Finance glossary

Note: This glossary focuses in particular on financial terms relevant to the UK Government.

Accounting Officer

The senior official ultimately responsible for all spending of a government department or arm's length
body. The Accounting Officer for a government department is usually the Permanent Secretary. The
Accounting Officer must personally sign off the Annual Report and Accounts of the body s/he has
responsibility for, and may be called to appear before a select committee to answer questions on
financial management.

Accounts Direction

A written document instructing officials how to prepare accounts.

Accruals Accounting

A method of recording expenditure as it is incurred (i.e. when the activity which generates the costs
arises), and income as it is earned, rather than when cash is paid or received. This method of accounting
is now used in the UK throughout the public and private sectors (with the exception of very small
charities and businesses). In the public sector context it is also sometimes known as 'Resource'
accounting.UK Government Budgets (the DEL and AME limits) are also set in accruals rather than cash
terms, and although departments still have to forecast cash movements, they are free to seek as high a
cash requirement in their Estimates as is necessary to support the accruals budgets allocated.

The principal advantage of accruals accounting over cash accounting (where cash movements are all
that is recorded) is that accruals accounting allows better financial management and scrutiny by:

• matching expenditure in any period to revenues earned and obligations incurred in that period; and

• matching the cost of assets to the period in which they are used or consumed, by charging
depreciation on them.

Administration budget

Budget limits controlling the resources set aside for the running costs (largely staff and associated costs)
of a government department, and which form part of its Resource Departmental Expenditure Budget
(DEL). Administration budgets are ring-fenced budgets, set at the time of a Spending Review. The other
part of the Resource DEL, outside of the Administration Budget is referred to as programme
expenditure. If the department's administration budget is breached, the department's accounts will be
qualified by the auditor (see qualified accounts).
OGL

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Foreword

About this document

i.

ii.

iii.

iv.

V.

This document updates the version published in 2007. Like the original, it sets out the main principles
for dealing with resources in UK public sector organisations Some of the specifics, especially those in the
annexes, relate to England rather than the devolved administrations, which have their own detailed
rulebooks. But the same basic principles generally apply in all parts of the UK public sector, with
adjustments for

context.
The key themes also remain. They are the fiduciary duties of those handling public resources to work to
high standards of probity; and the need for the public sector to work in harmony with parliament.

While these principles are invariant, the advice in this document cannot stand forever. The law, business
practices, and public expectations all change. So public sector organisations can and should innovate in
carrying out their responsibilities, using new technology and adopting good business practice.
Throughout parliament always expects the government and its public servants to meet the ethical
standards in this document and to operate transparently.

As before, the main text of the document is intended to be timeless. The Treasury will revise the
annexes from time to time as the need arises. All the text is available freely on the gov.uk website.

Above all, nothing in this document should discourage the application of sheer common sense.

Chapter 1 Responsibilities

The relationship between the government, acting on behalf of the Crown, and parliament, representing
the public, is central to how public resources are managed. Ministers implement government policies,
and deliver public services, through public servants; but are able to do so only where parliament grants
the right to raise, commit and spend resources. It falls to the Treasury to respect and secure the rights of
both government and parliament in this process.

1.1 Managing public money: principles

1.1.1 The principles for managing public resources run through many diverse organisations delivering
public services in the UK. The requirements for the different kinds of body reflect their duties,
responsibilities and public expectations. The demanding standards expected of public services are set
out in box 1.1.

Box 1.1: standards expected of all public services

honesty

impartiality

fairness

integrity

openness transparency

accountability accuracy

objectivity
reliability

carried out

in the spirit of, as well as to the letter of, the law

in the public interest

to high ethical standards achieving value for money

1.1.2 The principles in this handbook complement the guidance on good governance in the Corporate
Governance Code1applying to central government departments. Some of the detail applies to England
only, or just to departments of state. There is separate guidance for the devolved administrations.
Where restrictions apply, they are identified.

1.1.3 Much of this document is about meeting the expectations of parliament. These disciplines also
deliver accountability to the general public, on whose behalf parliament operates. The methods of
delivery used should evolve as technology permits. Public services should carry on their businesses and
account for their

1 The Corporate Governance Code - see https://www.gov.uk/government/publications/corporate-

governance-code-for-central- government-departments

stewardship of public resources in ways appropriate to their duties and context and conducive to
efficiency.

