying over money in respect of past
unpaid tax) and
e donations that relate directly to the public sector's balance
sheet — for example legacies to reduce the national debt.
Income from National Lottery distributing bodies
4.54 The government's hypothecated income from the National
Lottery is a tax. The spending by the National Lottery distributing
bodies scores as expenditure in AME.
4.55 Where a government department or ALB that is not a National
Lottery distributing body obtains income from a distributing
body to finance spending in resource DEL, it should retain the
income in resource DEL.
VAT
4.56 Departments’ budgets should be set net of any recoverable VAT.
Departments may retain VAT refunds for business activities and
also for certain non-business activities. Refunds should therefore
not be included in budgets.
4.57. The actual cash paid corresponding to the VAT leads to an
increase in debtors (receivables) for the department. When the
VAT is repaid that leads to a decrease in debtors (receivables) and
an increase in cash. The net movement in this debtors
(receivables) feeds into the departmental Net Cash Requirement
and must be recorded in the additional information section of
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4.58
the Standard Chart of Accounts (SCOA) as a movement in
working capital.
VAT output tax charged as an addition to the cost of services or
goods supplied is outside the scope of budgets. Tax received
results in an increase in accounts payable until paid over to
HMRC (or offset against recoverable input tax). The payment then
clears the accounts payable balance.
Retention of additional resource DEL
income beyond SR settlements
Background
4.59
4.60
In many cases current income does no more than cover the costs
of production of the activity to which it relates. For example, fees
and charges for statutory services are typically constrained by law
to recover no more than current costs, including depreciation
(refer to Managing Public Money for further detail). In such cases
it is illegal to plan to run surpluses and any surplus income would
normally need to be returned to fee payers.
To ensure that they obtain the right level of income from such
sources, departments will want to consider whether they have
any services where less than full costs are currently recovered
and which should move towards full cost recovery, or other
services which may be appropriate candidates for the
introduction of user charging.
In other cases, usually where departments are providing
discretionary commercial services into a competitive market,
income can generate returns that far exceed current costs of
production. In these cases, the Government must balance two
considerations:
« consistent with increasing public value, departments should
be encouraged to identify and obtain such income by being
allowed to retain and spend it; and
* government funds should be prioritised across the whole
range of spending to where they would do most good
Retention rules
4.62
Departmental budgets are set in the SR net of resource DEL
income. The SR settlement therefore has to be informed by the
expected level of resource DEL income. The SR process should be
used to identify the expected level of departments’ income; any
expected changes; and an assessment of the potential for new
income. It will look especially at the prospects of moving under-
recovering services towards full cost recovery and/or identifying
new sources of income from user charging. The SR settlement
will include an explicit statement of the expected level of income
in the years of the SR period.
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4.63
4.64
4.66
4.68
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Departments will be allowed to keep the DEL income that they
obtain in the SR period up to the amount that was taken into
account in the SR. Departments may, in any year, where no other
retention limit exists, also retain resource DEL income up to 10%
above the level envisaged for that year as part of the SR
settlement without an adjustment to budgets: as income cannot
be predicted wholly accurately, and the Treasury wishes to
encourage departments to find new income streams where
appropriate.. Note that this budgetary arrangement does not
provide cover for departments to retain surpluses generated on
statutory services where there is a legal requirement to charge
only to cover costs (see paragraph 4.59 above).
DEL income in respect of co-funded ALBs that originated from
other departments does not count towards the 10% limit. It
follows that income of ALBs ~ which is netted off in the Supply
Estimate — does not contribute to the calculation of the 10% limit.
Where the SR settlements did not clearly set out an expected
level of income, departments may in any year where no other
retention limit exists, retain total resource DEL income up to 5%
of net spending in resource DEL without an adjustment to
budgets.
If departments expect to retain more resource DEL income than
provided for above, they should talk to the Treasury about
whether they may retain all or part of the income without an
adjustment to budgets. When considering proposals, the
Treasury will tend to look favourably on requests to retain income
above forecast where:
e the additional income has arisen as a result of improved asset
management, including commercialisation of retained assets;
and
« the department can demonstrate value for money plans for
the utilisation of the income
For clarity, the Treasury will generally continue to look favourably
on requests to retain income above forecast where the
department has significantly improved their debt or fraudulent
payment recovery processes. Departments should refer to the
Debt Management Guidance in Annex B for guidance on debt
management approaches and principles.
The Treasury recognises that, in exceptional circumstances, the
10% limit may act as a constraint on departments pursuing
certain commercial opportunities that would represent value for
money, and that were unforeseeable at the point of the last SR.
The Treasury encourages departments to discuss such
opportunities with their Treasury spending teams where this is
the case.
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The circumstances where a department produces recurring
revenue benefits from improved asset management may be
rewarded with a proportionate resource DEL uplift. These are
broad and could include improved maintenance or
commercialising retained assets (for example through the sale of
licenses or shares in joint ventures). The Treasury encourages
departments to discuss such options with their Treasury
spending teams.
The Treasury recognises that some departments may wish to
adopt innovation programmes whereby proceeds (including
those in excess of forecast) from knowledge assets exploitation
and innovation are reinvested in further research, development,
Intellectual Property rights enforcement and protection for
example patents, or partly distributed through bonuses to
innovators. In these circumstances the Treasury is happy to
consider the terms of such schemes in advance and provide
comment as to whether it appears such schemes may constitute
value for money uses of income in excess of forecast. However,
when considering approval, the Treasury will want to consider
other factors, including the quantum of income and the specific
plans for their use.
Finally, where, under departmental accounts, all the revenue
from multi-year licensing contracts is required to be recognised
up-front, it may be the case that departments cannot realise the
benefit from this income, either as income received exceeds
settlement limits or there is too narrow a time-frame for any
income to be used. Where this occurs, the Treasury will consider
giving departments increased spending power in later years, to
properly incentivise departments to obtain value for money from
multi-year licensing contracts.
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Chapter 5
Administration Budgets
What are administration budgets?
5.1
5.2
5.3
In Spending Reviews (SRs), administration budgets are set for
entities classified as central government bodies for national
accounts purposes including executive agencies and other arm’s
length bodies (ALBs) that receive government funding unless
specific exemptions have been agreed.
Although devolved administrations are not set administration
budgets in SRs, they do operate their own arrangements for
constraining the costs of running central government.
Expenditure that does not fall within administration budgets set
in SRs is known as programme expenditure. Expenditure in AME
is assumed to be programme.
The boundary between administration
budgets and programme spending
5.4
5.6
Administration budgets cover the costs of all central government
administration other than the costs of direct frontline service
provision. In core departments support activities that are directly
associated with frontline service delivery are considered to be
programme, but in ALBs if there is no clear distinction between
support for the frontline and for non-frontline activities, all
support activities are deemed to be within administration
budgets. In practice administration budgets include activities
such as provision of policy advice, business support services,
back-office administration of benefits, advice on and
administration of grant programmes and technical or scientific
support.
To keep the number of reclassifications to manageable levels, the
Treasury is only willing to consider cases that represent a
substantial body of on-going work. Also, the merits of very
substantial reclassifications need to be weighed against the
potential effects on the administration budgets regime overall as
well as presentational and timing issues.
Where a department believes that expenditure should be
reclassified from administration spending to programme
spending, they should contact their Treasury spending team.
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5.7
5.8
Def
5.9
Departments should not reclassify expenditure without Treasury
approval. All reclassifications from administration budgets lead to
restated limits; reclassifying administration expenditure as
programme expenditure will not help departments respond to
pressures in their administration budgets because the budget
cover will also move to from administration to programme.
The split between administrative and programme expenditure
happens above the level of the individual civil servant.
Departments are encouraged to classify spend according to the
work of the business area rather than trying to split business
areas along proportional lines.
To help Departments understand what constitutes
administration budgets, case studies are provided in an appendix
to this Chapter. Departments are encouraged to consult their
Treasury spending teams if they are unclear on the definition of
administration spending.
inition of administration budgets
Administration budgets are simply a sub-set of resource DEL and
share most of the characteristics of DEL. They are set net of DEL
income that relates to administration expenditure. The chief
components of expenditure within administration budgets are:
e employee costs, including civil service pay, superannuation,
training, travel and subsistence
* current expenditure on office services including stationery,
postage, telecommunications and computer maintenance, HR,
accounting etc.
* current expenditure on professional fees including legal and
audit
* current expenditure on comparable contracted-out services
(including some consultancy costs, see below)
e depreciation charges incurred carrying out activities falling
within administration costs (and where fixed assets are used
for both administration and programme work, these costs
should be apportioned)
Payments to staff as a result of early exit, where a case explicitly
linked to improved efficiency has been agreed in advance with
the Treasury, may exceptionally be excluded from administration
budgets and scored to programme.
Consultancy costs
5.11
Consultancy fees and contract charges should be charged
against administration budgets where the consultancy relates
to some component of administration expenditure listed above,
or where the work carried out might otherwise be carried out by
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staff funded from administration budgets. The presumption
should be that consultancy spending should be scored within
administration budgets. Where a department believes
consultancy spending associated with a particular programme
should be classified as programme spend, they should agree this
with their Treasury spending team. Administration expenditure
should include:
* any costs associated with out-sourcing of support services. For
example: payroll services, some types of accommodation
contracts, departmental switchboards, etc
« provision of policy advice or support by consultants employed
in substantially the same role as if a civil servant was carrying
out the work
5.12 This rule is designed to avoid any perverse incentive to contract
out functions, or use consultants in place of civil servants, simply
because the resulting work would then be charged under
programme costs. Decisions on how support or policy services
should be supplied should be made purely on an assessment of
what offers the best combination of value for money and
effectiveness, rather than because programme cover may be
more readily available than administration cost cover or vice-
versa.
Allowable income
5.13 Departments may offset resource budget DEL income relating to
administration costs against their administration budget. This
includes income from ALBs and other UK public sector bodies,
where classified as administration income.
Comparability with departmental
accounts
5.14 Departmental accounts must include a note reporting outturn
against final administration budgets.
5.15 The element of net operating costs that falls with administration
budgets is reported in the SOCNE as net administration costs.
The only differences between outturn against administration
budgets and net administration costs are the differences that
apply generally between the SoCNE and resource budget set out
in Table A. of Annex A.
Approval for changes to administration
budgets
5.16 All changes to administration budgets — including changes to
expenditure and income provision within administration budgets
- require Treasury approval.
5.17. HMT spending teams may give approval at official level for:
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5.18
* some increases to the administration budget, including
e aswitch from programme to administration for the funding
of redundancy costs in exceptional circumstances
e transfers between departments where the overall effect is
neutral and
e changes to expenditure and income provision within
administration budgets where the administration budget itself
remains unchanged or is reduced
Approval from the Chief Secretary to the Treasury is required for
most other changes to the administration budget:
e increases involving claims on the DEL Reserve
e transfers from programme funds
Interactions with departmental accounts
and Estimates
5.19
Departments should be careful to classify administration
expenditure correctly and, as with all spending, departments or
agencies and their Accounting Officers have to take ultimate
responsibility for ensuring an outturn within administration
budgets.
Under the FReM, departments must include a statement of
administration costs incurred, with a comparison against the
administration costs limit, in their departmental accounts.
Departments must note that, although the administration
budget is not specifically voted as a limit by Parliament, it is
included within the department's Supply Estimate and any
breach of the limit will lead to an Excess Vote. Detailed guidance
on administration costs and Estimates is available in the Supply
Estimates quidance manual.
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Administration classifications: case studies
To improve consistency in the categorisation of programme and administration
expenditure across government, the Treasury has provided some examples of
activities with explanations as to how the classification was determined. These are
simplified examples, and departments will need to consider all of the facts and
circumstances of a particular case before making a classification decision rather than
structuring their considerations around these examples. All classification changes
must be discussed with the Treasury before being made by departments.
Example 1 - back-office programme support and policy design
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I Scenario: A directorate in a government department was responsible for project
I managing delivery of frontline services. The expenditure delivery of these frontline
Iservices was classified as programme. Staff within the directorate provided policy
Iadvice on the services offered, alongside technical support. The department asked
Ithe Treasury if they could classify expenditure on these staff as programme.
I Principle: The chief components of expenditure within administration budgets
‘includes employee costs and activities such as provision of policy advice and
I technical or scientific support.
I Classification: Whilst expenditure on the delivery of frontline services itself was
\classified as programme, these kinds of supporting activities are still classified as
‘administration. The department's request was therefore rejected.
I
IImpact on budgets: There was no change in classification, so budgets were
I unchanged.
I Example 2 - expenditure on consultants
I
I Scenario: An ALB submitted a request to the Treasury to classify expenditure on
Iconsultants as programme, rather than administration. Following discussions
I between the ALB and the Treasury, evidence was provided that this is not a role that
Icould be undertaken by a civil servant (even with the relevant training), and the
Iconsultants’ activities related to frontline service provision.
IPrinciple: The presumption should be that consultancy spending should be scored
lwithin administration budgets. This rule is designed to avoid any perverse incentive
Ito contract out functions, or use consultants in place of civil servants, simply because
ithe resulting work would then be charged under programme costs.
\Classification: The consultants under discussion were agreed as being programme.
I However, a subsequent unrelated request from the ALB to classify further
‘consultants as programme was rejected on the basis that these consultants were
found to be undertaking roles which could be done by civil servants or were related
Ito some component of administration expenditure as listed in 5.9. They were
I therefore classified as administration.
lImpact on budgets: Administration budgets were reduced in line with the change
jin classification. Non-ringfenced resource DEL programme budgets were increased
Iby a corresponding amount (such that the overall resource DEL control total was
Iunchanged).
t
IExample 3 — external technical advice
I Scenario: A government department was procuring external technical advice,
lincluding legal and financial. They submitted a request to classify this as programme
jon the basis that the technical advice would be used to shape the future provision of
Ifrontline services.
IPrinciple: The chief components of expenditure within administration budgets
‘include current expenditure on professional fees including legal and financial.
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Classification: These types of costs are pure administration; the request was refused
on the basis that these costs would not be incurred in the provision of a direct front
line service —- and were instead the provision of policy advice and technical support.
Impact on budget: There was no change in classification, so budgets were
unchanged.
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Chapter 6
Capital Budget
Introduction
6.1. The main elements of capital budgets include the following:
expenditure on fixed assets
capital grants
financial transactions (for example, lending and equity
investments—see Chapter 8 for more detail)
right of use assets for on balance sheet leases (see Chapter 13
for guidance on leases)
capital budget income, including the net book value on
disposal of fixed assets (see Chapter 7 for guidance on capital
budget income)
6.2 Capital spending by departments and ALBs generally scores in
the capital budget at the same value and with the same timing
a
s in accounts.
6.3. When budgeting for capital expenditure, departments should
c
onsistently follow agreed accounting policies when deciding
what costs of a project should be capitalised. In most cases this
should be uncontroversial but there are a few categories of
expenditure, such as some consultancy costs, that could be
either capital or resource, and departments should approach this
carefully.
6.4 This chapter provides the following guidance for specific areas of
t
he capital budget:
Predicting capital values (paragraphs 6.6-6.8)
Capital grants and grants in kind (paragraphs 6.9-6.12)
Inventories treated as capital in budgets (paragraphs 6.13-6.18)
Long-term debtors (receivables) and prepayments treated as
capital in budgets (paragraph 6.19)
Provisions which score to the capital budget (paragraphs 6.20-
6.30)
Payables in respect of fixed assets (paragraph 6.31)
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(u_o4s003
e Research and development costs (paragraph 6.32-6.34)
e Military equipment (paragraphs 6.35-6.38)
6.5 See separate chapters for the capital budget implications of
financial transactions, leases, PPP deals, support for local
authorities and support for public corporations.
Predicting capital values
6.6 In line with the Financial Reporting Manual (FReM), fixed assets
are carried at capital values rather than being based on historical
costs. Departments can use depreciated historical cost as a proxy
for fair value for assets with short lives or low values (or both).
Otherwise, departments should use the most appropriate
valuation methodology available (for example, professional
valuations, indices, etc.).
6.7 Departments need to make assumptions about future expected
disposals and acquisitions of fixed assets and movements in the
value of fixed assets held, to be able to budget for the resource
consequences (depreciation, maintenance and impairments) of
holding these items.
6.8 Past trends and movements in indices should provide evidence to
support departments’ forecasts for the revaluation of assets. As
the assumptions used in forecasting fixed asset values will no
doubt change over time, departments should regularly review
their continued appropriateness, and bring any significant
changes to the early attention of their spending team.
Capital grants and capital grants in kind
6.9 Chapter 3 sets out the difference between current grants (which
score to the resource budget) and capital grants (which score to
the capital budget).
6.10 Additionally, departments can provide capital grants in kind (i.e.
gifted fixed assets). Where a fixed asset is gifted by a department,
capital budgets will show no net impact. However, departments
should note that gifting an asset does not represent a write-off or
a loss on disposal ~as capital grants in kind, they are a transfer of
value from the department to a third party.
6.11. Toachieve the correct recording required for national accounts,
departments must make up to two equal and opposite entries:
« the disposal of asset, as income in the capital budget equal to
the net book value of the asset (as described in Chapter 7); and
¢ acapital grant, as a cost to the capital budget equal to the
disposal value
6.12. There are no net budgetary consequences of this grant, but
departmental accounts will show a cost in the SOCNE. The capital
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grant (and therefore the disposal of the asset) will be equal in size
and timing as the impact in accounts.
Inventories treated as capital in budgets
6.13
6.14
6.16
6.18
Departmental accounts do not treat purchases of inventories as
investment in fixed assets. Rather, inventory movements are
treated as changes in current assets. Normally, budgets follow
accounts in their treatment of inventories, and inventories are
excluded from budgets until they are used, disposed of, impaired
or written-off. See Chapter 3 for details.
The net acquisition of inventories is an item of capital spending in
national accounts and increases TME. Therefore, it would be
appropriate to score all net acquisitions of inventories in capital
budgets. However, in the interest of keeping down compliance
costs, the Treasury normally asks departments to follow the
treatment in departmental accounts.
Different budgeting rules are, however, appropriate where the
item being acquired for inventories would be the acquisition of a
fixed asset if it were not being acquired for inventory. For
example, land acquired by English Partnerships for reclamation
and development scores as capital expenditure in capital
budgets.
Similarly, if inventory acquisitions are large, or set to increase
significantly, it may be appropriate to score them in capital
budgets.
Where departments are aware of inventory acquisitions that
might fall into the categories above, they should consult the
Treasury on whether treatment in capital budgets would be
appropriate.
Where inventories score in capital budgets, they score like fixed
asset transactions. The net acquisition of inventories scores to
capital budgets. Impairments would score within the fixed asset
depreciation and impairment ringfence, and the rules for the
DEL/AME treatment of impairments would follow the treatment
for tangible fixed assets (see Chapter 3).
Long-term debtors (receivables) and
pre ayments treated as capital in
udgets
6.19
Normally, movements in long-term debtors (receivables) and
prepayments are treated as working capital and do not impact
directly on budgets. However, in limited cases long-term debtors
(receivables) and prepayments are treated as imputed lending
and impact the capital budget as financial transactions. See
Chapter 3 and Chapter 8 for more detail.
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Provisions which score to the capital
budget
6.20 Chapter 3 provides general guidance on provisions, which
normally score to the resource budget. Departments will
sometimes need to score provisions to the capital budget. This
can happen in two cases: provisions which score to the capital
budget only on utilisation, and provisions which score to the
capital budget from the point of initial recognition.
The flowchart below illustrates the correct budgetary scoring of
provisions in relation to their treatment in departmental
accounts:
Diagram 6.A - Budgetary scoring of provisions
departmental accounts?
Does the ison of the Follow ‘provisions which
ee result in ee Re ‘score to capital from
which scores to the capital or recognition’ guidance
resource budget?
Capital / Resource
Follow ‘provisions Follow standard
which score to capital provision scoring
on utilisation’ guidance guidance in Chapter 3
Provisions which score to capital on
utilisation
6.22 As with standard provisions outlined in Chapter 3, the creation of
6.23
these provisions is recognised in resource AME. This reflects their
recording in departmental accounts at recognition (debit
expense, credit provision liability).
However, in these cases the provision concerns the uncertain
future cost of expenditure which should be scored as capital in
budgets at the time the expenditure occurs. This could relate to
providing for the future payment of a capital grant or ESAIO
research & development expenditure, or for remedial work on
fixed assets the department will need to carry out but which
accounting standards do not allow to be capitalised at the time
the provision is created but will allow for capitalisation when the
provision is utilised. In these cases, the take-up, revaluation and
release will score to resource AME budgets in the same way as
provisions relating to resource spending. However, the utilisation
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will score to capital DEL, rather than resource DEL as for standard
provisions.
6.24 The example below illustrates how provisions which score to
capital on utilisation should be recorded in budgets.
Table 6.A: Provisions which score to capital on utilisation
Budget impact
Year] Year 2 Year3
Recognition of +£10 Resource AME
provision
Revalue +£2 Resource AME
provision
upwards
Utilisation of -£12 Resource AME
provision
Make a payment +£12 Capital DEL
Provisions which score to capital from
recognition
6.25 In some cases, the recognition of the provision liability is also the
trigger point to recognise an asset in departmental accounts.
They would therefore be recorded in departmental accounts at
recognition as debit asset, credit provision liability.
6.26 Provisions which score to the capital budget from the point of
initial recognition will include lease dilapidation provisions which
are capitalised as part of the right-of-use asset (see Chapter 13 for
further guidance on lease accounting).
6.27 If adepartment believes that it should be capitalising their
provisions in this way, they should contact their usual
Government Financial Reporting (GFR) team account manager
in the first instance (this will not be needed for lease dilapidation
provisions).
6.28 Where HMT's GFR team have been contacted and are content
that the department has made an informed account judgement
that the provision should be capitalised from recognition, the
capital AME budget will score the recognition of the liability. This
will maintain alignment between departmental accounts and
budgets. To note, OSCAR account codes may describe provisions
which score to capital from recognition as ‘capitalised provisions’.
6.29 When the actual cash payment is transacted, this will score in
capital DEL. The provision in capital AME will be released.
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6.30 The table below illustrates how provisions which score to capital
from recognition should be recorded in budgets.
Provisions which score to capital from recognition
Budget impact
Year] Year 2 Year3
Recognition of I +£10 Capital AME
provision
Revalue +£2 Capital AME
provision
upwards
Utilisation of -£12 Capital AME
provision
Make a +£12 Capital DEL
payment
Creditors (Payables) in respect of fixed
assets
6.31 No special treatment applies where a department has a payable
in respect of the acquisition of a fixed asset. In other words, the
capital expenditure scores in the capital budget at the same time
as the asset is recognised in the departmental accounts. The
cash transaction is then a movement in cash and payables in
departmental accounts and outside the budgeting framework.
Research and development costs
6.32. Departments should score as in capital budgets any
development costs that are capitalised in departmental
accounts. In addition, where costs (other than depreciation) do
not meet the criteria to be capitalised in departmental accounts
but meet the ESA10 definition of research and development, they
should be recognised as capital spending in budgets.
Departments will only recognise depreciation in budgets for
assets recognised in departmental accounts.
6.33 The definition of Research and Development (R&D) under ESAIO
is based upon and viewed as equivalent to the definition of R&D
in the OECD Frascati Manual is as follows:
“Creative work undertaken on a systematic basis to increase the
stock of knowledge, and use of this stock of knowledge for the
purpose of discovering or developing new products, including
improved versions or qualities of existing products, or discovering
new or more efficient processes of production”.
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6.34
When capitalising costs within the scope of the above definition
departments should include all costs, other than depreciation,
that are directly attributable to the activity and can be reliably
measured. Further guidance on what falls within the ESAIO
definition of R&D can be found in Annex C.
Military equipment
6.35
6.37
6.38
Military equipment is primarily held by the Ministry of Defence,
and so the Ministry of Defence will be the primary department to
whom the below guidance will apply.
National accounts do not differentiate between single and dual
use military equipment. National accounts instead differentiate
between (single use) military inventories and (single use)
weapons systems. The former are durable military goods (i.e.
ammunition, rockets, some missiles, bombs, torpedoes, etc.) and
are treated as inventories. Spending on single use military
inventories will be included within the capital DEL budget when
the purchase of such equipment takes place. The value of
inventories consumed during the year, as well as any items that
are written -off, will be included within the resource DEL budget
(and should be netted off in the capital DEL budget). Where
estimated impairments are recorded and then reversed prior to
write off (in accordance with a specific accounting treatment for
the Ministry of Defence's military inventories), these should be
both recorded and then reversed through ringfenced RDEL.
Expenditure on weapons systems (such as ships, planes, tanks
and other large single use capital items) is to be treated as capital
spending in national accounts like the spending on dual use
military equipment discussed below. Spending on these items
should be recorded on a staged payment basis in line with
departmental accounts. In the national accounts, these assets
will be depreciated using a similar methodology to other fixed
assets.
Expenditure on dual use military equipment is treated as capital
in national accounts. Dual use assets are those that could be
used by civilian organisations for the production of goods and
services such as airfields, docks, roads and hospitals. Expenditure
on almost all fixed structures will be treated as capital
expenditure in the national accounts as is that on types of
equipment which have alternative non-military uses - such as
transport equipment, computers and communication
equipment and hospital equipment.
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Chapter 7
Income and the Capital
Budget
Introduction
71
7.2
7.3
Just as in the resource budget (described in Chapter 4), some
income can be retained in departments’ capital budgets to help
departments manage their capital budget control totals. This
chapter provides guidance on income that can be retained in
capital budgets.
The following items of capital income may normally be retained
in capital budgets within the terms set out below:
* income from fixed asset sales—limited to the net book value of
the asset (paragraphs 7.4-7.6)
« income obtained from National Lottery distributing bodies
that finance capital expenditure (paragraphs 7.7-7.8)
« capital grants from the private sector including developer
contributions and capital donations (paragraphs 7.9-7.13)
« income received from exercising an overage (claw-back)
agreement (paragraphs 7.14-7.17)
« income from sale of inventories that score in the capital
budget (see section on inventories in capital DEL in Chapter 6)
« privatisation proceeds (see Chapter 8)
« income received from disposal of financial assets (see Chapter
8)
Only income in connection with DEL programmes scores in
capital budget DEL.
This chapter also provides guidance on:
e The timing of recording income in the capital budget
(paragraphs 7.18-7.19)
e When capital budget income can be retained above Spending
Review (SR) settlements (paragraphs 7.20-7.21)
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Further information on certain types of
capital budget income
Disposal of fixed assets
74
7.5
When a department or ALB disposes of an asset, the net book
value of this asset scores as capital DEL income.
Any profit or loss on disposal, i.e. the difference between net book
values and actual sale value, scores in the resource budget—see
Chapter 4 for more details.
Intangible asset income
7.6
There are scenarios where it is difficult to tell whether the income
associated with intangible assets is a royalty (which is treated as
current income in national accounts, and therefore in the
resource budget), or the disposal of the underlying intangible
asset (which is treated as capital income in national accounts,
and therefore in the capital budget). This is discussed in detail in
Chapter 4. Again, income from the sale of the underlying
intangible asset is retained in the capital budget.
Income from National Lottery distributing bodies
77
7.8
The government's income from the National Lottery is a tax. The
spending by the National Lottery distributing bodies counts as
expenditure in AME.
Where a government department or ALB that is not a National
Lottery distributing body obtains income from a distributing
body to finance spending in the capital budget DEL it should
take the income into budgets as capital DEL income.
Capital grants and capital grants-in-kind
7.9
7.10
The distinction between capital grants and current grants is
described in Chapter 3.
Receipts of capital grants from outside of the public sector
should be treated by departments as capital DEL income.
Receipts of capital grant income from within the public sector,
that is intended to be used for capital purposes should be treated
by departments as capital DEL income.
Donated assets and gifts of fixed assets should be recorded in the
same way as an asset purchased by way ofa capital grant.
Budgets will show two equal and opposite transactions in the
capital DEL budget:
« acapital grant equal to the market value of the asset which
should be recorded as capital DEL income
* purchase of the asset at market value, this will score as capital
DEL expenditure
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Where a department receives an asset by way of donation or
uses a capital grant to buy fixed assets, the depreciation of the
asset should exceptionally be recorded in AME. See section in
Chapter 3 on depreciation for further details.
Overage agreements
7A4
When a department disposes of surplus property, it will enter
into an agreement with the purchaser; it is common for these
agreements to contain a clause on overage/claw-back. The
intention of an overage clause is to allow the department to gain
some benefit if the purchaser should sell the property on in the
future for a profit above that envisaged at the time.
This clause represents a financial asset and should be recorded
on the department's SoFP accordingly. The amount and timing
of this financial asset will be subject to uncertainty, and
departments may find it difficult to value. In these circumstances
departments should refer to accounting guidance and use the
same valuation in budgets.
Since this financial asset comprises part of the value of the
property being disposed it, in effect, allows the public sector to
retain part of the value of the property. So, on disposal the
scoring in capital DEL should be:
« total net book value of the disposed asset (capital DEL income)
* profit/loss on disposal of the asset (resource DEL)
« the Open Market Value (OMV) of the overage agreement
(capital DEL expenditure)
The accounting for revaluations and impairment of assets
received in overage agreements is the same for other
investments. When the financial asset is disposed of, either
because of maturity or open-market sale, the amount received
by the department will score as capital DEL income.
Timing of recording of income
7.18
In general, departments should record capital income for
budgets at the same time as they record it in the departmental
accounts.
Income from capital transfers (i.e. grants, developer contributions
and donations received) other than income from the EU should
be recorded for budgeting purposes at the time that the receipt,
is due to be received. That may be different from the recording in
departmental accounts if exceptionally the accrual of the income
has been related to work done at a quite different time.
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When departments may retain additional
capital DEL income
7.20
The same general principles discussed in Chapter 4 regarding
income retention for resource DEL income apply to capital DEL
income, with the addition that where a department earns
income through asset sales, they may retain a proportion of the
capital DEL proceeds from the sale as discussed in Chapter 1,
section 1.88 and 1.89. In brief, departmental budgets are set in the
SR net of capital DEL income. Departments are allowed to keep
the capital DEL income that they obtain in the SR period up to
the amount that was predicted in the SR.
Departments can also, in any year, where no other retention limit
exists, retain capital DEL income up to 10% above the level
envisaged for that year without an adjustment to budgets. If
departments expect to obtain more income than provided for
above, they should talk to the Treasury about further income
retention. Again, see the guidance in Chapter 4 regarding when
the Treasury will look favourably on income retention.
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Chapter 8
Financial Transactions
Introduction
8.1
8.2
8.3
84
8.5
8.6
8.7
8.8
Financial transactions are defined in national accounts as
transactions in financial assets and financial liabilities, such as
lending or equity transactions. Financial assets and liabilities
generally involve claims between parties that are settled in cash.
Financial transactions do not score as capital expenditure in
national accounts. As they are exchanges of financial assets or
liabilities, they do not score as spending generally.
However, financial transactions with the private sector generally
impact government borrowing. For example, if a department
loans money to the private sector, it is exchanging a liquid asset
(cash) for an illiquid asset (the financial claim from the loan). This
will increase public sector net debt (PSND), which is calculated as
the difference between financial liabilities and liquid assets.
Consequently, financial transactions with bodies outside the
budgeting boundary scores to a department's capital budget to
reflect this impact to PSND. This is the case even though the
transactions are not classified as capital in national accounts.
Financial transactions are generally referred to as financial
instruments in departmental accounts.
If departments are unsure if the policy would give rise toa
financial transaction, they should contact the Treasury for
guidance.
Some financial transactions qualify as Official Development
Assistance (ODA). The rules that govern the statistical reporting
of ODA do not affect their treatment in the national accounts or
budgets.
This chapter:
« gives an overview of financial transactions (paragraphs 8.9-8.17)
e details specific guidance for types of financial transaction:
e loans (including expected credit losses, loan commitments
and write-offs) (paragraphs 8.18-8.34)
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e long-term debtors (receivables) and prepayments
(paragraphs 8.35-8.37)
e equity (paragraphs 8.38-8.43)
e privatisation (paragraphs 8.44-8.46)
e financial guarantee contracts (paragraphs 8.47-8.57)
e exchange rate changes (paragraphs 8.58-8.66 and Appendix
))
e student loans (in Appendix 2)
Overview of budgetary implications for
financial transactions
8.9
The guidance below provides an overview of how financial
transactions impact both the capital and resource budgets.
Capital budget impact
8.10
8.11
As described above, financial transactions impact on the capital
budget when they are first entered into, and as they are settled.
For some departments with higher levels of financial
transactions, financial transactions form a separate ringfence
within capital DEL budgets. Departments may not switch budget
cover out of their financial transactions ringfence (if they have
one) without the explicit approval of the Chief Secretary.
Financial transaction budgets are presented on a net basis,
unless specifically stated otherwise. This means that income from
settlements of financial transactions may be recycled by
departments, as long as the annual net financial transactions
total is not exceeded.
Resource budget impact
8.13
Financial transactions involve the exchange of financial assets
and liabilities. Financial transactions mainly impact on the
resource budget through the returns received or paid on these
financial assets or liabilities (for example, interest received/paid
ona loan, or dividends received/paid on equity). Financial assets
also impact on the resource budget through changes in their
valuation.
There are a number of different classifications of financial assets
in departmental accounts. The budgetary treatment of valuation
changes of these assets is dependent on their classification in
departmental accounts. Generally, changes in the value of
financial assets which are recognised in the Statement of
Comprehensive Net Expenditure (SoCNE) should score to the
resource budget.
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8.15
8.16
e for financial assets measured at amortised cost, expected
credit losses generally score to resource DEL! (see paragraphs
8.27-8.30)
e for financial assets measured at fair value through other
comprehensive income (OCI), expected credit losses generally
score to resource DEL' (see paragraphs 8.27-8.30). Other
changes in fair value recognised in OCI should be budgeted for
following the same principles as fixed asset revaluation.
Decreases in fair value will score to resource AME once any
previous upwards fair value changes for that class of asset have
been eliminated. Any other changes in fair value will not
impact budgets
e for financial assets measured at fair value through profit or loss,
changes in the fair value of these assets score to resource AME.
If a department chooses to disaggregate interest or dividend
income for these assets in its departmental accounts, that
income should score as a benefit to resource DEL
For all financial assets, write-offs score in the resource budget.
As with fixed assets, the treatment of valuation changes for
financial assets in budgets does not mirror their treatment in
national accounts. National accounts do not recognise expected
credit losses and treat changes in fair value as balance sheet
movements only.
The above only provides a general overview of the treatment of
financial transactions in budgets. The rest of this chapter goes
into more detail about different types of financial transactions:
loans (including expected credit losses and write-offs); equity
transactions; and financial guarantees. The chapter also provides
guidance about the impact of exchange rate changes on
budgeting for financial transactions.
Loans other than student loans
Overview
8.18
8.20
One major category of financial transaction is loans. Loans are
payments made to another party where the expectation is that
the payment will be wholly repaid, normally with interest, and
normally to a fixed regular payment schedule.
There is unique guidance on student loans contained in
Appendix 2.
Departments normally loan money, rather than borrow money.
This is because public sector borrowing is normally done
centrally through the Exchequer and not through individual
I Expected credit losses for trade debtors (receivables) and guarantees score to resource AME.
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departments. Therefore, this guidance is written from the
perspective of departments as lenders.
Loans need to be distinguished from deposits. In loans, a liquid
asset (cash) is exchanged for an illiquid asset (the claim from the
borrower). In deposits, a liquid asset (cash) is exchanged for
another liquid asset (the deposit with the bank).
The making and withdrawing of deposits do not score in
budgets. However, deposits themselves may attract interest
income, and this income would score in budgets in resource DEL.
Summary of budget treatment of loans
8.23
8.24
The budget treatment of a loan is:
e the capital budget will score
a) net lending (i.e. transactions in loan principal)
b) capitalised interest as appropriate
« the resource budget will score
c) interest income (resource DEL income)
d) arrangement fees (resource DEL income)
e) expected credit loss (resource DEL—see paragraphs 8.27-
8.30)
f) other changes in fair value of the loan (resource AME if at
all—see paragraph 8.14)
g) write-offs (resource DEL—see paragraphs 8.31-8.32)
This treatment generally captures the impact of loans on national
accounts, and departmental accounts. Valuation changes in the
financial assets associated with loans, namely expected credit
losses and other changes in fair value, impact departmental
accounts but not national accounts.
The above treatment is mainly applicable to loans which are
measured at amortised cost or fair value through other
comprehensive income in departmental accounts. For loans
measured at fair value through profit or loss, fair value changes
will score in resource AME, as described in paragraph 8.14.
However, there should be a resource DEL impact for any write-
offs, and interest income, if a department chooses to
disaggregate interest income.
AME vs. DEL
8.26
Normally, lending scores in DEL. Where exceptionally a loan
scheme may score in AME, the associated transactions will score
in resource AME. However, an exception to this is if the debt is
written off by mutual consent, i.e. a policy decision has been
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taken not to pursue the debt. In such cases it scores in DEL,
regardless of the initial loan being in AME.
Expected credit losses
8.27
8.28
8.29
Under the Expected Credit Loss (ECL) model, an entity calculates
an allowance for credit losses on loans, or in other words the risk
that loans will not be paid back because of a deterioration in the
credit quality of a borrower. The ECL model is a forward-looking
model, which means that predictions of future credit quality
should be included in the assessment of risk.
Entities should calculate the ECL by considering on a discounted
basis the cash shortfalls it would incur in various default
scenarios for future periods and multiplying the shortfalls by the
probability of each scenario occurring. The allowance is the sum
of these probability weighted outcomes.
Changes in the value of loans receivable that relate solely to the
application of the ECL model will score to the resource DEL
budget. Where departments apply the ECL model, the forecast
used should be robust and the amounts recognised should be
discussed with Treasury spending teams. When a department
applies the ECL model, Treasury expects departments to offset
the increase with a reduction in their DEL elsewhere — i.e. there
will be no increase to resource DEL budgets as a result of the ECL
model being applied. See table below for an example.
Table 8.A: Table Example of charges to DEL budgets for
loans with ECL provisions
CDEL RDEL
(ringfenced
FT)
Creation of Loan £100
Initial ECL valued at 10% £10 (but no increase in overall
resource DEL control totals,
these charges to the resource
DEL budget have to be
absorbed by adjusting spending
elsewhere)
ECL revalued at 20% £10 (but no increase in overall
resource DEL control totals,
these charges to the resource
DEL budget have to be
absorbed by adjusting spending}
elsewhere)
ECL crystallised (£20) (but no increase in overall
resource DEL as this covers half
the Write-off)
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Write-off of loan - now £40 (£20 offset by the switch
at 40% from the ECL)
8.30 ECLs are referred to as impairments in departmental accounts.
However, they are not treated as impairments in budgets.
Therefore, they are not included in the ring-fenced budget for
depreciation and impairments of fixed assets.
Loan commitments
8.31
Any expenses associated with the recognition or change in value
of loan commitments within the scope of IFRS 9 will score to the
resource AME budget.
The derecognition of a loan commitment within scope of IFRS 9
scores as a benefit to resource AME (similar to the release of
provisions as described in Chapter 3). If a loan is recognised upon
derecognition of the loan commitment, the guidance set out
earlier in this chapter should apply to the loan.
Write-offs
8.33
All write-offs for financial transactions should score in DEL. Any
previous changes to fair value recognised in AME must also be
reflected in DEL to the full value of the write-off.
Where departments are considering large write-offs of debts—
greater than £200 million - they are asked to inform the Treasury
beforehand. That gives the Treasury warning of the fiscal effects.
Long-term debtors (receivables) and
prepayments
8.35
Chapter 3 provides guidance for when trade debtors (receivables)
or prepayments should be treated as lending and therefore
budgeted for as a financial transaction. Briefly, trade debtors
(receivables) or prepayments should be treated as lending when
they are long-term and over £20 million. The scoring in such
cases would be:
e the full amount of the long-term debtor (receivable) or
prepayment that would score as a loan in capital budgets
« any increase in the value of the long-term debtor (receivable)
or prepayment as the discount unwinds would score as
increased net lending (a cost)
« asthe long-term debtor (receivable) or prepayment is utilised,
it is treated as the repayment of a loan
« any ECLs or write-offs for the long-term debtor (receivable) or
prepayment would score according to the general principles
for loans set out earlier in this chapter
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In other words, the treatment would be on a net basis like the
treatment of loan principal. This scoring is intended to capture
and control the impact of this lending on PSND.