1.2 Ministers

1.2.1 In the absence of a written constitution, the powers used to deploy public resources are a blend of
common law, primary and secondary legislation, parliamentary procedure, the duties of ministers, and
other long-standing practices. This mix may of course change from time to time.

1.2.2 As the Corporate Governance Code makes clear, the minister in charge of a department is
responsible for its policy and business as part of the broad sweep of government policy determined in
Cabinet. They:

determines the policies of the departmental group;

chairs the departmental board;

allocates responsibilities among the ministers in the department;

chooses which areas of business to delegate to officials, and on what conditions;

looks to the department's accounting officer (see chapter 3) to delegate within the department to
deliver the minister's decisions and to support the minister in making policy decisions and handling
public funds; and

also has general oversight of other bodies on whose behalf they may answer in parliament, including the
department's arms length bodies (ALBs).

1.2.3 The Ministerial Code2 requires ministers to heed the advice of their accounting officers about the
proper conduct of public business. See section 3.4 for how the minister may direct the accounting officer
to proceed with a policy if a point of this kind cannot be resolved.

1.2.4 The minister in charge of a department may delegate defined areas of its business, or of its
parliamentary work, to their junior ministers. Ministers have wide powers to make policies and to
instruct officials.

1.2.5 Only ministers can propose legislation to parliament to raise public revenue through taxation, or to
use public funds to pursue their policy objectives. Specific primary legislation is normally required to
spend public funds (see section 2.1). Similarly, taxes may be collected, and public funds may be drawn,
only with parliamentary authority; and only as parliament has authorised.

1.2.6 It is not normally acceptable for a private sector organisation to be granted powers to raise taxes,
nor to distribute their proceeds. Parliament expects these responsibilities to fall to ministers, using
public sector organisations.

1.2.7 The House of Commons (and not the House of Lords) enjoys the financial privilege to make
decisions on these matters.

2 https://www.gov.uk/government/publications/ministerial-code

1.3 Parliament

1.3.1 Parliament approves the legislation which empowers ministers to carry out their policies. It also
allows finance for services when it approves each year's Estimates. See the Estimates Manual3 for more.

1.3.2 From time to time parliament may examine government activity. Select committees examine
policies, expenditure, administration and service delivery in defined areas. The Committee of Public
Accounts (PAC - see section 3.5) examines financial accounts, scrutinises value for money and generally
holds the government and its public servants to account for the quality of their past administration.
1.4 The Treasury

1.4.1 Parliament looks to the Treasury to make sure that:

departments use their powers only as it has intended; and

revenue is raised, and the resources so raised spent, only within the agreed limits.

1.4.2 Hence it falls to the Treasury to:

set the ground rules for the administration of public money; and

account to parliament for doing so.

1.4.3 This document sets out how the Treasury seeks to meet these parliamentary expectations. The key
requirements are regularity, propriety, value for money and feasibility (see box 3.2). The Treasury:

designs and runs the financial planning system4 and oversees the operation of the agreed multiyear
budgets to meet ministers' fiscal policy objectives;

oversees the operation of the Estimates through which departments obtain authority to spend year by
year;

sets the standards to which central government organisations publish annual reports and accounts in
the Financial Reporting Manual (FReM). This adapts International Financial Reporting Standards (IFRS) to
take account of the public sector context;

sets Accounts Directions for the different kinds of central government organisations whose accounts are
laid in parliament; and

may also work through the Cabinet Office to set certain standards applicable across central government,
for example functional standards5.

3 https://www.gov.uk/government/publications/supply-estimates-guidance-manual

4 See the Consolidated Budgeting Guidance for more -

https://www.gov.uk/government/publications/consolidated-budgeting- guidance

5 See Functional Standards - GOV.UK (www.gov.uk).

1.5 Departments

1.5.1 Within the standards expected by parliament, and subject to the overall control and direction of
their ministers, departments have considerable freedom about how they organise, direct and manage
the resources at their disposal. It is for the accounting officer in each department, acting within
ministers' instructions, and supported by their boards, to control and account for the department's
business.