Note that the transaction financed by the debtor (account
receivable) or prepayment would also score in budgets as
normal.
Note also that if the pre-payment is discounted, the SoCNE will
show a credit entry as that discount unwinds (the credit entry
represents an interest payment from the holder of the prepaid
cash). This transaction scores in resource DEL.
Equity transactions
8.38
8.39
Purchase and sale of shares or other equity in private sector
bodies scores in capital DEL, as with other types of financial
transactions.
Note that purchase or sale of shares will affect the amount of
control the public sector has over a body. Where this transfer of
control is significant then departments should consider the
impact on classification of the body as part of the public or
private sector— see Chapter 1 for details of classification.
Dividends and equity withdrawals
8.40
8.41
8.42
8.43
A dividend is a payment made to a shareholder in consideration
of having put equity finance into a body. The equity finance may
be in the form of Companies Act shares, Public Dividend Capital
(PDC) or the implied equity in a statutory Public Corporation.
Public sector bodies may hold equity in other public sector
bodies or in private sector organisations. Dividends are payments
made out of current earnings.
If dividends are greater than the sum of the profits, before
income and tax, of the current and two previous years — super-
dividends - they count as equity withdrawals in the national
accounts (a financial transaction as opposed to a current receipt
in the national accounts). Equity withdrawals count as capital
income for budgeting. A more detailed definition of when a
payment is a dividend as opposed to a withdrawal of equity for
budgeting purposes is given in Chapter 11 (the chapter on public
corporations).
In departmental accounts, reductions of equity in the form of
sales of shares or PDC reductions would not normally go through
the SoCNE. But special payments from bodies that are not
accompanied by actual reductions in equity holdings would go
through the SoCNE; they may be termed super-dividends. Such
super-dividends would be equity withdrawals in the sense above.
“Dividends” received from bodies within central government,
including joint ventures classified to the central government
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sector, are not dividends but transfers within Government and as
such are not generally treated as income in budgets.
Privatisation proceeds
8.44
8.45
8.46
Privatisation proceeds score in AME, even where the asset or
business being sold was on a DEL programme.
Sale of shares in a private sector PPP represents the disposal of a
financial asset by the department. As a form of privatisation, the
income scores as a benefit to capital AME.
Sale of shares in a public-sector PPP increases the public
sector's financial liabilities. As above, the income scores as a
benefit to capital AME.
Financial guarantee contracts
8.47
8.48
8.49
Departments sometimes guarantee the debt of bodies outside
the public sector—these promises are generally known as
financial guarantees. In national accounts, financial guarantees
are classified as either standardised or one-off guarantees. ONS
have the responsibility for classifying guarantees as standardised
or one-off.
Standardised guarantees have a fiscal impact upon recognition,
whilst one-off guarantees generally do not have a fiscal impact
unless they are called.
Financial guarantee contracts do not score to the financial
transaction ring-fence.
Standardised Guarantees
8.50
8.51
Generally, guarantees are classified as standardised guarantees
by the ONS if there is a large volume of guarantees given on
identical terms and conditions, where there is pooling of risk
across the guarantees and departments are able to estimate
their expected loss based on available risk profiles.
There are relatively few standardised guarantees in central
government; most guarantees are classified as one-off
guarantees. Departments should contact their Spending Team in
the first instance if they believe they have a standardised
guarantee.
Standardised guarantees should score to capital DEL when the
guarantees are given, at the value of expected losses on the
guarantee (net of any expected income on the guarantee). This
should generally be the same amount as the value of the
guarantee recognised in departmental accounts.
One-off Guarantees
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8.53
8.55
8.56
The budgeting treatment of one-off guarantee contracts will
depend on their treatment in departmental accounts. In
departmental accounts, financial guarantees are recognised
when they are provided if they meet the IFRS 9 definition of a
‘financial guarantee contract.’ For financial guarantee contracts,
the treatment in budgets should generally follow the accounting.
Other financial guarantees that are not recognised in
departmental accounts would be outside of budgets until they
are called. For national accounts purposes, all one-off guarantees
only have a fiscal impact when they are called (the call scores as a
capital transfer).
One-off guarantees that meet the definition of financial
guarantee contracts in IFRS 9 impact on budgets in the following
ways:
« an initial resource AME cost when the financial guarantee
contract is provided; this will be recorded as the SoFP value of
the contract
e a benefit to resource AME when any guarantee fees are
recognised
* resource AME impacts where remeasurement of the financial
guarantee contract goes through the SoCNE (including any
remeasurements for ECLs)
« a benefit to resource AME when the guarantee is derecognised
« capital DEL cost for payments associated with the calling of
the guarantee
Again, one-off guarantees that do not meet the definition of
financial guarantee contracts in IFRS 9 are outside of budgets
until they are called. Any payments associated with calls on these
guarantees should score as a hit to capital DEL. This reflects their
treatment in national accounts.
Where a financial guarantee could be assessed as a contingent
liability, departments will need to apply the same considerations
as for other contingent liabilities. Further information is available
in Chapter 3 and guidance is available in the form of the
Contingent Liability Approval Framework. Department should
contact their Spending Teams in the first instance.
The following flowchart summarises the budgetary treatment for
guarantees:
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Diagram 8A - Budgetary treatment of guarantees
What is the national
accounts treatment of the
guarantee?
‘What is the departmental
Ee eipeae cas pied accounts treatment of the
guarantee?
} \
Falls within IFRS 9 / \ Falls outside IFRS 9
/ *
For a guarantee which For a guarantee which
meets the definition of a does not meet the
financial guarantee definition of a financial
contract in IFRS 9, follow guarantee contract in
CBG 8.52-8.53 IFRS 9, follow CBG 8.54
Exchange rate movements
8.58 Departments may engage in transactions denominated ina
foreign currency. Where there is a timing difference between the
transaction being recorded in accounts and the cash being paid,
any movements in the exchange rate of the foreign currency will
affect the value of the financial asset or financial liability.
8.59 Departments should record movements in exchange rate as
follows:
* at the point the income/expenditure is recognised in accounts,
departments should record the impact in AME
e when exchange rates fluctuate the revaluations of the financial
asset or financial liability should be recorded as income/cost in
AME with the same timing and value as shown in accounts
« when the cash is paid there is no impact in the SoCNE, but the
cumulative AME transactions should be switched to the DEL
budget
8.60 Departments have the option to hedge against exchange rate
risks to protect their budgets against adverse movements.
Guidance on recording hedging is included below.
Exchange rate hedging
8.61 Where departments carry out transactions in foreign currencies,
their expenditure or income will be subject to the risk of
exchange rates moving unfavourably. Departments have the
option of hedging against this risk to gain certainty on outcomes
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8.62
8.63
a)
b
c)
d)
e)
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and mitigate against the risk of unfavourable movements in the
exchange rate. Managing Public Money contains more detail on
the appropriateness of hedging.
National accounts treats a forward contract used in a hedge in
the same way as any other financial instrument. So any
revaluations over the life of the contract would score to the
revaluation account; and at maturity of the contract all flows are
recorded as financial transactions.
In order to maintain hedging as a useable option in budgets, the
budgeting does not follow the national accounts treatment in
this case. Instead the benefits/costs of a hedge are realised when
the department incurs the associated expenditure or receives the
income.
The following items must be recorded in budgets for exchange
rate hedges that qualify for hedge accounting under IFRS 9:
e capital DEL
cost of purchasing the initial forward contract (usually this will be
zero)
any capital expenditure funded through the forward contract.
This should be valued at the daily spot rate at the point of
incurring the expenditure
the difference between the value of b and the value of the capital
expenditure at the forward contract rate
* resource DEL
any current expenditure funded through the forward contract.
This should be valued at the daily spot rate at the point of
incurring the expenditure
the difference between the value of d and the value of the
current expenditure at the forward contract rate
* resource AME
revaluations of the contract whilst held by the department (for
fair-value hedges); and transfers from the hedging reserve to the
SOCNE on maturity (for cash-flow hedges). This net resource AME
movement of a hedging instrument is moved out of resource
AME and to RDEL and/or CDEL at maturity (depending on the
resource or capital nature of the expenditure the cash is used
for).
This recording is necessary to capture the correct treatment in
both budgets and national accounts. A basic worked example of
the recording of an exchange rate hedge is available in Appendix
1.
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8.66 When hedging against a specific cost or income stream,
departments may find that the timing of the budgeting impacts
for exchange rate moves are different to the timing of the
hedging impacts. Where departments find this creates pressure
in their budgets, they should discuss the correct treatment with
Treasury.
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Appendix 1 to Chapter 8: Example
exchange rate fair value hedge
Date Transaction Exch Budgeting Impact
rate £1=
RDEL RAME CDEL
(000’s) (000’s) (000’s)
1 April Enter into contract to buy $2 (e)
$200,000 on 1 January at $2
=
ljuly Exchange rate changes $1.50 -333
1October IExchange rate changes $1.75 19
Forward contract matures 3.6 143 10.7
Spend $150,000 on capital 85.7
1 January procurement $1.75
Spend $50,000 on current 28.6
procurement
Totals 25 oO 75
Note: the £33,300 credit to AME represents the gain on the
forward contract from the first movement in the exchange rate.
The subsequent £19,000 charge represents the loss on the
subsequent exchange rate move. The accumulated net gain/loss
is reversed from RAME at maturity of the contract, and scored to
RDEL and/or CDEL (depending on the resource or capital nature
of the expenditure the cash is used for). In the example, the gain
on the contract is £14,300 of which £3,600 has been used in RDEL
and £10,700 in CDEL, matching the split of the expenditure
which the forward contract was bought to cover.
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Appendix 2 to Chapter 8: Student loans
guidance
Impairments
8.67
8.68
8.73
Because of the soft terms on which student loans are offered, the
departments and devolved governments who issue student
loans must calculate the impairment resulting from the cost at
which the loans are delivered.
Subsidy impairment - Student loans are offered at a loan rate
lower than the government's cost of capital, as such over the
lifetime of the loans there is an effective subsidy. The main
student loans impairment is to account for this subsidy and will
be valued as the difference between the expected income from
the loans and the costs of delivering them at the Government's
cost of capital (HM Treasury's financial instrument rate).
Impairment relating to policy write-offs —- The second
impairment is to account for “policy” write-offs. When loans are
issued, it is the policy of the department that these will be
written-off in certain circumstances (for example death or
disability of the debt owner, or age of the debt). These amounts
are recognised at the point the loan is made. Where these debts
are deemed to be policy write-offs, they will be recorded as
capital transfers in the National Accounts at the time the loan is
formally written-off; there is however no transaction in
Departmental Accounts or budgets.
The arrangements described in this chapter for student loans are
only applicable to loans owned by government and do not apply
to loans which have been sold (such as the 1998-99 student loan
book and ICR loans sold in 2017 and 2018).
In August 2013, loans were introduced in further education for
learners aged 24 and above, studying courses at level three and
above. The following guidance applies to Further Education
student loans, Higher Education student loans currently subject
to a sale and Higher Education student loans not subject toa
sale. The following budgeting guidance will apply equally to
England and, where appropriate, the Devolved Administrations.
The Treasury will set a target impairment for loans at the start of
each Spending Review period.
In year one, when loans are issued:
1. Cash value of the loans issued are a charge on capital AME
2. When loans are issued, any portion of the impairment arising
from changes made to the discount rate since the target was
set will be treated as a classification change in budgets and
ringfenced within RAME.
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3. The remaining impairments up to the target are charged to
RDEL. The budget for this spending is ring-fenced within RDEL,
which may not be reprioritised to other RDEL or CDEL
spending, although transfers across from non-ringfenced RDEL
are allowable without Treasury agreement.
4. Any impairments in excess of the target (the additional
impairment) will be charged to RAME and switched to non-
ringfenced RDEL over a maximum of 30 years. When using the
maximum period of 30 years, one thirtieth of the additional
impairment will be switched from RAME to non-ringfenced
RDEL each year for 30 years. This starts in the year of the
impairment.
8.74 In year one, and subsequent years, budgets will record the
following impacts:
5. The interest receivable from the loans scores as a benefit to
Resource AME. This is irrespective of the fact that no cash may
have been received
6. The interest receivable will be capitalised and a cost to Capital
AME. This is equal and opposite to (5), and reflects the fact that
capitalising interest is effectively new lending
7. The unwinding of the discount scores as a benefit to Resource
AME. The discount is created and unwound at the
Government's long-term cost of borrowing (HM Treasury's
financial instrument rate).
8. Where policy changes are made which increase impairments,
impairments arising from the change are to be scored as non-
ringfenced RDEL in the year(s) that they occur.
8.75 In year two and subsequent years:
9. Repayments of principal, or of capitalised interest, are treated as
negative Capital AME
10.Where additional impairments had arisen upon loan issue in
year one, if employing the maximum 30 year period, one
thirtieth of the total additional impairment will continue to be
removed from RAME budgets annually and charged to non-
ringfenced RDEL budgets (with no overall impact on TME). This
will span thirty years inclusive of the year of loan issue.
NT.
Should any revaluations of existing loans occur, the following
applies:
a. For revaluations that occur because the original values were
based on forecasts that have turned out to be incorrect, or
because of updates made to the student loans model -
Revaluations up to the target impairment level are charged to
ringfenced RDEL. Revaluations in excess of the target
impairment level will be charged to RAME, and switched to non-
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ringfenced RDEL over a maximum of thirty years. When using
the maximum period of thirty years, one-thirtieth of the
additional impairment will be switched from RAME to non-
ringfenced RDEL each year for 30 years. The net effect of these
entries in RDEL and RAME each year will equal the annual
impairment charge due to these forecast/model changes.
b. For revaluations that occur because of a change in discount
rate since the target was set - These will be treated asa
classification change within budgets and ring-fenced within
RAME.
c. For revaluations that occur for any other reason, including
where policy changes are made which increase impairments -
these will be scored to non-ringfenced RDEL in the year(s) that
they occur.
Example of additional impairments arising under scenario a)
8.76 HM Treasury have set a figure of 28% as the target level of
impairment for loans. The impairment calculated in the year is
above the target set by HM Treasury. The amount in excess of the
target impairment level (the additional impairment) is
£30million. The cause of the revaluation was due to the original
values being based on forecasts which have turned out to be
incorrect, and because of updates made to the student loans
model. This sum (£30million) will be charged to the department's
budget over the maximum period of 30 years.
8.77 Inthe first year £1million (1/30") will be charged to non-
ringfenced RDEL and the balance charged to RAME, in the
second year a further £Imillion will be charged to non-ringfenced
RDEL, with the charge to RAME being reduced to £28million
(effectively an AME/DEL switch). This treatment will continue
until the full impairment has been charged to RDEL.
Table 8.B: Budgetary impact of Additional Impairment beyond
target
Additional Yearl Year2 Year3 Year 4 Year 30
Impairment
£30 million DEL £imillion £1million — £1million £1million £1million
Cumulative AME £29million £27million £26million £0
£28million
8.78 In each year additional loans will be made which will possibly
impact on the level of additional impairment to be charged.
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Year Additional Year Year 2 budget] Year 3 budget IYear 4 budget!
impairment pudget charges charges charges
beyond’ charges
target
incurred in
year
DEL IAAME [PEL (AME [DEL JAME IDEL IAME
Year] £30 million £1m £29m £1lm (€lm) £lm (Elm) £1m_ (£1m)
Year 2 £90 million £3m £87m £3m (&3m) £3m_ (£3m)
Year 3 £150 million £5m £145m £5m = (£5m)
Year 4 £210 million £7m £203m
Total charged in yearElm £29m £4m £86m £9m £14Im £16m £194m
Assuming no further beyond target impairments were incurred past Year 4, the
process would continue until all impairments have been charged in full to non-
ringfenced RDEL (Year 33)
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Chapter 9
Arm's Length Bodies
9.1
9.2
This chapter applies to the budgeting of all bodies in the central
government sector (as defined by the Office for National
Statistics) other than government departments (including
executive agencies), and bodies referred to in the following two
paragraphs. An ALB could therefore be:
* an executive or advisory NDPB
e other advisory bodies
* atribunal
* acommission
* expert committees
* aninspectorate
« an office holder etc
The term ALB refers to most non-government departments
regardless of whether or not they have been classified by the
Cabinet Office. This chapter does not apply to public
corporations. Most trading funds are public corporations, but
some may be central government bodies. This chapter applies to
any trading fund that is a central government body.
Overview
9.3
94
ALBs' resource consumption and capital expenditure score in the
department's resource and capital DEL in the same way as the
department's own spending. Departments should normally use
the output from the ALB’s own accounts as the basis for working
out the ALB’s impact on budgets.
Grants and grant-in-aid paid by the department and any other
financing facilities made available by the department are outside
the department's budget. This treatment will align with the
accounting which eliminates intra-group transactions between a
department and its ALBs. The financing of ALBs through grant-
in-aid is excluded from Estimates and budgets, but other intra-
group transactions, such as the purchase of shared services by an
ALB from the parent department, will need to be removed by the
department and not recorded on the OSCAR database. Full
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9.5
guidance on the consolidation of intra-group transactions can be
found in the Supply Estimates quidance manual.
ALBs are set administration budgets; these should be scored in
the same way as the department’s own administration budgets.
See Chapter 5 for more detail on administration budgets.
Subsidiaries
9.6
9.7
9.8
Where an ALB has a subsidiary that is itself a body in the central
government sector that subsidiary will be consolidated with the
ALB for budgeting purposes.
Where an ALB has a subsidiary that is a public corporation, that
subsidiary will score in budgets like public corporations
accountable directly to Ministers and the public corporation will
impact on the parent department's overall DEL. Departments
may place the DEL impact in the DEL allocated to the ALB.
Where an ALB enters into a joint venture, departments need to
be clear whether the joint venture is classified to the public or
private sector. If to the public sector, departments need to be
clear where the budgeting impact falls.
Planning and monitoring
9.9
9.10
Departments are expected to set their ALBs firm resource and
capital DEL budgets for the year ahead. Departments are
generally advised to set firm or indicative budgets for forward
years to help ALBs plan.
Departments should monitor in-year both:
e the ALB's drawdown of cash grant-in-aid
« the ALB's expenditure in budgets
ALB income and receipts
9.11
9.12
The ALB’s impact on the department's resource budget DEL is
made up of its gross resource consumption less its retained DEL
income. Similarly, the capital budget DEL is net only of retained
DEL income. Whether ALB income can be retained in DEL
follows the same rules as for departmental income (see separate
chapters). So, for example, charges for the sales of goods and
services can typically be retained in DEL and the receipt of taxes
are typically not. Expenditure financed in cash terms by non-
budget income scores gross in budgets.
Where an ALB obtains income that is not cannot be retained in
DEL, the department may arrange for the ALB to pass the cash to
the department for surrender it to the Consolidated Fund.
Alternatively, the cash may be retained by the ALB and offset the
ALB's need for cash grant-in-aid. Either way, income that is not
retained in DEL does not convey spending authority.
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9.13
Where a levy-funded body over recovers income due to an
incorrectly set levy, any excess income should be classified as a
payable as it should be returned to the levy payers in due course.
Such excess does not therefore form part of the budgetary
income of the body.
Borrowing and use of reserves
9.14
Normally, ALBs are not allowed to borrow. Where exceptionally
they are allowed to borrow the spending financed by borrowing
scores gross in budgets. This applies whatever the source of
borrowing (for example department or market). The cash raised
by borrowing does not score as income in DEL.
Use of reserves - i.e. the run-down of savings — has the same
effect overall as borrowing. Therefore expenditure financed by
the use of reserves counts as spending in budgets.
Corporation Tax
9.16
Exceptionally, some ALBs pay Corporation Tax. Such payments
are resource AME, because payments within central government
of taxes on income are consolidated out in national accounts.
ALBs should not devote resources to tax minimisation or tax
planning.
Depreciation
9.17
Depreciation charges may only be recorded in AME for grant
funded assets where the grant originated from the sponsoring
department.
Co-funded ALBs
9.18
9.19
9.20
This section applies to all grants from a central government body
to an ALB, regardless of whether they are grant-in-aid or capital.
It does not apply to bodies purchasing services from ALBs.
Where an ALB receives grant from more than one department
then the following budgeting treatment will apply.
Department A makes a voted cash payment to department B. It
is for the departments concerned to decide how the ALBs costs
should be apportioned, and therefore how large department A's
payment should be. Department B is the sponsor of the ALB and
pays it a single grant-in-aid, including an element in respect of
the payment made by department A. Department B takes
responsibility for the budgetary impact of the ALBs expenditure.
The ALB’s expenditure should score in department B’s budgets
(resource or capital and DEL or AME as appropriate). Department
B's grant-in-aid to the ALB scores outside the budget in the
normal way. Department A’s payment to department B scores in
department A’s DEL as a cost, and in department B's DEL as a
benefit - thereby sharing the budgetary impact.
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Department A a _ Department 6
ALB I
9.21. Inthe numerical examples:
e department A contributes £100. There are no AME costs
associated with these activities and
« the ALB's total spending in DEL from all sources is £950 and it
needs cash of £850.
Department A's Department B’s budget Department B’s
budget grant-in-aid to the
ALB
Departmental ALB element
element
£100 -£100 £950 £850
9.22 This treatment will apply to all grants that move between central
government budgeting boundaries. So, in the example above
department A could just as easily be replaced by ALB A- the
grant would still be required to go through department B.
Certain levy-funded bodies
9.23. The spending of a number of levy-funded bodies, defined against
the criteria in Appendix 4 to Chapter 1, isin AME, rather than DEL.
NHS Trusts
9.24 AIILNHS Care Commissioning Groups and NHS Provider Trusts are
central government bodies — this includes Foundation Trusts.
CCGs are recorded in budgets in the same way as NDPBs, as set
out earlier in this chapter. The budgetary treatment of NHS
Provider Trusts (including Foundation Trusts) is set out below.
Resource budget
9.25 The departmental resource DEL and AME budgets score the
majority of transactions in the same way as any ALB. The only
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items where the treatment of a transaction is different to the
standard ALB model are:
e CCGs and DHSC's payments to NHS Provider Trusts are
recorded as procurement in accounts but for national
accounts and budgets they are classified as grants
« the element of procurement that covers Provider Trusts’
depreciation charges scores in resource DEL. Unlike other
depreciation charges, NHS Trust depreciation is not included in
any ring-fence
* corporation tax paid by Provider Trusts scores as a cost in RDEL
budgets
Capital budget
9.26
9.27
All capital transactions of Provider Trusts are treated in the same
way as capital transactions of ALBs. Capital transactions between
the Trust and the department score in the same way as
transactions between an ALB and its sponsor department.
For further information on the treatment of PPP in budgets,
please see Chapter 13.
Devolved Administrations
9.28
NHS Trusts in Wales and Northern Ireland score in budgets in the
same way as ALBs. NHS Trusts no longer exist in Scotland, and funding
is channelled through NHS and special health boards.
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Chapter 10
Support for Local
Authorities
Overview
10.1. Departmental budgets include government support for local
authorities. They do not include self-financed local authority
spending.
Resource budget
10.2. The resource budget includes current grants to local authorities.
10.3. Departmental accounts do not distinguish between current and
capital grants. Both go through the Statement of Comprehensive
Net Expenditure (SoCNE). National accounts do distinguish
between current and capital grants, and the budgeting
treatment follows the national accounts distinction, with capital
grants going through the capital budget. See Chapter 3 for
descriptions of current and capital grants.
Capital budget
10.4 Capital budgets include:
e Supported Capital Expenditure (Capital)
« Supported Capital Expenditure (Revenue)
Supported Capital Expenditure (Capital)
10.5 Supported Capital Expenditure (Capital) is the local government
finance term for capital grants. See Chapter 3 for the distinction
between capital grants, current grants and subsidies.
Supported Capital Expenditure (Revenue)
10.6 Supported Capital Expenditure (Revenue) (SCE(R)) is the local
government finance term for the amount of borrowing which
government is prepared to support. A stream of current support
to cover local authority borrowing to this level is provided as non-
ring-fenced revenue as part of the Local Government Finance
Settlement. Ongoing revenue support for specific local
government PPP projects that are on-balance-sheet for national
accounts is also SCE(R).
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10.7. Departmental budgets score the capital value of SCE(R). The
current support is paid by DLUHC as part of the Revenue Support
Grant.
10.8 For certain outturn years, departments score the capital values of
the predecessor regime, credit approvals.
10.9 Self-financed borrowing by local authorities under the prudential
borrowing regime that is not supported by central government
does not score in departmental budgets.
Debt repayment grants
10.10 Grants to enable local authorities to repay debt principal score in
capital AME budgets. Any payment of such a grant requires
specific Treasury approval. Normally, approval of such a grant will
be associated with offsetting budgetary adjustments.
10.11. Where a department gives a grant that covers both debt
repayment and the payment of any associated debt interest
premia by the local authority to the debt provider the two
elements of the grant should be separated. The element that
covers debt interest premia should score as a current grant in
DEL budgets.
10.12. Where a local authority uses a debt repayment grant to repay
debt and receives a discount on that debt because of that then:
e inthe majority of cases the department will have paid a grant
to the local authority that was less than the amount of debt
principal. The whole of the grant would count as a debt
repayment grant
« ifthe department shares in the value of the discount in the
form of a payment from the LA this income will be retained in
capital AME
Arm’s Length Body support to Local
Authorities
10.13 ALBs' support to local authorities is treated in the same way as
support for local authorities provided by departments.
Support to LA PPP projects including PPP
arrangements
10.14 As part of the SR settlement departments are allocated a specific
amount of resource DEL to fund the ongoing cost of local
authority PPP projects.
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Public Corporations accountable to Local
Authorities
10.15
10.16
Transactions between local authorities and their public
corporations are recorded as transactions between those two
sectors. If a department provides grants to a local authority
which it in turn uses to support its public corporations then the
transaction at the departmental level should be recorded as a
transaction between central and local government, in resource or
capital budgets as appropriate.
Similarly, where a department provides SCE(R), which is for
ultimate use by a public corporation accountable to a local
authority it will score in the department's budget in the usual
way.
Capitalisation directions
10.17
10.18
DLUHC and the devolved administrations have the power to
issue directions to local authorities to capitalise certain
expenditure. Such directions do not change the nature of the
expenditure from current to capital. Rather, broadly, they allow
local authorities to borrow or use capital receipts in order to
finance current spending.
There may be arguments for allowing local authorities to spread
the incidence of certain lumpy current expenditure payments.
such as large redundancy payments. However, capitalisation
directions run contrary to Treasury's position to constrain public
sector net borrowing.
New burdens on Local Authorities
10.19
10.20
If a department introduces a new policy that places new burdens
on local authorities, they are required to conduct a new burdens
assessment. This assessment will determine if there is a net
additional cost to the sector. If so, the department is responsible
for providing funding to local authorities for new burdens arising
from its policy decisions. Where a department considers that it
requires additional resources to do this, it is responsible for
securing those resources. If a department introduces offsetting
measures at the same time to reduce other burdens on local
authorities, it will need to fund the net additional cost.
Departments should not consider general efficiency savings
within a local authority to be an available source of funding for
new burdens, nor should they assume that local authorities can
absorb the cost of a new burden through reduced expenditure
on existing functions. Departments should inform DLUHC (Local
Government Finance directorate) at the earliest possible stage of
any new policy affecting local authorities - see Annex D for
contacts and Annex E for guidance.
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Chapter 11
Public Corporations
Definition of Public Corporations
111
Public Corporations (PCs) are defined for the national accounts
by the Office for National Statistics (ONS). ONS publish a list of
PCs in the Public Sector Classification Guide. If a body is not listed
in the Public Sector Classification Guide and you are in doubt as
to whether it is a PC, or if you are considering setting up a body
that might be a PC, you should contact the Treasury.
PCs are bodies that are controlled by government or another
public corporation and that are market bodies (i.e. their income
comes mainly from trading activities). Certain regulatory
activities may count as trading.
PCs may take various legal forms, including statutory bodies and
Companies Act companies. Not all statutory bodies or
government-owned Companies Act companies are PCs; they
may be ALBs for example.
Most trading funds are PCs. However, trading fund is a legal
designation leading to a particular Estimates treatment. The ONS
need to consider separately whether a particular trading fund
meets the national accounts criteria for PC status. This chapter
applies to trading funds that are PCs, with some special features
— see below. Those trading funds that are not PCs are budgeted
for as departments or ALBs as appropriate. Some Public Private
Partnerships (PPPs) may be PCs - see the passage on PPPs
below. If they are PCs they are budgeted for like other PCs.
Certain special arrangements apply to self-financing Public
Corporations (SFPCs), which are set out below in this chapter.
Like other AME spending, departments are responsible for
monitoring this spend and taking steps to prevent undue
increases. As part of this, departments are expected to obtain all
information about PCs’ planned spending (see paragraph 11.91)
This chapter applies to public corporations answerable to
Ministers. UK subsidiaries of a public corporation are included
within the budgeting controls of the parent Public Corporation.
Departments should discuss with the Treasury the budgeting
arrangements for non-resident subsidiaries of a public
corporation. These budgeting rules also apply to public
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corporations that are a joint venture of one or more public
corporations accountable to ministers. Different arrangements
apply to public corporations answerable to local authorities (see
chapter on support for local authorities).
The objectives of the budgeting system
for Public Corporations
117
11.10
The aims of the budgeting framework with regards to public
corporations are:
« tosupport the government's fiscal objectives
e to provide sensible and transparent incentives to managers in
public corporations and in departments. This implies both
e ensuring that public corporations and their sponsoring
departments face good incentives for the PC to generate
the right return on capital
¢ appropriate levels of freedom to exercise commercial
judgement, within appropriate delegated authority
arrangements that protect departments
In addition, the budgeting framework aims to reduce
compliance costs for departments, by being based as far as is
practicable on entries in departmental accounts and the PCs’
accounts.
The government's fiscal framework applies to the whole of the
public sector, that is general government (central and local
government) and public corporations. In the fiscal framework:
« PCs’ gross operating surplus is a benefit to the current balance.
Payments of interest and dividends to the private sector and
depreciation make the current balance worse
e PCs’ capital investment increases PSNI and net borrowing, and
their liabilities contribute to net debt
Most internationally recognised debt and deficit measures apply
to general government. They exclude the performance and
spending of public corporations but include certain departments’
transactions with public corporations. That helps to explain why
we need accurate measures of government's dealings with
public corporations even though domestically we measure
performance at the public sector level. It is for departments to
manage their relationship with their public corporations in the
way that best meets their needs. Departments should take
advice from UK Government Investments (UKGI) where
appropriate. UKGI is a Treasury-owned company that operates
both in an executive function for departments in relation to some
PCs and as advisors alongside departmental shareholder team
for others. The Treasury issues guidance on public corporations
policy in general and on trading funds policy.
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11.11 Departments are expected to set PCs clear objectives and
challenging targets covering Return on Capital Employed,
dividend levels, efficiency, and quality of goods and services. The
corporate plans of PCs should be subject to agreement by the
department. That is particularly important where PCs have been
underperforming against profits targets; face risks to
performance, or might generate substantial levels of excess cash.
Treatment of PCs in budgets
11.12 Public corporations are recorded in budgets on an “external
finance basis”. This means that the transactions of the PC are, in
most cases, outside of the department's budget. The budget of
the sponsoring department will show all transactions between
the department and the PC. Additionally, should the PC
undertake any borrowing the financing raised will be recorded in
the budget of the sponsoring department.
11.13 The table below sets out the main elements of scoring PCs on an
external finance basis.
Resource budget Capital budget
External Finance basis Investment grants paid to
Public Corporations
Subsidies paid to Public
Corporations Net lending to Public
Corporations (voted and
Less interest and dividends NLF)
received from Public Corporations
Public Corporations’ market
and overseas borrowing
(PCMOB) (including on
balance sheet property lease
arrangements and on
balance sheet PPP)
Less withdrawals from
Public Corporations
11.14 Most PCs are recorded on a consistent external finance basis as
described above. However, a selected few bodies have been
classified as self-financing public corporations (SFPCs) and these
have a different treatment in budgets which places more
transactions in AME. The detailed budgetary requirements for
SFPCs are set out later in this chapter.
External finance basis
11.15 This section sets out the resource budget and capital budget
scoring of public corporations on an external finance basis.
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Resource budget
11.16 Fora public corporation, the departmental resource DEL scores:
« subsidies paid to the PC
« minus interest and dividend income received by departments
from PCs (including interest on NLF loans) plus interest
payable to the NLF
« plus a charge for the impairment of any investment in PCs
Interest
11.17. When debts are repaid early,
e interest premia received from the PC count as current income
in the departmental accounts alongside other interest
« interest rate discounts paid by the department to the PC count
as current payments in resource DEL alongside other
payments of interest a department may make
NLF Interest
11.18 Where a department's accounts show interest payable from PCs
in respect of NLF loans and the subsequent payment of interest
to the NLF then both should be reflected in the resource budget
Dividends
11.19 Adividend policy should be agreed between the PC and its
department as shareholder. The department may choose not to
recover the full rate of return (as agreed with Treasury) as a
dividend (in order to allow for reinvestment of its profits by the
PC). But, the eventual cost of this under recovery should be borne
by the department. As such budgets should be set at SRs on the
expectation that the full agreed rate of return will be achieved.
11.20 The timing of dividend recognition in budgets generally follows
departmental accounts. However, not all receipts treated as
dividends in departmental accounts count as dividends for
budgeting. Please see the section on equity withdrawals below.
Capital budget
11.21 The capital budget scores:
« capital grants paid by the department to the PC
* loans to the PC (includes voted loans, National Loans Fund loans
and Public Works Loan Board loans), net of repayments
e Public Corporations Market and Overseas Borrowing net of
repayments (PCMOB)
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11.22
11.23
« injections of equity into PCs net of repayments of equity by PCs.
Equity includes Companies Act shares and Public Dividend
Capital
e minus equity withdrawals.
Loans score in the capital budget whatever their purpose, that is
whether they have been taken out to finance working capital or
fixed assets investment.
Note that the capital budget does not score capital expenditure
by the PC, only the external support for capital expenditure.
Subject to their agreeing their business plans with their
department as shareholder, PCs are therefore free to invest
insofar as they are able to finance their investment from asset
sales, income that covers depreciation and a level of profits that
exceeds what is needed to pay interest and dividends as agreed
with the department.
Capital grants
11.24
11.25
11.26
11.27
Capital grants are unrequited transfer payments that are
intended to finance investment by the PC. Investment includes
the acquisition of any fixed asset (land, buildings, vehicles,
machinery, etc.) and any financial asset (lending, company
securities, etc.). Grants to finance stock-building should also be
treated as capital grants. Grants to refinance pension funds are
capital grants.
Capital grants should be paid whenever the NLF has made a loan
to a PC that the PC would otherwise be unable to repay — this
demonstrates transparency to Parliament. For voted loans, follow
the procedures in Managing Public Money.
Capital grants should also be paid where a department wishes a
PC not to be burdened by a loan that it could not repay, perhaps
as part of a restructuring.
Grants from the department to make good a shortfall in a real
pension fund score as capital grants in budgets and may need
special recording. Departments contemplating such a grant
should contact the Treasury.
Public Corporations Market and Overseas Borrowing
(including property leases and on balance sheet PPP
arrangements)
11.28
Expenditure financed by PCMOB scores in the government's
fiscal framework like any other expenditure. Therefore, PCMOB
should be controlled. Where PCs wish to borrow on the market
or overseas, departments should discuss proposals (other than
for overdrafts) with HM Treasury. Approval for borrowing from the
private sector will be permitted only in exceptional cases.
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11.29
11.30
11.31
11.32
11.33
11.34
PCs may normally only borrow from the market or overseas
where at least one of the following applies:
«a facility is not provided by the public sector, for example
overdrafts, and that facility is either necessary to the normal
conduct of business or offers better value for money than other
forms of finance
« it would be cheaper for the PC to borrow on the market than for
the government to borrow - this will almost never be the case,
although some bodies may offer cheap loans. Where a PC or
department believes that a body’s borrowing would be
cheaper than the Exchequer’s cost of borrowing it should first
verify the assessment with the Treasury
« it would be better value for money for the PC to borrow on the
market than to borrow from government. This might apply to
some on-balance sheet PPP procurement, for example
« there is no power for government to lend to the PC
PCMOB scores as a cost in capital budgets of the sponsor
department.
PCMOB does not include movements in PCs' bank deposits or
other liquid financial securities.
Where a PC has property leases taken out from the private
sector, there is a CDEL hit to PCMOB for lease liabilities and a
CDEL benefit for lease principal repayments, where the lease was
entered into on or after 1 April 2022 (or the date of IFRS 16
adoption in departmental accounts, if earlier). This reflects their
scoring as borrowing in national accounts. This is not applicable
for non-property leases which are not on balance sheet in
national accounts.
See Chapter 13 for the PCMOB treatment of on balance sheet
PPP arrangements.
Further details of the Treasury's approach to lending to PCs,
particularly ensuring an appropriate lending rate is used, can be
found on the HMT Dear Accounting Officer (DAO) letters site.
Setting the rate of return on Capital
Employed
11.35
Public corporations, by definition, are market bodies majority
financed by sales of goods or services. Where comparable bodies
operate in the private sector, they must achieve a return on
investment appropriate to the risk of operating in that market. As
such the sponsor department should require its PCs to generate
a certain rate of return on the capital employed in producing
services.
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11.36
11.37
Departments must agree with Treasury on what is an
appropriate rate of return for each of their PCs. This anticipated
level of return should be considered alongside other sources of
income at Spending Reviews (SRs) - see Chapter 4 for details on
income in the resource budget.
In exceptional cases a department may choose to subsidise a PC
for policy reasons and collect a level of income lower than the
level agreed with Treasury. In these cases, SR calculations should
always use the agreed level of income rather than the subsidised
level. Departments should be careful to comply with trading fund
guidance on disclosure to Parliament where appropriate.
Weighted Average Cost of Capital
11.38
11.39
Departments should begin by establishing an appropriate post-
tax Weighted Average Cost of Capital (WACC) for the PC. To work
out the WACC, departments should consider the whole of the
Capital Employed in the PC, not just the department's share.
Looked at from funding, Capital Employed comprises total
equity, reserves, debt including all interest-bearing liabilities and
un-funded or under-funded pension liabilities. This may not
always match the figures reported on a department's balance
sheet.
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Capital Employed
Trade Creditors f Spontaneous Finance
Debtors, Stocks &
Prepayments Short-term Debt
Long-term Debt
Fixed Assets Convertibles Capital Employed
Preferred Stock
Equity and
Retained Earnings
11.40
11.41
The appropriate WACC should be calculated using a cost of
equity and cost of debt commensurate with the returns equity
and debt investors would expect to receive from investing in a
comparable private sector business with the same level of risk.
For some regulated businesses it may be appropriate to use a
Regulatory Asset Base or Regulatory Capital Value (RCV) in
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11.42
respect of all or part of the PC as the Capital Base upon which a
cost of capital charge is levied. If you think that would be the
appropriate Capital Base you should talk to HM Treasury.
UKGI will be able to provide support and expert advice to
departments in determining the appropriate cost of equity or
debt.
Setting a target rate of return
11.43
11.44
11.45
11.46
11.47
11.48
APC should be set a target return to earn at least its WACC
multiplied by the overall Capital Employed. You should use the
average Capital Employed over the year.
In the case of PCs performing essentially government-type
functions, 3.5% real will normally be appropriate. A PC competing
in the market should typically be expected to return a higher rate
to reflect the prevailing market rate.
Where a PC has a monopoly, departments should ensure that
the rate of return set is not exploitative.
The right rate for the PC should be agreed with the Treasury
when a new PC is set up and as part of the SR process.
Once the total Capital Employed and target rate of return has
been worked out, the department's expected receipts are
calculated by deducting those elements on which the public
corporation owes a return to another funder.