1.5.2 A departmental board, chaired by the senior minister, leads each department. Boards can bring to
bear skills and experiences from elsewhere in, and outside of, the public sector (see section 4.1).

1.5.3 Within each department, there should be adequate delegations, controls and reporting
arrangements to provide assurance to the board, the accounting officer and ultimately ministers about
what is being achieved, to what standards and with what effect. These arrangements should provide
timely and prompt management information to enable plans to be adjusted as necessary. Similarly
ministers should have enough evidence about the impact of their policies to decide whether to
continue, modify or end them. This is discussed further in chapter 4.

1.5.4 In supporting ministers, civil servants should provide politically impartial advice. Should they be
asked to carry out duties which appear incompatible with this obligation, the accounting officer should
take the matter up with the minister concerned (see also the Civil Service Code?).

1.5.5 Departments often operate with and through a variety of partners to deliver their ministers'
policies. It is important that these relationships operate in the public interest: see chapter 7.

1.6 The Comptroller and Auditor General

1.6.1 Supported by the National Audit Office (NAO), the Comptroller and Auditor General (C&AG)
operates independently to help parliament scrutinise how public funds have been used in practice.
Further information about the role of the NAO is available on their websites and in annex 1.1.

1.6.2 The C&AG provides parliament with two sorts of audit:

financial audit of the accounts of departments and ALBS, covering:

assurance that accounts have been properly prepared and are free of material misstatements9; and

confirmation that the underlying transactions have appropriate parliamentary authority;

value for money reports assessing the economy, efficiency and effectiveness with which public money
has been deployed in selected areas of public business. A programme of these reviews covers a variety

6 If there is a change of Accounting Officer in the course of the year, the Accounting Officer in place at
the year end takes responsibility for the whole year's accounts, using assurances as necessary.

7 http://www.civilservice.gov.uk/about/values
8 The NAO website address is http://www.nao.org.uk

9 See Audit Practice Note 10 of the Audit Practices Board on the FRC website at Http://www.frc.org.uk

of subjects over a period, taking account of the risks to value for money and parliament's interests.

1.6.3 The C&AG has a general right to inspect the books of a wide variety of public organisations to
further these investigations. When the NAO investigates any public sector organisation, it should get full
cooperation in provision of papers and other oversight. It is good practice to draw the NAO's attention
to the confidentiality of any sensitive documents provided in this process. It is then for the independent
C&AG to judge what material can be published in the public interest.

1.6.4 In addition, the C&AG publishes other independent reports to parliament. The PAC (see section
3.5) may hold hearings to examine evidence on any of these reports and on other related matters.

Chapter 2

Use of Public Funds

This chapter explains the process for parliamentary authorisation of public resources. Parliament
consents in principle to the use of public funds through legislation to enable specified policies. It then
approves use of public resources to carry out those policies year by year by approving Estimates. Only
rarely can lesser authority suffice. At the close of each financial year, parliament expects a clear account
of the use of the public funds it has authorised. Parliament expects the Treasury to oversee the
operation of these controls. The PAC may investigate specific issues further.

Ministers have very broad powers to control and direct their

departments. In general, they may do anything that legislation does not prohibit or limit, including using
common law powers to administer their operations or continue business as usual.

Ministers also need parliamentary authority for use of public funds before each year's expenditure can
take place. The full list of requirements is set out in box 2.1.

Box 2.1: requirements for use of public funds

·

budget cover in the collectively agreed multi-year budgets

with a few exceptions1, parliamentary authorisation for each year's drawdown of funds through an
Estimate, which is then approved as a Supply and Appropriation Act (see section 2.2)

adequate Treasury consents (see section 2.3)

assurance that the proposed expenditure is regular and proper (section 2.4)

sufficient specific legal powers - though see section 2.5 for some limited exceptions

2.1.1 The Treasury runs the control process because parliament expects the Treasury to control public
expenditure as part of fiscal policy. The primary means through which the Treasury controls public
expenditure is multi-year budgets, agreed collectively at spending reviews. The Consolidated Budgeting
Guidance sets out the rules for their use. (See also chapter 4).