In principle, the calculation is:
« total rate of return
e Jess returns owed on loans from the private sector, including
finance leases and other interest bearing liabilities
e less returns owed on the value of private sector equity stakes in
the business
e Jess returns owed on unfunded or under-funded pension
liabilities (which are a sort of debt owed to the household
sector). Typically, we would expect these returns to be equal to
either ASLC contributions or the return on corporate bonds
e less the amount of interest that the PC has to pay on any
National Loans Fund (NLF) loan (since the departmental asset
in respect of a NLF loan is matched by a liability to the NLF)
Regulated businesses
11.49
Budgets are set net of other departmental receipts. As a result,
departmental allocations will take the expected receipts from
PCs into account. For example, if a department had agreed a
total spend of £500 million and it had a PC with expected interest
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and dividend payments to the department of £30million, the net
Resource budget would be equal to £470 million.
Tax planning
11.50 The government obtains a return from public corporations partly
through the normal tax on corporations and partly as owner. PC’s
may undertake normal tax planning but should not incur
wasteful expenditure on tax mitigation.
11.51 The passage on WACC above assumed that public corporations
have not operated in a way designed to reduce their tax bill.
Where public corporations have undertaken tax mitigation — in
particular where public corporations have high levels of interest-
bearing debt - departments should consult the Treasury on how
to work out the WACC so as to counteract the effects of tax
mitigation.
11.52 Managing Public Money (4.2.6 and Annex 4.4) gives more guidance
to departments and ALBs on tax planning.
Trading funds
11.53. Trading funds that are public corporations are normally
budgeted for exactly like other public corporations.
Trading funds that are departments in their own
right
11.54 The budgeting for trading funds that are treated as departments
is exactly the same as all other PCs. Where the PC is engaging in
borrowing from the NLF or Public Corporations Market and
Overseas Borrowing (PCMOB) then the amount borrowed must
score in the CDEL budget of a parent department.
Subsidies
11.55 Subsidies are unrequited current payments to trading bodies:
e “Unrequited” payments should be distinguished from
payments for goods and services, where the department
obtains something direct in return for the payment. That the
department obtains a general policy benefit from a subsidy
does not stop it being unrequited
« Departmental accounts do not distinguish between subsidies
and capital grants. Departments need to do so for budgets
following national accounts principles. The distinction is
needed because subsidy and expenditure financed by capital
grants score differently in the fiscal framework: in effect,
subsidies affect the current balance, while capital grants do
not. Capital grants are unrequited transfer payments that are
intended to finance investment by the PC (see below)
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Underperformance
11.56
11.57
11.58
11.59
Departments have to obtain a return from their PCs that covers
the rate of return agreed with Treasury. The return comes in the
form of interest and dividend income from the PC. In order to be
able to pay the necessary amount of interest and dividends, the
PC needs to achieve a high enough level of earnings, and the
department should ensure that the PC is set sufficiently
challenging targets and that they are met. A dividend policy
should then be agreed between the PC and its department as
shareholder.
If the PC’s level of earnings do not allow it to pay the right level of
interest and dividends, the department should pay a subsidy to
the PC so that it can make those payments. The reason for this
requirement is to make it transparent to Parliament and public
that a PC is under-performing and needs a subsidy to be paid.
Where a department has no power to pay a subsidy or where
such a subsidy would represent state aid, the overall effect on
budgets is still the same, since it is the initial shortfall in PC
performance against the cost of capital that impacts on the
budget. However, in these cases the department should still
disclose the effective subsidy in a note to the departmental
accounts.
No subsidy need be paid if the Treasury and the department
agree that the PC’s underperformance was due to normal
volatility.
It is important to make clear to PCs that only making the
expected return after receiving a general subsidy is not good
enough. The payment of a subsidy needs to be accompanied by
the PC’s development of a recovery plan to get performance
back on track.
Social policies
11.60
Where a department wishes a PC to perform a social policy
function then it should pay for that explicitly out of its budget
rather than seeking to recover the costs by accepting PC
underperformance or by overcharging PC customers. A
department has two choices:
e it may pay a subsidy to the PC
« it may set up an arrangement whereby the PC as a handling
agent. Here the department would pay the PC for its services
in handling a transaction, while the transaction itself would
score in the budgets and departmental accounts of the
department acting as principal. This route should be used
when PCs are involved in the payment of grants to the private
sector or local authorities, since grant-giving is not a market
activity appropriate to PCs
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11.61
11.62
11.63
It may be appropriate for subsidies to be paid by a department
other than the sponsoring department where it is the other
department that wants the social policy function to be carried
out.
Where a department wishes a PC to perform a social policy
function and does not have legal power to pay a subsidy the
department should contact HM Treasury to establish how best to
obtain transparency.
Departments should ensure that payment of subsidies is
compatible with EU state aid legislation.
Early debt redemption
11.64
11.65
11.66
Where a department supports a PC to repay debt early and the
PC has to pay an interest rate premium, the element of grant
that covers the premium scores as a subsidy.
That is the case even if the department makes a single grant
payment in support of both principal repayment and early
redemption premia: the two elements must be divided into a
subsidy and a capital grant.
Where the department is supporting only a part of the PC’s total
payment covering debt repayment and premium, the grant
should be divided into subsidy and capital grant in the same
proportions as the total payment by the PC is divided into
premium and debt principal repayment.
Excess cash balances and equity
withdrawals
11.67
11.68
11.69
11.70
Departments should ensure that PCs do not build up excessive
cash balances. Cash balances are excessive if they are more than
the amount needed to fund expenditure in the next three years
as set out in the corporate plan that has been agreed with the
department. Excess cash balances should be taken out of PCs so
that the spending power that they represent is prioritised across
the departmental group as a whole. Excess cash balances are
normally taken out by means of equity withdrawals.
Equity withdrawals benefit capital budgets. So a department
may in effect borrow spending power from its PC, extracting cash
in one year (obtaining a capital DEL benefit) and making
spending power available to the PC through capital DEL in a later
year.
Equity withdrawals are exceptional payments from accumulated
reserves or cash balances. They should be distinguished from
dividends in that dividends should be paid out of the profits of
the current year or the two previous years.
Equity withdrawals do not need to result in an actual repayment
of shares or PDC. That is, they may simply be a cash transaction.
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11.71
11.72
11.73
In departmental accounts, equity withdrawal of this type will go
through the SoCNE as special dividends, in the same way as
ordinary dividends. There is no impact on the department's
Statement of Financial Position other than the increase in cash.
However, because of the differing treatment in national accounts
and budgets, departments need to distinguish equity
withdrawals from dividends according to the principles
described above.
In the national accounts for general government, income from
dividends scores as current income, while income from equity
withdrawals scores ‘below the line’ as a financial transaction. They
thus have a different impact on certain of the fiscal measures.
Where equity withdrawals do result in an actual repayment of
shares or PDC then there is no difference in treatment between
departmental accounts and budgets. Where a profit is taken to
the SoCNE the department should discuss proposals with their
Treasury spending team.
PPP and similar arrangements
11.74
For the treatment of PPP in budgets, please see Chapter 13 on
PPP.
Treatment of Self-Financing Public
Corporations
11.75
Certain PCs have been designated by the Treasury as Self-
Financing Public Corporations and have special budgeting
treatment. The transactions that score in budgets, and treatment
of resource/capital, are consistent with all other PCs; but SFPCs
place different transactions in AME or DEL.
Rationale and criteria for SFPCs
11.76
11.77
11.78
The main rationale underpinning SFPCs is that the SR is used to
prioritise spending financed by taxes. Where public corporations
expect to recover expenditure from fee-payers in a competitive
open market, that expenditure may be excluded from the SR
prioritisation process.
However, SFPCs are still public bodies, their spending is still
public spending, their activities impact on the fiscal framework,
and their liabilities contribute to net debt. They therefore need to
be managed and monitored.
It is for the Chief Secretary to the Treasury to designate an SFPC
where it is appropriate to the Treasury's conduct of the SR. The
criteria that guide the Chief Secretary include:
« the PC must have traded profitably for a number of years, not
requiring subsidies, and must be able to demonstrate that this
state of affairs will continue into the future
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« the PC must be selling goods and services into an open
market. It should not be selling regulatory services
« the PC must either
e be selling primarily to customers outside general
government
e bea publicly announced candidate for privatisation or a PPP
in the private sector
List of SFPCs
11.79 The following PCs have been designated as SFPCs:
Commonwealth Development Corporation, Channel 4, the
Crown Estate, and the Royal Mint.
Control of SFPCs
11.80 Departments control Self-Financing Public Corporations in the
same way as other PCs. In the SR, departments agree a forward
plan in respect of the SFPCs alongside but not in the normal SR
process. At this point, the status of the SFPC as self-financing
should also be reviewed as to whether it still fulfils the
classification criteria. As with other spending in AME,
performance against the plan is monitored formally by
departments and the Treasury in the run-up to each Budget
report.
11.81. The plan will include the appropriate rate of return and the
arrangements for underperformance, see below.
Scoring in budgets
11.82 Self-Financing Public Corporations face the same budgeting
rules and are scored in the same way as set out above, except
that certain transactions score in AME rather than DEL. So, for
SFPCs budgeted for on the external finance basis:
* resource AME scores
e interest and dividends paid by the SFPC to the department
(and loan arrangement fees, where payable and where not
excessive)
* resource DEL scores
e any subsidy paid by the department
e underperformance charges
e capital AME scores
e loans to SFPCs (net)
e equity injections in SFPCs (net)
¢ purchase or sale of the shares of SFPCs
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11.83
e minus capital repayments made by SFPCs
e¢ minus equity withdrawals
e plus PCMOB (net)
e¢ capital DEL scores
e any capital grants paid to SFPCs
The subsidy formally paid to the Crown Estate to cover certain
administration costs scores in resource AME. Dividend income
received from the Crown Estate is outside budgets.
Underperformance by SFPCs
11.84
11.85
11.86
11.87
SFPCs should cover the agreed rate of return through their
payments of interest and dividends.
When returns from the SFPC fall short of the department's rate
of return, an underperformance charge equal to the short-fall will
be charged to departmental resource DEL. This
underperformance charge reflects the budgeting guidelines for
PCs and is intended to incentivise departments to manage
SFPCs appropriately as well as provide visibility of
underperformance to Parliament and the wider public.
In other words, the underperformance charge will be equal to:
e the expected return, as calculated by the rate of return agreed
between departments and Treasury
e plus retained loss after interest and dividend payments, if
applicable
e less any interest and dividends that the SFPC has paid to the
department
During the SR period, departments may be able to negotiate a
cap on their exposure to underperformance charges. On an
exceptional basis (for example if the SFPC is undergoing a
restructuring programme), it may also be possible to use a
recovery target rate of return for calculation of the
underperformance charge. However, when an SFPC
underperforms on an ongoing basis, reclassification as a PC
should be considered as part of the SR process.
Public private partnerships (PPPs)
11.88
PPPs that are entities in their own right may be classified by the
ONS to the public or private sectors. In some PPPs, shares may
be sold and the PC remains in the public sector. In other cases
(for example National Air Traffic Service (NATS)), shares may be
sold and the PC may move into the private sector. The ONS takes
into account a range of factors when considering classification
and not simply the percentage of government shareholding.
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11.89 In the case of SFPCs, PCMOB may only be undertaken in line
with the agreed forward plan. The plan will set out what should
be done with the sum realised by a share sale. In default of other
arrangements, the sum should be taken out of the SFPC by way
of an equity withdrawal in order to offset the PCMOB.
Privatisation
11.90 Sale of shares on the privatisation of a public corporation is the
disposal of a financial asset by the department. The income
scores as a benefit to the capital AME budget.
Supplementary information on Public
Corporations
11.91 Departments are asked to provide certain financial information
about PCs in addition to the budget data.
Capital expenditure
11.92 Even though for most PCs capital expenditure does not score in
budgets, departments are responsible for monitoring this
expenditure and taking steps to prevent undue increases.
Departments are to obtain information about all PCs’ outturn
and planned capital expenditure and to pass it on to the Treasury
via OSCAR using a non-budget identifier.
11.93 This information needs to be accurate and kept up to date
because:
e itis information that departments should use in any event as
part of their monitoring of PCs
* the information feeds into the national accounts measures of
spending and borrowing, including the fiscal framework
e the information is published in PESA separately for each PC
and is used in the functional and regional analyses of public
sector spending, including tables that appear in Departmental
Reports
11.94 The information that is required is:
* gross capital expenditure, including land, buildings, vehicles
and machinery
e less (actual) sales proceed
e additions to inventories (net)
Gross Operating Surplus
11.95 In addition, for the larger public corporations, the Treasury seeks
special non-OSCAR returns of outturn and plan gross operating
surplus (broadly, profit before depreciation).
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11.96 This information is useful to the Treasury as gross operating
surplus is an item on the revenue side of the Surplus on the
current budget, used to measure achievement of the temporary
operating rule.
Joint Ventures
11.97 Where the public sector engages in a joint venture with a private
sector partner the new entity will be subject to the same
classification considerations as any other new body (see Chapter
1 for details). Annex E contains a link to guidance on the public
sector's involvement in joint ventures.
11.98 Where it is determined that the public sector has engaged ina
joint venture with a private sector partner and controls and
voting rights are equally split, and if the joint venture is classified
as a market body then it should be partitioned in half, and 50% of
its expenditure, income, assets and liabilities should be treated as
if a public corporation. The parent department will then reflect
what it has to for a public corporation. If the joint venture is
deemed to be a non-market body, then it should in its entirety
should be classified to the central government sector and
consolidated into its parent department's accounts.
11.99 If the body is not owned by exactly equal percentages by each of
the public or private parties, the joint venture will be allocated to
the party which holds the majority. If this would be the public
body, then the joint venture will be classified within the
government sector if it has a predominant non-market activity. If
it is recognised as a market producer, then it will be treated as a
public corporation and the parent department should then
reflect what it has for a public corporation. Useful guidance can
be found here - Joint Ventures Guidance.
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Chapter 12
Pensions
12.1. This chapter is split into separate sections for the following cases:
a) unfunded pension schemes, covering employing
departments and ALBs who contribute to multi-employer
unfunded pension schemes
b
funded pension schemes: departments and ALBs who
contribute to and run funded pension schemes
c) unfunded by-analogy arrangements: departments and ALBs
who run their own unfunded, by-analogy, pension schemes —
that is schemes run by-analogy to the multi-employer
pension schemes
d) bulk transfers to funded schemes
Section A: Unfunded pension schemes, used
by employing departments that contribute to
multi-employer unfunded pension schemes
12.2. Departments are required to recognise in their budgets the
accruing cost of their existing staffs’ pension liabilities that will
need to be met in future periods. For those departments whose
staff are members of the large unfunded multi-employer
schemes (such as the Civil Service, Teachers’ or NHS schemes)
IAS 19 allows departments to account only for the employer
contributions payable to the pension scheme administrator (the
accruing superannuation liability charge (ASLC)).
12.3. The employing department bears the cost of that ASLC in its
resource DEL, as part of its salary bill.
12.4 The department bears no further liability in respect of pensions.
12.5 The employee may also pay a contribution into the scheme. Such
payments are made by the employee out of her or his pay. The
department will have shown pay as a cost in its resource DEL. It
should not show anything further in respect of the employee
contribution.
12.6 This section of the budgeting guidance applies to the
administrators of the multi-employer unfunded schemes
(schemes under Section A):
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e Principal Civil Service Pension Scheme (PCSPS)
e Alpha pension scheme
e NHS pensions schemes
e Teachers’ pension schemes
e Armed forces pension schemes
e Judicial pension schemes
e UK Atomic Energy Authority (UKAEA) superannuation
schemes
« Overseas Pension Department (OPD) schemes
e Royal Mail unfunded pension scheme
This section applies to the budgeting of the schemes themselves.
It does not cover employing departments’ contributions to the
schemes - see earlier paragraphs of this Chapter.
The transactions of these schemes are scored in AME. The
transactions follow those that are recorded in the departmental
accounts, and are as follows:
Expenditure:
* current service costs (defined as “the increase in the present
value of the scheme liabilities expected to arise from employee
service in the current period”)
* past service costs (normally expected to be zero) interest on
scheme liabilities (the unwinding of the discount on the
scheme liability)
« increase in future liability arising from employees purchase of
added years and group and individual transfers in
e there may be occasions where actual pensions benefits paid
pass through the revenue account if they are not charged toa
provision on the balance sheet
Income:
« employers’ contributions
« employee contributions - normal
« employee contributions — purchase of added years
* group and individual transfers in
Unfunded pension benefits payable
12.9
Pension benefits payable to retired members, and group and
individual transfers out, score only in the departmental accounts
via the balance sheet as it is simply a discharge of a provision. It
represents the movement of cash and liabilities. As such it has no
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12.10
12.11
overall budgetary impact, as the discharge and use of provisions
cancel each other out within the same budget boundary.
However, to record the discharge of the provision correctly
departments should record on OSCAR matching entries (a series
2 CoA with a negative and a 9 series CoA with a positive) within
the AME budgeting boundary to ensure that the correct cash
required can be calculated and that information required for the
national accounts is captured.
Bulk transfers to the private sector score as capital transactions in
national accounts and are treated as a cost in the resource
budget offset by the release of provision.
Where payments are not covered by an existing provision (i.e. no
account has been taken of the build-up of the pension liability),
they score as charges in the resource AME budget.
Section B: Funded pension schemes:
departments and ALBs who contribute to
and run funded pension schemes
12.12
12.13
12.14
12.15
Some departments and ALBs run pension schemes with a real
fund (as distinct from a notional fund used for unfunded
schemes). Such departments and ALBs also have to comply with
the accounting standard IAS 19.
IAS 19 covers the position where:
e there is a deficit in the pension fund (i.e. there is a shortfall in
the value of the assets of the scheme over the present value of
the scheme's liabilities)
e the deficit is identifiable as belonging to the employer
« the employer has a legal or constructive obligation to make
good a deficit in the pension fund
In these circumstances, the employer should recognise that
deficit in the fund as a liability on their balance sheet.
The cost in the departmental budget is the same as that shown
in the accounts of the department or ALB under IAS 19.
Specifically, the movement in the pension scheme liability as
recorded in the SoCNE scores as a cost in the resource budget.
Any actual contributions to the scheme that serve to reduce the
liability score in the cash subsection of the Resource budget
offset by a negative amount. However, note that these effects will
not net-off within AME and DEL budgets. An example is given
below.
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Resource budget
Department or ALB Accounts Total
AME DEL
Increase in scheme liabilities
Cr pensions liability (110)
Dr Statement of Comprehensive ite) 110 no
Net Expenditure/ I&E
Contribute cash to scheme
Dr liability 100 (100) (100)
Cr cash (100) 100 100
10 100 no
12.16
12.17
12.18
The example assumes that the contributing department pays 100
cash to the scheme but that the accruing cost of the pension
liability is 110.
The accruing liability would normally fall to departmental
resource AME, whilst the cash costs would fall to DEL. This is
more analogous to the costs borne by those departments who
contribute to unfunded schemes, and reduces the scope for
volatility in departmental resource DELs. Where there is a serious
or structural deficit the scheme actuary will ultimately suggest
higher contributions or a one-off payment to rectify affairs. This
would score against DEL like normal contributions.
Where there is a surplus in the scheme, the department or ALB
should recognise that surplus as an asset if the conditions in
paragraph 37 and onwards of IAS 19 are satisfied (i.e. to the extent
that employers can recover that surplus either through reduced
contributions in future or through refunds from the scheme). This
will be a benefit to the resource budget in AME. Movements in
the value of the surplus then impact on the SoCNE and resource
budget.
Section C: Unfunded by-analogy
arrangements; departments and ALBs
who run their own unfunded, by-analogy
pension schemes
12.19 “By-analogy” means schemes run by-analogy to the
multiemployer pension schemes. The budgets of departments or
their ALBs that run unfunded by-analogy pension schemes
should recognise the accruing cost of their existing staff's
pension liability that will need to be met in future periods. Such
schemes should be accounted for on an IAS 19 basis as adapted
for the unfunded schemes in the central government sector.
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12.20
12.21
12.22
The department or body that employs the staff recognises a
provision on the balance sheet in respect of the accruing liability
to pay pensions in the future, and a cost in their budget based on
the change in that liability.
To ensure parity between those bodies who pay into multi-
employer schemes and those bodies that run their own
unfunded by-analogy schemes the costs borne by the by-
analogy schemes in resource DEL are equivalent to those paid by
departments who pay into the multi-employer schemes.
Accordingly, the following transactions score in resource DEL:
Expenditure:
e increases in provisions due to current service cost
e increases in provisions due to past service costs
* increases in provisions due to any bulk/individual transfers in
« increases in provisions due to purchases of added years
Income:
* income from bulk/individual transfers in (funds the increase in
the provision due to transfers in)
« income from employees — normal contributions (goes part way
to fund the increase in the provision due to the current service
cost)
« income from employees - added years (funding increase in the
provision due to added years)
This treatment is broadly analogous to the costs borne bya
department that contributes a multi-employer scheme because
the current service cost borne by the department is broadly
equivalent to the ASLC that would be paid to multi-employer
pension scheme administrators.
Charges to Departmental AME
12.23 To ensure parity in the DEL treatment between those
departments who pay into the multi-employer schemes and
those that run their own unfunded by-analogy schemes certain
transactions score in departmental AME:
« pensions benefits paid, offset by the release of a provision from
the balance sheet (in this case there will be a credit to resource
AME to represent the discharge of the liability and a net
charge to departmental AME to reflect the payment)
« pensions benefits paid, if they are not charged toa provision
on the balance sheet
« the departmental accounts - and therefore budgets - score the
increase in the liability due to the unwinding of the discount
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rate. This increase is sometimes termed the interest on the
scheme liability. The discount rate is based on AA corporate
bond rates, and a CPI inflation assumption derived from
market data, and is advised annually
Unfunded board members
12.24
Unfunded broadly by-analogy arrangements for chairs, vice-
chairs, board members and other holders of public appointments
are also subject to IAS 19 as adapted for unfunded schemes in the
central government sector and should be included in any
measure of a body’s unfunded liabilities.
Bulk transfers of unfunded schemes joining I
multi-employer public sector unfunded pension
scheme
12.25
12.26
12.27
12.28
Where an unfunded scheme joins the multi-employer unfunded
scheme it will be required to make a cash payment equivalent to
the value of the liability that is being transferred. For the
transferring body that has previously recognised a liability in its
balance sheet in respect of its unfunded pensions liability, this
will be a balance sheet transaction — a movement in cash and
liabilities - with no impact on the SoCNE (the SOCNE does not
include the discharge of provisions, which is what this effectively
is). It follows that there is no overall impact on budgets.
However, to record the discharge of the provision correctly,
departments should record on OSCAR matching entries within
AME budgeting boundary to ensure that the correct cash
required can be calculated and that information required for the
national accounts is correctly captured. In addition, any amount
of cash that is required above or below the liability previously
recognised on the transferring body's balance sheet will be a
cost/benefit to the SoCNE.
Budgetary cover for this debit or credit will be provided for as an
AME item. The cash required for the transfer will be provided in
the appropriate manner - either through supply or grant-in-aid to
the body transferring the liability with no further impact on
budgets.
For an unfunded scheme joining an unfunded multi-employer
scheme that has not previously recognised a provision on its
balance sheet it follows that any payment it makes will be a cost
in its SOCNE. Budgetary cover for this cost will be provided for in
AME.
Section D: Bulk transfers to funded
schemes
12.29
Where a public-sector body makes a bulk transfer into a funded
scheme this cash payment increases TME. Where departments
are considering such payments they must contact the Treasury
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to obtain consent for the transfer. This is the case whether the
transferring body has previously provided for the liability or not,
or whether they have been making contributions to a public
sector multi-employer scheme or not.
Departments should contact the Treasury early in the process of
considering such transfers.
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Chapter 13
Leases and PPPs
The chapter sets out the budgeting guidance for leases and
Public-Private Partnerships (PPPs).
Leases and PPPs both represent areas where their respective
treatments in the departmental accounts and national accounts
are not fully aligned.
For leases, budgets should generally follow departmental
accounts treatment. For PPPs, budgets should generally follow
national accounts treatment. The detailed budget requirements
for leases and PPPs are provided in this chapter.
This chapter contains guidance for:
« Leases (paragraph 13.5-13.16); and
« PPPs that do not meet the definition of leases, including Private
Finance Initiative (PFI) and Private Finance 2 (PF2). This
includes:
« An overview of the national accounts and departmental
accounts recording of PPPs (paragraph 13.17-13.23);
¢ Specific budgeting guidance for PPPs, including:
o The difference between on- and off-balance sheet PPPs
(paragraphs 13.24-13.31)
o Differences for public corporations (PCs) (paragraphs 13.32-
13.33)
o Barter deals (paragraphs 13.34-13.49)
o Reversionary interests (paragraphs 13.50-13.54)
o Termination payments (paragraphs 13.55-13.60)
o The treatment of refinancing gains (paragraphs 13.61-13.70)
Leases: overview
13.5
The guiding principle to apply when budgeting for leases is that
the budgeting treatment aligns to the departmental accounts
treatment. The IFRS 16 accounting standard for leases has been
adopted by departments from 1 April 2022, with the exception of
a number of departments who adopted this early.
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For lessees, under departmental accounts, most leases will be
treated as on-balance sheet, with the recognition of an asset for
the right to use the underlying asset in the lease (a ‘right-of-use
asset’), and a liability for the imputed borrowing to acquire the
right-of-use asset (as payments for the lease asset will be made
over time). An on-balance sheet lease therefore has the following
budget impacts:
i) capital DEL expenditure at lease commencement, for the
right-of-use asset;
ii) resource DEL ringfenced depreciation, due to depreciation
on the leased asset over the life of the lease; and
iii) non-ringfenced resource DEL expenditure for the interest
incurred over the life of the lease (as annual cash
payments on the lease now score as working capital
movements).
Any off-balance sheet lease (i.e. short-term leases or low-value
leases) will incur resource DEL expenditure as rental expense is
incurred in the departmental accounts.
For lessors, accounting under IFRS 16 is largely unchanged from
the previous accounting standard. Lessors will continue to
classify leases as either operating or finance leases and account
and budget for them accordingly. Appendix B of the IFRS 16
supplementary budgeting guidance document sets out
budgeting for lessors.
There is more detailed guidance about budgeting for leases and
its impact on financial planning in the_IFRS 16 supplementary
budgeting guidance document
Further budgeting clarifications
13.10
As above, the guiding principle to apply when budgeting for
leases is that the budgeting treatment should align to the
accounting. However, please note the following:
Transition adjustment to opening balances - On transition to
the IFRS16 leasing standard (on 1 April 2022 for most
departments), departments are required to adjust their opening
balances in accounts for the impact of the new standard
(‘Cumulative catch-up approach’). No budget entry should be
made for the cumulative catch-up adjustment to accounts.
Instead, for budgeting, the cumulative catch up is ignored and
no Prior Period Adjustment (PPA) is required.
Capital expenditure recognised on commencement - The
capital expenditure incurred on commencement of the lease,
ie. the date on which the lessor makes the underlying asset
available for use by the lessee, should be equivalent to the asset
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recognised on-balance sheet! (or de-recognised if a lessor). For
example, the capital hit should allow for any prepayments,
which, on an accruals basis, should score on lease
commencement.
¢ Revaluation, re-measurement or lease modification —- The
budgeting for these items is consistent with the principles
outlined elsewhere in this document. For example, the creation
of a revaluation reserve for a right-of-use asset has no budget
impact (see Chapter 3). However, a re-measurement or lease
modification that results in either a reduction or increase in
both the right-of-use asset and lease liability will have a capital
DEL impact.
¢ Impairment or early termination — Again, the budgeting for
these items is consistent with the principles outlined elsewhere
in this document. For example, whether an impairment is first
offset against a revaluation reserve, or is DEL or AME, will
depend on the standard application of the impairment
guidance for fixed assets in Chapter 3.
e Peppercorn leases - The treatment for a peppercorn lease (a
lease with nil or nominal consideration) is identical to that of a
donated asset/capital grant in kind, with depreciation scoring to
AME (see Chapters 3 and 6). Modifications and early
terminations of peppercorn leases will be treated as extensions
or reversals of capital grants-in-kind (and will therefore be
budget-neutral).
e Sale and leaseback - The budgeting for any sale and leaseback
arrangement should follow the accounting in departmental
accounts. Any gain/loss on the rights transferred from the seller-
lessee to the buyer-lessor should be treated as a gain/loss on
the sale of a fixed asset (see Chapter 4).
e Barter transactions - There is specific budgeting guidance on
sale and leaseback transactions where the sale and leaseback
elements are bartered, which is set out in paragraphs 13.34-
13.49. Note, for transactions such as these, the accounting
treatment for such a transaction may not align to the
budgeting treatment.
e Dilapidation provisions - As described in Chapter 6,
dilapidation provisions relating to right-of-use assets should
score to capital AME (and not capital DEL as part of the right-of-
use asset). The full depreciation cost should score to the
ringfenced resource DEL budget. Any remeasurement or
release of the provision follows the normal budgeting for
provisions.
1 The capital hit will normally score entirely to DEL. The only exception to this is if there are dilapidation provisions in the lease which
are included in the cost of the right-of-use asset. These will initially score to capital AME — see chapter 6 for more details.
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e¢ Depreciation under contracts or programmes involving the
development of a sovereign defence capability that give rise to
the recognition of right of use assets used solely in the
production of assets under the same contract/programme —
refer to Chapter 3, 3.25-3.26
13.11 Property leases taken on from the private sector by a
department's PCs score as Public Corporations Market and
Overseas Borrowing (PCMOB). This means that the borrowing
associated with these leases scores to the department's capital
budget. See Chapter 11 for more details on PCMOB.
National accounts treatment of leases
13.12 Lessee accounting is an area where departmental accounts and
national accounts are not fully aligned; again, the budgeting
treatment should follow the departmental accounts treatment.
13.13 For property leases (land and/or buildings), national accounts,
departmental accounts and budgets are fully aligned. Property
leases are treated as ‘on-balance sheet’ for lessees; the right-of-
use assets and lease liabilities that a lessee takes on in a lease are
reflected in departmental accounts, budgets, and fiscal
aggregates like PSND, PSNI and PSCB.
13.14 For non-property leases, national accounts are not aligned to
departmental accounts. Departmental accounts treat non-
property leases as ‘on-balance sheet’ for lessees, while in national
accounts they are generally treated as ‘off-balance sheet.’ Again,
budgets will align to departmental accounts.
13.15 Departments and spending teams should, therefore, note that
the fiscal impact of a non-property lease for a lessee is not
aligned to the budgeting impact.
13.16 The Treasury carries out a central adjustment to adjust non-
property lease budget data supplied by departments to the
national accounts position. This does not require any input from
departments, other than correct OSCAR coding. Given the
different treatment of property vs non-property leases in national
accounts, it is vital that leases are appropriately coded as either
property or non-property in OSCAR.
PPPs: overview
13.17 APPPisa means of procuring services with significant asset
content. The choice of means of procurement should be driven
entirely by value for money considerations. So:
« APPP should be used where - and only where - it offers better
value for money than other means of procurement
13.18 Any PPPs that meet the definition of a lease as set out in
departmental accounts should follow the budgeting guidance
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13.19
for leases laid out in paragraphs 13.5-13.16 of this chapter. The
remainder of this chapter provides budgeting guidance for PPPs
that do not meet the definition of a lease.
Departments must follow the principles and methodology laid
out in the Green Book when determining whether a prospective
PPP project would be value for money. At Budget 2018 the
Chancellor of the Exchequer announced that PF2 would not be
used for new government projects.
Recording of PPPs or similar arrangements
13.20
13.21
13.22
13.23
There is specific guidance in the Financial Reporting Manual
(FReM) on how to account for PPPs in departmental accounts
(namely, in the FReM’s interpretation of IFRIC 12). However, this
guidance is not applied when determining the budgetary
treatment of a PPP transaction.
The budgetary treatment for PPPs should follow the national
accounts treatment. This ensures that budgets reflect the fiscal
impacts of a PPP transaction.
The treatment of PPPs in national accounts is covered in Part 6 of
the ESA10 Manual on Government Deficit and Debt 2022 (MGDD).
Budgeting and national accounts standards fit together as
follows:
On / off balance sheet for national accounts
purposes
13.24
13.25
If a project is in substance borrowing then it is held to be on
balance sheet. On-balance-sheet projects are in effect capital
expenditure by the purchasing authority that has been financed
by borrowing from the contractor. Off-balance-sheet projects are
purchases of services by the purchasing authority from the
contractor who has created an asset in order to deliver the
services. Departments should be aware that public sector
controls on the individual entities involved in the procurement
arrangement could affect the classification of those entities and
the project as a whole. These issues are covered in Part 6 of the
Manual on Government Deficit and Debt 2022 (MGDD) and in the
supporting guidance on the statistical treatment of PPPs.
It is the department's responsibility to come to a view on the
expected classification of a project, where possible with the
agreement of its auditor. The department is at risk in cases where
the eventual classification by the auditor or by the Office for
National Statistics (ONS) does not match the department's
expectations. The ONS will not consider the classification of most
projects, but can consider any classification they wish as part of
the national accounts process.
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13.26
13.27
13.28
Additionally, the Treasury may choose to scrutinise any PPP
project regardless of the recording under the different standards.
In the first instance departments and procuring authorities
should consult their Treasury spending team while preparing the
project’s Outline Business Case to determine if it requires
Treasury approval.
In the fiscal framework, on-balance-sheet projects:
* score in PSNI and PSNB
* score in PSND
« score in the Maastricht general government measure of the
deficit and
stock of debt
The budgeting system reflects the distinction between on and off
balance sheet projects, with technical differences in the way that
the distinction impacts on departments and ALBs versus PCs.
Budgeting - departments and ALBs
Projects on balance sheet for national accounts
purposes
13.29
13.30
Projects on balance sheet for national accounts purposes score in
capital budgets like capital expenditure undertaken directly by
the department or ALB. The value of the capital expenditure and
the timing of recognition should follow the treatment in national
accounts set out above.
Annual repayments under the PPP contract, i.e. the unitary
charge, will be treated in the resource budget as a mix of:
e service charges (resource DEL)
« repayment of the imputed loan to the private sector (outside
budgets) and
e the full amount of interest charged on the loan (resource DEL)
e depreciation of the asset (ring-fenced resource DEL)
Projects off balance sheet for national accounts
purposes
13.31
Where the project is off balance sheet for national accounts
purposes, the budgeting impact is as if the department or ALB is
purchasing services. Any associated capital expenditure is an
investment by the private sector and does not appear on the
procuring authority's budget. The only entries in the budget of
the department or ALB are the payments under the unitary
charge, which are payments for services and score in the
resource budget.
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Budgeting — Public Corporations
Projects on balance sheet for national accounts
purposes
13.32 For most public corporations the budgeting system scores their
external finance. External finance includes PCMOB. A PPP that is
on balance sheet for national accounts purposes is a form of
PCMOB and is treated in the same way:
e the borrowing implied by on-balance-sheet capital
expenditure of public corporations scores in the capital budget
e asthe debt is reduced the capital budget of the sponsor
department is credited back and
e the profit that public corporations make should be calculated
after the payment of the interest and service elements of
service charge on the finance lease and after the deduction of
depreciation on the PPP financed asset
Projects off balance sheet for national accounts
purposes
13.33 Projects that are off balance sheet for national accounts purposes
do not score in capital budgets (except to the extent there is a
reversionary interest to be accrued over the length of the
contract). The public corporation's payments of the unitary
charge are a cost of doing business in the calculation of profits
like any other purchase of services.
Barter deals
Definition of barter
13.34 A barter transaction is one in which party A disposes of an asset,
good or service to party B; party A then receives an asset, good or
service in return from party B. Money is not used as the medium
of exchange or is used for only a proportion of the transaction.
Barter deals can involve the creation of financial assets and
liabilities such as loans if the goods and services are exchanged
at different times.
Example of a barter deal
13.35 Sale and lease-back deals may include an element of barter. In
this scenario a department disposes of buildings to a private
sector company at no charge, or at a price below the normal
market value. In return the company provides the department
with serviced office accommodation at below market price for a
number of years. The reduction in the cash charge for service
payments is a way for the department to obtain value from its
asset, instead of getting the full market value in cash.
13.36 In effect part of the value of the building is bartered for future
serviced office space. The reduction in the selling price is in effect
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13.37
a pre-payment of rentals. You can view this as a loan to the
private sector company financed from the receipt from the
disposal of the building.
However, this is only one example, and these general principles
apply equally to barter deals that do not involve property or PPPs.
Principles of recording barter deals
13.38
13.39
13.40
13.41
13.42
Barter deals should be recorded as if the exchanges had taken
place in cash at current market prices. This recording applies to
accounts, budgets and in the national accounts.
National accounts aim to score transactions at the Open Market
Value (OMV). Scoring barter transactions at zero or another price
would not reflect the economic substance of the transactions
and misstate the balance of expenditure between sectors of the
economy.
The real economic value of the asset disposed of is the OMV not
nil or just the cash sum received; the annual running costs should
also be measured at the OMV cost of accommodation and not
just the cash sum paid.
If the delivery of bartered assets, goods and services occur at
different times it might be necessary to record a financial
transaction. For example, if a department sells a building at
below OMV in return for reduced future rents, there is in
substance a loan from the department to the company. The
reduction in the selling price is a prepayment of rents and
represented as such in the departmental accounts.
For a barter transaction to be a viable proposition, the reduction
in sale price would have to be at least equal to the net present
value of the future rent reductions — using a discount rate
reflecting the cost of capital of the government. So, the imputed
future rents have to be recorded as being equal to the cash
actually paid, plus the amount being financed by the
prepayment, plus an extra amount (representing a finance
charge on the prepayment).
Open Market Value
13.43
13.44
13.45
OMV is the price of the asset, good or service that would be paid
in an open market transaction without any element of barter.
When assets, goods or services are bartered it is necessary to
determine their OMV so that accounts can be recorded properly
(i.e, using OMVs) and also for investment appraisal to ensure that
the barter deal is good value for money.
It is for departments to determine and record OMVs.
Broad information for establishing OMVs should be available
from information in the investment appraisal undertaken before
the department decided to structure the deal in a particular way,
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13.46
13.47
13.48
13.49
in the supplier's bid documentation, and in the contract
documentation and supporting papers.
For accounts, it should be assumed that the goods bartered have
equal value. This means that once the OMV has been determined
for the assets, goods or services supplied, the value of the assets,
goods or services received in exchange will be known. For
example, consider the case of a building being sold at below
OMV in return for being able to pay reduced rents (i.e. at below
OMY) in the future. The OMV of the building could be estimated
as the cash price paid plus the net present value of the future
rent reductions (using 3.5 per cent discount rate); or the rent
reductions could be estimated from the difference between the
cash received and OMV of the building sold; or if both
components can be estimated reliably the residual would be the
implied discount rate for the financing charge. The method used
should be agreed with Treasury.
Note that the OMV of an asset for this purpose may differ from
the amount recorded in the department's balance sheet if that
has not been updated recently. In such cases the difference
between the balance sheet figure and OMV would be recorded in
departmental accounts and budgets as a loss/gain on sale. The
difference between the OMV and the cash amount actually
received as a result of the barter deal (i.e. that part of the value of
the building that is bartered) would not be recorded as a loss on
sale, in our example this would be shown as a prepayment.
For investment appraisal it is of course necessary to measure as
directly as possible the OMV of all components - to identify which
option is best value for money.
Appendix 1 to this chapter shows a worked example of the
accounting and budgeting for a sale and lease-back deal that
includes a bartered element, where the deal is on balance sheet.
Reversionary interests in PPPs
13.50
13.51
13.52
Some deals involve the legal transfer of the asset to the public
sector at the end of the deal period. In some cases the asset will
not be expected to have a value and in other cases it will. Where
the asset is expected to have a value the department is said to
have a reversionary interest (RI).
In many cases the existence of a reversionary interest will point to
the public sector having the whole of the asset on its balance
sheet for the life of the deal, as the public sector is taking residual
value risk. In that case the reversionary interest rules are
irrelevant.