1 See section 5.3

2.2 Using the Estimate

2.2.1 The requirements in box 2.1 are to some extent interrelated. The accounting officer of a
department (see also chapter 3) is responsible for ensuring that:

2.2.2 the Estimate(s) presented to parliament for the department's annual expenditure (consolidating its
ALBs) are within the statutory powers and within the government's expenditure plans; and

2.2.3 use of resources is within the ambit of the vote and consistent with the Estimate(s)-

and must answer to parliament for stewardship of these responsibilities.

2.3 Treasury consents

2.3.1 Departments also need Treasury consent before undertaking expenditure or making commitments
which could lead to expenditure (see annex 2.1). Usually the Treasury agrees some general approvals for
each department subject to delegated limits and/or exclusions.

2.3.2 Some common approaches to setting delegations are shown in box 2.2 and are discussed further in
annex 2.2. It is good practice to review delegations from time to time to make sure that they remain up
to date and appropriate. Delegations can be tightened or loosened at reviews, depending on experience.

Box 2.2: examples of approaches to delegated authorities

objective criteria for exceptions requiring specific Treasury scrutiny or approval a sampling mechanism
to allow specimen cases to be examined

a lower limit above which certain kinds of projects must achieve specific consent

2.3.3 In turn departments should agree with each of their arm's length bodies (ALBS - the public sector
organisations they sponsor or finance) a similar set of delegations appropriate to their business2 (see
also chapter 7).

2.3.4 There is an important category of expenditure commitments for which the Treasury cannot
delegate responsibility. It is transactions which set precedents, are novel, contentious or could cause
repercussions elsewhere in the public sector. Box 2.3 gives examples. Treasury consent to such
transactions should always be obtained before proceeding, even if the amounts in question lie within
the delegated limits.

2 Delegations to ALBs should never be greater than the delegated limits agreed between the Treasury
and the sponsor department.

Box 2.3: examples of transactions requiring explicit Treasury consent

extra statutory payments similar to but outside statutory schemes

ephemeral ex gratia payment schemes, eg payments to compensate for official errors

special severance payments, eg compromise agreements in excess of contractual commitments

non-standard payments in kind

unusual financial transactions, eg imposing lasting commitments or using tax avoidance unusual
schemes or policies using novel techniques

2.3.5 It is improper for a public sector organisation to spend or make commitments outside the agreed
delegations. The Treasury may subsequently agree to give retrospective consent, but only if the
expenditure in question would have been agreed if permission had been sought at the right time.

2.3.6 Sometimes legislation calls for explicit Treasury consent, eg for large or critical projects. There are
also Whitehall wide controls on key progress points for the very largest projects.3 In such cases it is
unlawful to proceed without Treasury consent - and Treasury consent cannot be given retrospectively.

2.4 Regularity and propriety

2.4.1 The concepts of regularity and propriety, fundamental to the right use of public funds, are set out
in box 2.4. The term regularity and propriety is often used to convey the idea of probity and ethics in the
use of public funds - that is, delivering public sector values in the round, encompassing the qualities
summarised in box 1.1. Supporting this concept are the Seven Principles of Public Life - the Nolan
principles4 - which apply to the public sector at large. In striving to meet these standards, central
government departments should give a lead to the partners with which they work.

Box 2.4: regularity and propriety

Regularity: compliant with the relevant legislation and wider legal principles such as subsidy control and
procurement law, delegated authorities and following the guidance in this document. Propriety:
meeting high standards of public conduct, including robust governance and the relevant parliamentary
expectations, especially transparency.

2.4.2 Each departmental accounting officer should make sure that ministers in their department
appreciate:

the importance of operating with regularity and propriety; and

3 Through the Major Projects Authority, [http://www.cabinetoffice.gov.uk/content/major-projects-

authority), using powers delegated by the Treasury

4 http://www.public-standards.gov.uk/

the need for efficiency, economy, effectiveness and prudence in the administration of public resources,
to secure value for public money5.