However, in some cases the deal may be judged to be off balance
sheet and the department is taking residual value risk,
departments are required to score against CDEL the reversionary
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13.53
13.54
interest that would have applied under UK GAAP - note this only
applies to projects signed before April 2009.
Under UK GAAP, where a department had an RI it would build up
an Rl asset on its Statement of Financial Position over the life of
the contract. At the end of the contract the asset would revert to
the department who would debit non-current (infrastructure)
assets and credit the RI asset. In other words, the RI asset built up
over the life of the contract will finance the acquisition of the
infrastructure asset at the end of the period. In order to build up
the RI over the life of the contract part of the unitary payment
would have been capitalised. This would have resulted in a lower
SoCNE-cost scoring in the departmental accounts and an
increase in the RI asset on the balance sheet.
Where schemes are off balance sheet for budgets, but there
would have been a RI charge under UK GAAP, the budgets will
not follow the departmental accounts but will show.
in capital DEL:
* movement in the RI on the balance sheet over the life of the
contract and
« the acquisition of the asset at the end of the period
in resource DEL:
« The resource budget simply shows the costs that are in the
SOCNE, i.e. the unitary payment less the amount that is
capitalised as the RI
PPP Termination payments
13.55
13.56
13.57
13.58
Termination payments may be payable if a PPP contract is ended
early.
In the case of on balance sheet PPPs, termination payments
could represent just the extinguishment of the liability, and so
not be shown in budgets, or in addition to the repayment of debt
there could be a cost in budgets. That difference in treatment
would depend upon the level of the balance sheet liability
compared with the termination payment and what, if any, other
assets come on the balance sheet.
Where the amount of cash paid is different to the outstanding
liability, and the department is not gaining any other assets, then
the national accounts treat this element of the payment
(difference between liability on the balance sheet and cash paid)
as a capital grant to the contractor. This is a cost (or potentially a
benefit) in the departmental capital budget (DEL).
Where the department is receiving additional assets as part of
the termination deal then it may be appropriate to capitalise the
cash payment above the value of the liability. In effect the
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13.59
13.60
department is purchasing the additional assets from the
contractor, and the price paid is the value of the cash payment
above the liability that is being extinguished. Departmental
budgets treat this in the same way as any other capital addition,
ie. in capital budgets (DEL).
Termination payments paid under off-balance-sheet deals lead
to a cost in the SoCNE and a charge to the Resource budget
(assuming no asset arrives in return).
Any department facing a termination payment should contact
your normal Treasury spending team to seek advice.
PPP refinancing gains
13.61
This section of the guidance briefly sets the background and the
policy of sharing refinancing gains on PPP deals, and details the
treatment of the associated transactions in the national
accounts, departmental accounts and budgets. The guidance
deals with the scenario where the PPP contractor goes to the
private sector debt markets to refinance their debt.
Background
13.62
13.63
13.64
When a private sector contractor enters into a PPP deal they will
borrow from the market to finance the capital expenditure they
are undertaking. The market will charge the contractor a certain
interest rate on that borrowing; this will be based on many things
including the amount of risk perceived by the lender. The
contractor will take this rate of interest into account when
setting the unitary charge that is charged to the public sector for
the use of the infrastructure created under the PPP contract.
It is common practice for the PPP contractor to refinance or
restructure their debt once the project is up and running. The
contractor will, at this point, be able to negotiate a lower interest
rate, as they can demonstrate that the amount of risk has
reduced.
Guidance on how procuring authorities with PPP contracts
should be able to access these gains and split the benefit with
the private sector partner can be found in the Treasury
publication “Refinancing of Early PFI transactions” and in
Eurostat’s publication “A Guide to the Statistical Treatment of
PPPs",
Refinancing
13.65
When refinancing occurs the contractor's cost of providing the
service drops thanks to the restructured debt profile. This is
shared with their customers (the public sector) via a reduced
price to buy the service, an increased level of service to buy the
service, or as a one-off payment.
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13.66
13.67
13.68
13.69
13.70
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Where the gain is shared via a cheaper service cost this is simply
less current expenditure in the national accounts, departmental
accounts and departmental budget over the remaining life of the
contract.
Where the gain is shared via a one-off windfall payment to the
public sector we risk distorting measures of GDP in the economy
if we record this as less consumption by the public sector in one
year. It is more correct to view the lump sum as a portion of the
on-going savings to the contractor, which has been rolled up and
then split between the parties. The view in such a situation is that
the private sector has lent the public-sector cash up front and
has an asset on their balance sheet, each month this would
unwind to finance the reduction in the unitary charge. In effect
the contractor is pre-paying a reduction in the service charge.
This means that the refinancing gain is recorded as a benefit to
the public sector matched to the time frame in which it is viewed
to have accrued. A simple example ignoring any discounting is
given below.
e public sector receives lump sum of £15million in respect of a
refinancing gain, to be accounted for over 15 years, the
remaining life of the contract
* suppose that the public sector continues to pay a unitary
charge of £10million per annum for 15 years
e thecash lump sum should be recorded as a financial
transaction — in effect borrowing from the private sector. The
department would show cash of £15million and a matching
liability. Each year the public sector continues to pay the
contractor a £10million cash unitary charge for the year
In departmental accounts, on receiving the cash the department
shows an increase in liabilities (payables).
Then annually:
e« the SoCNE score £9million unitary payment and
e cash out the door would be £10million and the liability would
reduce by £Imillion
The budgets follow the departmental accounts. In other words,
the upfront receipt of the cash does not benefit the Resource
budget, but the lower annual service charge does.
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Appendix 1 to chapter 13: On-balance sheet
PPP with sale and leaseback bartered element
13.71. This appendix sets out the accounting and budgeting treatment
for a sale and lease-back deal including a bartered element
where the deal is an on-balance sheet PPP. This does not relate
to service concession arrangements.
Background
13.72 Department Yellow enters into a PPP deal for a new
headquarters building with the Reader Sinclair Consortium. The
consortium will design and build and then operate the HQ for a
period of 30 years from the date of occupation. In addition, the
consortium will provide the IT systems for seven years, after
which that part of the contract will terminate. The building will
revert to Department Yellow at no cost at the end of the contract
period. This is determined to be an on-balance-sheet PPP deal.
13.73 The cost to Department Yellow comprises two elements: annual
Unitary Payments (UP) and the transfer of properties (Barter
Deal). The transfer of properties under Barter Deal results, over
time, in lower service payments. Annual UPs cover capital, a
finance charge, and a service payment. The Barter Deal
comprises the transfer of five properties at various stages
throughout the project, including two prior to occupation of the
new HQ. The final transfer can be deferred by five years. If
Department Yellow opts for deferral, the department will pay
compensation to the Consortium in the form of an upfront cash
payment equal to the value of the property under the contract at
the original transfer date. Upon vacation of the property, the
Consortium will repay to Department Yellow the value of the
property at that date.
13.74 The contract takes effect from 1 April YEAR 0. The new HQ will be
occupied from 1 April YEAR 3. The schedule of Barter Deal
transfers is:
Plot1 1April YEAR O Land only
Plot 2 1April YEAR1 Land only
Plot3 1April YEAR 2 Land only
Plot 4 1April YEAR 4 Land and Buildings
Plot 5 1 April YEAR 10 (with possible deferral to1 April Land and Buildings
YEAR IS.
13.75 The total value of the new HQ and IT is £250 million. It is
estimated that £229 million is in respect of the new HQ and £21
million relates to the IT element. In addition, the UP includes total
interest of £320 million and total service costs of £15 million. (Total
value of UP over 30 years is £560 million). The values of the five
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plots included in the Barter Deal are shown below. The year
YEAR-1 is the year prior to the contract coming into effect.
Plot]
Plot 2
Plot3
Plot 4
Plot
Book Barter Deal Values
values
1 April 1 April
YEAR -1 YEAR O
45 million 4 million
2.5 million
4 million
15 million
13 million
1 April
YEARI
3 million
1April 1April 1April
YEAR2 YEAR 4 YEAR 10
4 million
Tmillion
13 million
13.76 The schedule of UPs is as follows, starting in year beginning 1
April YEAR 3.
1 April 31 March £million
YEAR 3 - YEAR4 23.5 lyear at 23.5 =23.5
YEAR 4 - YEAR 10 23.25 6 years at 23.25 = 139.5
YEAR 10 - x029 17.25 23 years at 17.25 = 396.75
0.25 Balancing payment
560 Total
Accounting for the Barter Deal - asset valuations
13.77. The value of the plots in Department Yellow’s accounts needs to
be adjusted for 1 April YEAR O to reflect the Barter Deal value at
the future date of transfer, taking account of projected
movements in value in the intervening period, during which the
plots continue to be recognised as fixed assets by the
department. (Note: this assumes that the values have been
agreed at the time the contract is signed.)
At 31 March YEAR O
Budget impact Departmental
million.
(the end of YEAR -1) accounts
Plot1 The value is written down by resource AME cost Dr Revaluation reserve
£0.5 million. with write down in or SOCNE (FReM
value 5.2.34)
Cr Fixed assets
Plot 2 Upwards revaluation to £3 None Dr Fixed assets
Cr Revaluation
Reserve
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Plot 3
No change
None
None
Plot 4
The split between land and
buildings is £0.75 million land
and £0.75 million buildings.
Without the PPP deal, the
buildings had a remaining
economic useful life of 10 years,
with residual value of £0.3
million. It is assumed that the
value of the plot at 1 April YEAR
4 will comprise land at £0.75
million and buildings at £0.25
four years’ use of the property.
The value of Plot 4 is written
down to £1.20 million,
and buildings at £0.45 million.
Over the four years ending
March YEAR], YEAR 2, YEAR 3.
and YEAR 4, depreciation of
£0.05 million will be charged
annually.
million. Department Yellow has
comprising land at £0.75 million
resource AME cost
£03 million.
Routine depreciati
is reflected in RDE!
with write down of
Dr Revaluation reserve
or SOCNE (FReM
5.234)
Cr Fixed assets,
Routine accounting
entries
ion
L
Plot
The split between land and
£3 million buildings. Because
the transfers are not due to tak
YEAR -1 is agreed as proxy for
account increases in land value:
the buildings on the site.
buildings is £10 million land and
place until YEAR 10, the value at
the value at YEAR 10, taking into
offset by changes in the value of
None
e
S
None
Accounting for the Barter Deal — transfers of
property prior to occupation
13.78 Department Yellow accounts for the plots as they are transferred
to the Consortium prior to the occupation of the new
accommodation as follows
Plot]
Plot 2
Plot3
Date of Value
transfer
1TAprilYEARO £4 million
1April YEAR1 £3 million
1AprilYEAR2 £4 million
Budget impact
CDEL income for
the NBV of the
transfer
CDEL income for
the NBV of the
transfer
CDEL income for
the NBV of the
transfer
Departmental Accounts
Dr Prepayments Cr Fixed
assets
Dr Prepayments Cr Fixed
assets
Dr Prepayments Cr Fixed
assets
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Accounting for the occupation of the new
building
13.79 When Department Yellow occupies the new accommodation,
the property is valued at £250 million (see background section)
and is brought on balance sheet.
13.80 The accounting entries are:
« Dr Fixed assets
e¢ Cr Long-term lease liability of £250 million
13.81 The £250 million is a capital DEL hit.
Accounting for the transfer of Plot 4
13.82 Department Yellow accounts for the transfer of Plot 4 after the
occupation of the new building as follows:
Date of Value Budget impact Departmental Accounts
transfer
Plot 4 1AprilYEAR4 = £1 million CDELincome for Dr Prepayments (if
the NBVofthe prepayment against
transfer service/interest charged
Cr Fixed asset
Subsequent accounting
13.83 Each year until the end of the lease, there will be a cash
requirement in respect of the UP. There will be a resource DEL hit
equal to the imputed interest rate. As the building is on balance
sheet, depreciation also scores in both the SoCNE and resource
DEL. The capital repayment, i.e. the movement in the long-term
liability is outside of budgets.
13.84 The accounting entries are:
« Dr Long-term lease liability for capital element of UP
*« Dr SoCNE for service and interest elements of UP
°¢ CrCash
(In addition to the service and interest elements, depreciation
also passes through the SoCNE.)
13.85 In addition, Department Yellow can now start to release the pre-
payment. Because it represents the lower service payment, it
should be released over the period of the reduced service
payment (in this example, considered to be the life of the
contract).
13.86 The accounting entries are:
e Dr SoCNE
e Cr Prepayment
170
13.87
The release of the pre-payment has no budgetary impact — as
noted it is the full SoCNE costs that are reflected in the budget.
Department Yellow defers the final stage of the
Barter Deal
13.88
13.89
13.90
13.91
In XO08, Department Yellow determines that it needs to retain
Plot 5 beyond YEAR 10. Under the contract, therefore, the
department will have a cash requirement of £13 million to pay to
the Consortium.
The accounting entries are:
e Dr Long-term lease liability
° CrCash
Since the value of the Plot 5 is included in the overall valuation of
the new accommodation, there is no DEL hit involved in the
deferral, as the cash is used to repay the liability. (Note: the
accounting entries do not deal with Supply in respect of the net
cash requirement.)
During the five years of the deferral, the department will
continue to revalue and depreciate Plot 5 in the normal manner.
Final deal
13.92
13.93
Under the terms of the contract, Department Yellow has to
vacate the property in XO15, and the Consortium pays to the
department the value of the property at that date.
The accounting entries are:
e¢ DrCash
* Cr Fixed Assets
There is capital DEL income in respect of the disposal of the
asset.
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Annex A
Difference between Budgets
and Departmental Accounts
Al
A.2
There are very few differences between departmental accounts
and budgets. The majority of transactions should, therefore, be
recorded in budgets at the same value and with the same timing
as in accounts. There are, however, some outstanding
misalignments, these are set out in the tables below. Treasury will
continue to try and minimise the differences between budgets
and accounts consistent with the principles of alignment.
Table A.1 below shows the main differences between the SoCcNE
in departmental accounts and the resource budget. Table A.2
shows the main differences between capital budgets and
additions to fixed assets and investments in departmental
accounts.
Table A.1: The main differences between the Statement of
Comprehensive Net Expenditure (SoCNE) and Resource
budgets
Departments’ own The SOCNE includes capital grants; these score in capital
spending budgets.
The SOCNE score the creation of provisions. The release and
payment are both movements on the Statement of Financial
Position. In budgets, the creation and release score to AME
whereas the payment scores to DEL.
Departments’ income
Income that is classified as a capital grant, such as a donation
that is to be used to finance acquisition of a fixed asset, scores in
the capital budget.
Support for local
authorities
Capital grants to local authorities score in the SoCNE and in
capital budgets.
Public Corporations
Capital grants to public corporations score in the SOCNE and in
capital budgets for public corporations on the external finance
basis.
Equity withdrawals from PCs may score in the SoCNE as special
dividends and will in all cases score in capital budgets for public
corporations on the external finance basis.
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PPP PPP contracts recorded as service concessions in accounts will
be recorded in budgets on the basis of national accounts
(ESA10) standards, which may lead to a different balance sheet
treatment of the asset. See chapter 13 for full details.
Research and Research and development expenditure that meets the criteria
Development under the national accounts are recorded as capital in budgets
(See Annex C for details). This may differ to the treatment in
departmental accounts where research expenditure is usually
expensed in the SoCNE and development expenditure is
capitalised in accordance with IAS 38 Intangible Assets as
adapted by the FReM
Table A.2: The main differences between the capital budget
and the Departmental Account entries for total net
additions to fixed assets and investments
Departments’ own Capital budgets include capital grants; these score in the
spending SoCNE
In a limited range of cases, purchase and disposal of inventories
scores in capital budget, but are not transactions in fixed assets
in departmental accounts, which treats the transaction as
dealing in current assets.
Departments’ income _ IIncome that counts as capital transfers in the national
accounts, such as a donation to finance construction of an
asset, passes through capital budgets.
There are limits on the quantum of income from the sale of
assets that departments may keep in their budgets.
Support for Local Capital grants to local authorities score in the SoCNE and in
Authorities capital budgets
Capital budgets include Supported Capital Expenditure
(Revenue) which does not feature in departmental accounts
Public Corporations Capital grants to public corporations score in the SOCNE and in
capital budgets
Budgets for public corporations include Public Corporations
Market and Overseas Borrowing (PCMOB) which is not
included in departmental accounts (see Chapter 11)
If a trading fund that is a department in its own right borrows
from the National Loans Fund the “parent” department for
budgeting purposes will show no accounting entry. However,
its budget will show borrowing net of repayments
Equity withdrawals from PCs may score in the SOCNE as special
dividends and will always score in capital budgets for PCs on
the external finance basis.
Service Concessions Service concession arrangements which are subject to IFRIC 12
in accounts, are measured according to ESAIO standards set
out in the Manual on Government Deficit and Debt (see
Chapter 13 for details)
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Research and
Development
Research and development expenditure that meets the criteria
under the national accounts are recorded as capital in budgets
(See Annex C for details). This may differ to the treatment in
departmental accounts where research expenditure is usually
expensed in the SOCNE and development expenditure is
capitalised in accordance with IAS 38 Intangible Assets as
adapted by the FReM
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Annex B
Debt Management Guidance
B.1 Good debt management is a key part of achieving the
government's objectives for fiscal policy. These objectives are set
out in the Charter for Budget Responsibility (section 3.1) and in
the Consolidated Budgeting Guidance.
B.2 Overdue debt owed to central government increased to a
historical high of c.£64.3 billion at March 2021, predominantly due
to the government's response to support people and businesses
through the pandemic. By March 2022, the overdue debt balance
fell to c.£49.5billion. The government's pursuit of Fair Debt
Outcomes For All aims to ensure fairness to taxpayers and those
that do pay on time by taking a proportionate response to those
that do not, while ensuring those who cannot pay through
financial, mental or physical vulnerability are identified and
provided with relevant support.
Debt management
B.3 Government has a duty to manage its debts effectively in order
to ensure fair outcomes for all. Government debt includes, but is
not limited to, overdue tax liabilities, benefit overpayments, tax
credits overpayments, staff salary overpayments, loans,
outstanding fines, penalties, court confiscation orders, erroneous
payments made under government fiscal relief schemes and
debt arising from fraudulent activity.
B.4 Departments and their arms’ length bodies (ALBs) must work
together with HM Treasury and the Government Debt
Management Function (GDMF) Centre of Expertise (CoEx) to
reduce fraud, error and debt.
B.5 The GDMF CoExX sets the strategic context for how government
manages its debt. This is implemented through the Government
Debt Strategy which outlines the function's aim to fine tune its
approach to debt resolution. Departments and their ALBs must
work with GDMF CoEx and HM Treasury to deliver this strategy
through the following specific activities:
* contribute to the government's pursuit of fair debt outcomes for
all, including government as a creditor and individuals /
businesses in debt
175,
B.6
embed the mandatory Debt Functional Standard, assess
organisational maturity and identify opportunities for continuous
improvement
effectively monitor and consistently report debt data to GDMF
CoEx e.g. through the Consolidated Data Return
source additional debt-related service capacity and capability
through the private sector where appropriate via Crown
Commercial Service frameworks, in line with the NAO report on
Managing Debt Qwed to Central Government
identify opportunities to help detect and reduce fraud and debt
owed to the public sector by sharing data through the Digital
Economy Act 2017
support continuous development of capability within functional
teams across government, contributing to the development of a
Debt Profession
develop an approach to improve the resolution of staff related
pay discrepancies, helping better prevent and correct both debt
and underpayments.
work with the GDMF CoEx and HM Treasury to:
o ensure that debt management regulations remain fit for
purpose, are reviewed where necessary and align with the
aims of the Government Debt Strategy;
o ensure that new debt management regulations are
effectively implemented; and
o identify policies that may result in new types of debt and
agree approaches to effectively mitigate against
subsequent debt related risks
Departments and their ALBs must have their own debt
management strategies, agreed with their Senior Management
Teams, which should be reviewed annually. These strategies
must be in line with Managing Public Money, the Consolidated
Budgeting Guidance rules and the Balance Sheet Review's debt
performance measures. These strategies must also align to the
principles set out below:
minimise the creation of debt, including building and deploying
good data analytics effectively to prevent fraud and error
prevent the creation of avoidable overdue debt, tackle aged
debt and reduce the ageing of debt
strike a balance between collectability, allowing debt to age and
applying write-off or hardship policies
consider the impact of new policies on both debt creation and
on the management of existing debt
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e apply the Principles of Fairness for government debt collection,
as set out in the Fairness Group Joint Public Statement, to
ensure repayments are affordable and sustainable
e maintain due regard to the Public Sector Equality Duty and
consider how best to support vulnerable customers, including
the use of the Debt Management Vulnerability Toolkit and the
Economic Abuse Toolkit, which are both available here - Public
Sector Toolkits - GOV.UK (www.gov.uk)
e identify and tackle policy and process barriers preventing
effective debt management
Balance sheet review debt management
principles
B.7 Following the government's Balance Sheet Review, and in line
with the government's commitments announced in the 2018
Budget, departments and their ALBs should also:
e report on key performance measures in their debt
management strategies through the Consolidated Data
Returns (CDRs) and annual review
e apply the risk management framework on debt developed by
Cabinet Office, capturing current and future risks, and report on
risk management
e apply the performance management measures set out below
to improve the management of overdue debt owed to
government
e base debt collection measures on financial year-end
forecasts for overdue debt, write-offs and remissions
e additional debt metrics on overdue debt in organisational
CDRs (as detailed in CDR guidance) to help tackle the
challenges on overdue debt and track all overdue debt
Debt Management in Managing Public Money
and Consolidated Budgeting Guidance
B.8 The management of debt must be in accordance with Managing
Public Money and the budgetary framework:
e The budgetary framework ensures that departments and other
central government bodies have good incentives to manage
their business well, to prioritise across programmes, and to
obtain value for money - this should include robust debt
management.
e The budgeting policies and purpose of control totals apply all to
areas of a department's budget including debt owed to
government. Chapters 3, 4 and 8 of this document specifically
address debt.
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Managing Public Money sets out how to handle public funds
with probity and in the public interest. All aspects of the
guidance should be considered however in addition to the main
chapters, the key areas from a debt management perspective
are:
°
0000
Box 3.1 Standards expected of the accounting officer's
organisation
Box 4.5 Essential features of systems for collecting sums
due
Box 4.8 Factors to consider when planning policies or
projects
Annex 2.2 Delegated authorities
Annex 4.9 Fraud
Annex 4.10 Losses and write offs.
Annex 4.11 Overpayments
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Annex C
Guidance on Research and
Development under ESA 10
Introduction
C1
C2
C3
C4
This annex provides further guidance to help assess whether
expenditure meets the ESAI0 definition of Research and
Development (R&D) for budgeting and national accounts
purposes. Appendix 1 provides a decision tree on capitalising
R&D costs that is provided for departmental accounting and
budgeting purposes. Appendix 2 provides details of activities that
are to be included or excluded as R&D.
Expenditure that is currently capitalised under IFRS
(International Financial Reporting Standards) for in-year
accounting should be capitalised and depreciated in budgets
and national accounts. Expenditure that does not meet the
criteria for capitalisation under IFRS but fits with the ESA1O
definition of R&D will be treated as an expense in departmental
accounts and as capital within budgets.
Under ESAIO, section 3.82, R&D is defined as:
“Creative work undertaken on a systematic basis to increase the
stock of knowledge, and use of this stock of knowledge for
discovering or developing new products, including improved
versions or qualities of existing products, or discovering or
developing new or more efficient processes of production”)
This definition of R&D is based upon and viewed as equivalent to
the definition of R&D in the OECD 2015 Frascati Manual, Chapter
2. Clarifications include:
e ‘creative work undertaken on a systematic basis to increase the
stock of knowledge, and use of this stock of knowledge...’
should be interpreted to mean ‘and/or’. That is, all R&D should
be included that meets either or both of the conditions in this
definition
e in addition, the term ‘product’ in this definition should be
widely interpreted to include a good or a service; all R&D that
underpins policy development, design and implementation
should be included under this definition
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C5
« the term R&D covers three types of activity: (a) Basic research
(b) Applied research (c) Experimental development
It may be helpful to note that there are five criteria to help
identify R&D. The activity must have elements of all of these:
aimed at new findings (novel). This includes acquiring new
knowledge directed primarily towards a specific aim or
objective. It also encompasses experimental development
projects, aimed at creating knowledge in support of the
development of new concepts and ideas related to the design
of new products or processes
based on new concepts or ideas with the objective of improving
on existing knowledge (creative). This includes R&D to improve
methods or ways of doing things
uncertain about its final outcome (uncertain)
systematically performed. R&D is conducted in a planned way,
with the process and outcomes documented (systematic) and
lead to results that have the potential to be reproduced
(transferable and/or reproducible).
All R&D that serves the purposes of a department's objectives
should be included in R&D capital
Staff
C6
The cost of staff who conduct or manage R&D should be
included within R&D expenditure. Programme management
offices that solely (or mostly) provide support for running R&D
programmes should also be included.
Data collection
C7
Data collection and surveys solely or primarily conducted as part
of the R&D process should be included as R&D. However, data
collected for other or general purposes for example, the
collection of unemployment statistics, the collection and
reporting of management information for annual reporting are
to be excluded.
Scientific and technical information
C8 Scientific and technical information services maintained
predominantly for the dissemination and publication of R&D are
to be included. However, the activities of central
communications, Press Office etc. should be excluded.
Testing
C9 Activities to devise new or improved methods of testing are to be
included. However, organisations and laboratories whose main
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purpose is to test products and verify standards are met should
be excluded.
Experimental development
C.10
The ESAI0 definition of R&D includes experimental development.
If work relating to the development of new products or processes
fits the definition and criteria to be classified as R&D (as defined
in this document), then it should be included as R&D
expenditure.
Small Business Research Initiative (SBRI)
C11
If work on projects commissioned through the SBRI fits the
definition and criteria to be classified as R&D (as outlined in this
document), then it should be included as R&D expenditure.
Apportioning costs for partner
organisations and internal units
C12
Where a considerable proportion (materially all) of a partner
organisation's or in-house unit's activities are R&D related, the full
budget of the organisation or unit should be included. In other
cases, these activities should be distinguished, and costs
apportioned where it is administratively sensible to do so.
Departments should take a pragmatic approach when
apportioning costs.
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Appendix 1 to Annex C: Decision tree for
capitalising research and development
costs in budgets
Does the Expenditure meet all the criteria
for capitalisation under International
Reporting Standards?
For example 1AS38
lity of completion of
tion) clearly
10 definition of
Intention to complete the intangible asset
- Ability to use or sell the intangible asset
- Adequate technical, financial an
resources to complete develop
then use/sell the intangibl
Probable future economic benefit
- Reliably measure expenditure attributable
to intangible asset
C.14_ If after having followed the decision tree departments are still
unclear as to whether or not expenditure meets the ESAIO
definition of R&D, they should consult their HM Treasury
spending team.
C15 Inallinstances, the treatment in Estimates is the same as the
treatment in budgets. Depreciation is only recognised in budgets
on assets recognised in Accounts.
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Appendix 2 to Annex C: Activities to be
included or excluded in R&D Capital
Activities to be included as R&D
Research performed in-house, including by in house research units (intramural
R&D)
Research commissioned from an external organisation (extramural R&D)
Resources needed to deliver and manage research, as appropriate, including;
People who conduct or manage R&D
- Programme management offices that solely (or mostly) procure and manage R&D
contracts
Policy (or programmatic) evaluations that employ experimental or quasi-
experimental methods. Evaluations conducted by skilled professionals using a
rigorous methodology meet the criteria for inclusion?
Data collection and surveys solely or primarily conducted as part of the R&D
process
Scientific and technical information services predominantly for the
dissemination and publication of R&D
Feasibility studies on research projects as part of R&D*
Activities to be excluded as R&D
Routine data collection and surveys
Routine monitoring and surveillance
Scientific and technical information services
Feasibility studies (for example an investigation of a proposed engineering
project using existing techniques to provide additional information before
deciding on implementation, is not R&D)?
Policy related activities, generally carried out by policy professionals, for example,
provision of policy advice, relations with the media etc. should be excluded.
(However, research activities aimed at providing decision makers with a
thorough knowledge about social, economic or natural phenomena should be
included in R&D)*
Purely R&D financing activities, for example, central procurement and
commercial units, albeit they may help procure some R&D projects
Indirect supporting activities which support R&D but are not undertaken
exclusively for R&D, such as payroll, HR departments, canteen services etc.
2 Frascati Manual 2015 Section 2.119 ~ See Annex E for link
3 Frascati Manual 2015 Section 2.114
4 Frascati Manual 2015 Section 2.116 - 2.118
183
IM_045083}
Costs to be included as R&D
All costs, other than depreciation, within the scope of the ESAIO
definition that are directly attributable to R&D activities and can be
reliably measured. Grant funding to private sector bodies to undertake
R&D activities can be classified as R&D expenditure.
Costs to be excluded as R&D
The following costs do not fall within the scope of the ESAI0 definition
of R&D and should follow the principles laid out in the corresponding
chapters of CBG and would score to non-ringfenced RDEL. This would
include, but is not limited to -
o Interest receivable as part of financial transaction repayments
o ECLson financial transactions
o Upfront lease interest recognition as part of the IFRSI6
adaptation
o Dividends received from public corporations
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Annex D
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Treasury and other Contacts
D1 This annex gives details of Treasury and other officials who may
be contacted for further advice.
Issue
Initial contact for any aspect of the public
spending control system
Resource & Capital budgeting
Resource budgeting Policies,
Administration Budgets,
Capital budgeting Policies
Budget Exchange
Contact - via email
Your normal Treasury Spending team
contact
Sarah Geisman
Visaly.Muthusam’
Visaly.Muthusamy@?
Classification of Bodies and Transactions
National Accounts classification of flows
Sector Classification
Treatment of receipts and income in the
National Accounts and in budgets.
Technical Accounting Advisor
Cabinet Office Public Bodies Team -
administrative classification
Sarah.Geisman@/_
Sally.King@
publicbodiesreform@
Resource Estimates
Armed Forces Pensions, Cabinet Office, Civil
Superannuation, DCMS, DfT, DWP, HMT, IPSA,
MoD, NS&I, Royal Mail Pensions, and SIA
BEIS, DfE, DHSC, DIT, ECGD, FSA, HM Land
Registry, OFGEM, OFQUAL, OFSTED, and
Pension schemes for UKAEA, NHS and
Teachers.
185
Gary.Hansman@
Orietta.Barbari@!
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CC, Crown Estate Office, Defra, House of
Commons (Admin’), House of Commons
(Members), House of Lords, DLUHC, MoJ, MoJ
IPS, PHSO, Parliamentary Buildings Malcoim.Pellett a
(Restoration and Renewal) Sponsor Body, and
WSRA
FCDO, FCDO Superannuation, Local
Government Boundary Commission for Emma.Walker@
England, NAO, and ORR
GAD, HO, HMRC, NCA, and Statistics Board Matthew.Carter@
CMA, CPS, Electoral Commission, National :
Archives, NIO, SO, SFO, TSOL, UK Supreme Mohammad.Hug@!
Court, and WO ~
Local Authorities
Department for Levelling Up, Housing
New Burdens Rules and Communities - New burdens
team
newburdens@:
Accounts
Accounting queries Departmental Finance Teams
Whole of Government Accounts. WGA.Team@f
Recording
Recording Resource budgets on OSCAR Sarah.Geisman@;
OSCAR Database; New Segments, database
maintenance, database operations & data Fenn.Brown@!~
updates
PES Papers
PES Papers I Gary. Hansman@f "GRO
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Annex E
Useful Links
* The Autumn Statement 2022 documents set out more detail
around the fiscal rules and review of the fiscal framework
Autumn Statement 2022: documents - GOV.UK (www.gov.uk)
« The Treasury’s public website gives access to the 2022 Charter
for Budget Responsibility
Charter for Budget Responsibility: Autumn 2022 update - GOV.UK
(www.gov.uk)
e ONS publish a Sector Classification Guide which lists many
bodies and sets out what sector of the economy they are in
Public Sector Classification Guide and Forward Work Plan - Office for
National Statistics
« The Cabinet Office publishes a range of material about Arm’s
Length Bodies
https://www.gov.uk/government/publications/public-bodies-
information-and-quidance
e The Treasury publishes a range of classification guidance notes
that cover National Accounts treatments
https://www.gov.uk/government/publications/introduction-to-
classification
* Guidance on Supply Estimates is available at the HM Treasury
public website
Supply Estimates guidance manual - Publications - GOV.UK
e Public Expenditure Statistical Analyses gives information on
public spending analysed by reference to the budgetary
control framework, sectors of the economy, government
functions (irrespective of which organisation is spending the
money), and the country or region of the UK, which has
benefited from public spending. Appendices describe the
control framework. One of the appendices is a glossary of
public expenditure terms
https://www.qgov.uk/government/collections/public-expenditure-
statistical-analyses-pesa
187
Managing Public Money offers guidance on how to handle
public funds of all kinds
Managing public money - Publications - GOV.UK
The Government Financial Reporting Manual (FReM)
contains the technical accounting guidance used for public
funds. It is available on its dedicated website
Guidance on annual reports and accounts - GOV.UK
Dear Accounting Officer letters give guidance on a range of
subjects
HMT Dear Accounting Officer (DAO) letters - GOV.UK
Information on Whole of Government Accounts is at:
https://www.gov.uk/government/collections/whole-of-government-
accounts
The PPP area of the Treasury's website gives access to the
main policy document on PPP - Meeting the Investment
Challenge, the value for money guidance and guidance on
refinancing
https://www.gov.uk/government/publications/pfippp-finance-
guidance
The Cabinet Office's website for pensions is at:
http//www.civilservice.gov.uk/pensions
The European System of Accounts (ESATO) is used by the
Office for National Statistics in assembling the National
Accounts
European system of accounts - ESA 2010 - Product - Eurostat
The ESA10 Manual on Government Deficit and Debt provides
detailed guidance on the application of ESAIO to General
Government. Part 6 includes guidance relating to the
recording of service concessions
Manual on Government Deficit and Debt 2022 (MGDD)
The PPP Policy Note: Early termination of contracts set out
the budgeting, accounting and fiscal implications of a
voluntary termination of a PPP contract by an Authority, as
well as the review and approval process that should be
followed.
PPP Policy Note: Early termination of contracts
A Guide to the Statistical Treatment of PPPs provides further
clarity and understanding of how the MGDD 2022 rules should
be applied to PPPs.
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A Guide to the Statistical Treatment of PPPs
The Control Framework for levy-funded spending is at:
[ARCHIVED CONTENT] Control framework for DECC levy-funded
spending - HM Treasury
The Department for Levelling Up, Communities and Housing's
new burdens guidance is at:
https//www.gov.uk/government/publications/new-burdens-
doctrine-quidance-for-government-departments
The Frascati Manual is the Internationally recognised
methodology for collecting and using R&D statistics published
by the OECD
Frascati Manual 2015 I OECD READ edition
The Contingent Liabilities Approval Framework is at
https//www.gov.uk/government/publications/contingent-liability-
approval-framework
The Government Functional Finance Standard sets
expectations for the effective management and use of public
funds. This guidance should be read alongside Managing
Public Money and the Finance Functional Standard for
comprehensive read across and signposting to all other
relevant guidance documents
Government Functional Finance Standard
The guidance on the CRC Energy Efficiency Scheme (CRC)
guidance is at
CRC Energy Efficiency Scheme - GOV.UK
The National Audit Office report Managing Debt Owed to
Central Government is at
Managing debt owed to central government - National Audit Office
NAO) Report
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A D
‘Accounts 117-123, Annex A Debt management Annex B
‘Administration 361-363, 619, 835-
budeoe 153, Chapter 5 Debtors ey
AME 143-151, Chapter 1 DEL 143183
Appendix 3
. Departmental
Arm's Length Foreword, Chapter 9 Unallocated 235-236
Bodies
Provision
190-195, 4.22, 4.46- Departmental
Asset Sales cio nane I I pepe 117-123, Annex A
B Depreciation 319-331
Disposal of Capital 190-195, 4.22, 438,
Barter deals 13:34-13.49 Dispos Lee Lane
Breaches of 252-258 Dividends 119-1120
budgetary limits
Budget Exchange 175-196 Donated Assets 3.28-3.28, 450-453,
79-713
c E
Capital 152, Chapters 6, 7,8 Economic rents 435
Capital grants and 3.7-315, 328-330, 69-
capital grants in 612, 79-713, 852, 105, Employee benefits Chapter 12
kind
11.24-11.27
Cash 1.28-1.32, 2.62-2.64 Equity transactions 8.38-8.39, Chapter
Charging for 170 Equity withdrawals —_8.40-8.43, Chapter 11
services
Co-funded ALBs 9.18-9.22 ESA10 1s
Consolidated Fund 410 Estimates 124-127, 49-412
Extra Receipts
Contingent 2.48, 3:78-3:79 Exchange rate 861-8.66
liabilities hedging
Consultancy Foreword, 5.11-5.12 Exchange rate 8.58-8.60
movements
Creditors
3.64, 6.31
Expected credit
losses
3.55-3.60, 8.27-8.30
Current assets and
liabilities
3.49-3.60
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FE L
4.20, 66, 8.14-8116,
8.23-8.25, 835,
Fair value Appendix tte Chapter Leases Chapter 13
8
Financial
guarantee 8.47-857 Licences and levies 439-4.44
contracts
Financial Chapter 8 Loans Chapter 8
transactions
Fines and Penalties 439-444 N
Fiscal rules 18-116 National accounts Foreword,I.8-116
. 3.16-3.48, 4.22, 4.46- Netting off
Fixed assets 449, 14-16 agreements 4.23, 4.39-4.44
New burdens on
G Local authorities 1.71-1.73, 10.19-10.20
Grant-in-kind 610 Notional insurance 3.83-3.84
3.7-315, 3:28-3:29, 6.9-
Grants 6112, 7.9-7.13, 8.52-8.53, °
10.5, 11.24-11.27
1 OSCAR 211-219, 249-251
. 3.32-3,39, 3.52, Overage
Impairments Chapter 8 Appendix 2 agreements 714-7.17
Improving
spending control Chapter 2 P
Income Chapter 4, Chapter 7 Payables 3.65, 6.31
Intangible assets 4,28-4.34, 7.6 Prepayments 3.61-3.63, 6.19, oe
Prior period
Insurance 3.80-3.84 adjustments (PPAs) Chapter? Appendix 4
Inventories 3.49-351, 613-6118 Privatisation 8.44-8.46, 11.90
Investments Chapter 8 Profit/loss on sale 4.22, 446-449
of assets
J Provisions 3.63-3.77, 6.20-6.30
Joint Ventures 71.97-1199 Public Chapter 11
Corporations
Public Private Chapter 13
191
Partnerships
Public spending
control
Chapter 1, Chapter 2
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R T
. Taxes (including 1,105, 3.85-3.88,
Rate of return 1135-11.48 tox credits) Chapter 4
; 3.61-3.63, 6119, 835- Termination
Receivables 837 payments (PF) 13.55-13.60
Refinancing 13.61-13.70 Theft 3.40, 3.53
Rent 435-438 Total Managed 1.98-199
Expenditure
Research and 632-634, Annex C Trading funds 153-154
development
Reserves 9.14-9.15 U
Revaluations 341-345 Unfunded pension Chapter 12
schemes
Reversionary
itcrest 13.50-13.54 Vv
Ring-fences 1.59-1.65, 330-331, 8.11 VAT 456-458
Royalties 4,28-4.34,7.6 Ww
Weighted average
s cost of capital N38-11.48
Sales of goods and 3,46-3.48, 3.55-3.60,
convinces 426-427 Write-offs Bae eas
Self-Financing
Public 1.75-11.87
Corporations
Single use military 635-638
equipment
Student loans
Chapter 8 Appendix 2
Subsidies 3.7-3.15, 11.55
Supported capital 104.109
expenditure
Switches 159-165
192
HM Treasury contacts
This document can be downloaded from www.gov.uk
If you require this information in an alternative format or have
general enquiries about HM Treasury and its work, contact:
Correspondence Team
HM Treasury
1 Horse Guards Road
London
SWIA 2HQ
Tel: 020 7270 5000
Email: public.enquiries@hmtreasury.gov.uk
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