2.4.3 Should a minister seek a course of action which the accounting officer cannot reconcile with any
aspect of these requirements, they should seek instructions in writing from the minister before
proceeding (see chapter 3).

2.4.4 Should departments need to resolve an issue about regularity or propriety, they should consult the
relevant Treasury spending team. Similarly, ALBs should consult their sponsor departments about such
issues, and the department concerned may in turn consult the Treasury.

2.4.5 Neither improper nor irregular expenditure achieves the standards that parliament expects. So any
such expenditure must be noted in the department's annual report and accounts. If the discrepancy is
material it can result in a qualification to the accounts. When any expenditure of this kind comes to
light, it should be drawn to the attention of both the NAO and the Treasury. The immediate follow up
action is to identify the source of any systematic problems so that there is no recurrence. The PAC may
also call the accounting officer to explain the matter at a public hearing.
2.5 Securing adequate legal authority

2.5.1 Parliament usually authorises spending on a specific policy or service by approving bespoke
legislation setting out in some detail how it should work. It is not normally acceptable to use a royal
charter as an alternative to primary legislation, for this approach robs parliament of its expectations for
control and accountability. Departments should ensure that both they and their ALBs have adequate
legal cover for any specific actions they undertake.

2.5.2 The Treasury takes this requirement seriously. It is fundamental to the trust and understanding
between the government and parliament on which management of the public finances is founded. In
the Concordat of 1932 (see annex 2.3), the Treasury undertook that departments would not spend
without adequate legal authority.

2.5.3 There are some general exceptions. These kinds of expenditure do not require specific legislation
in order to avoid burdening parliamentary time:

routine matters covered by common law (the main examples are in box 2.5);

a very limited range of Consolidated Fund Standing Services (see section 5.3);

2.5.4 Projects or services which are modest or temporary (see box 2.6). This exception cannot be used to
plug a gap in spending authority before specific legislation for an ongoing service is passed. The
temporary services derogation only applies to initiatives lasting no more than two years in total, and it is
therefore important to note that this does not provide a two-year grace period for spending on a new,
ongoing service before specific legislation is required.

A more detailed description of value for money is at annex 4.4

10

Box 2.5: expenditure which may rely on a Supply and Appropriation Act

routine administration costs: employment costs, rent, cleaning etc

lease agreements, eg for photocopiers, lifts

contractual obligations to purchase goods or services (eg where single year contracts might be bad
value)
expenditure using prerogative powers such as defence of the realm and international treaty obligations

In all the three cases in paragraph 2.5.3, departments may rely on the sole authority of a Supply and
Appropriation Act (the culmination of the Estimates process) without the need for specific legal
authority, provided that the other conditions in box 2.1 are met.

Box 2.6: modest or temporary expenditure which may rely on a Supply and Appropriation Act either
services or initiatives lasting no more than two years, eg a pilot study or one off intervention or
expenditure of no more than £1.75m a year (amount adjusted from time to time) provided that there is
no specific legislation covering these matters before parliament and existing statutory restrictions are
respected.

These conditions are demanding. Treasury consent is required before they may be relied on.

2.6 New services

2.6.1 When ministers decide on a new activity, all the conditions in box 2.1 must be met before it can
begin. In practical terms this means that most significant new policies which are intended to persist
require specific primary legislation. Sometimes ministers want to start early on a new policy which is
intended to continue but whose enabling legislation has not yet secured royal assent. It may be possible
to make limited preparation for delivery of the new service before royal assent, but to do so it will
usually be necessary to consider borrowing from the Contingencies Fund (see annex 2.4). Access to this
Fund is controlled by the Treasury, subject to the conditions in box 2.7. Specific Treasury consent is
always required.

Box 2.7: conditions for access to the contingencies fund (see also annex 2.4)

the proposed expenditure must be urgent and in the public interest, ie with wider benefits to outweigh
the convention of awaiting parliamentary authority (political imperative is not enough)

the relevant bill must have successfully passed second reading in the House of Commons

the legislation must be certain, or virtually certain, to pass into law with no substantive change in the
near future, and usually within the financial year

the department responsible must explain clearly to parliament what is to take place, why, and by when
matters should be placed on a normal footing.

11

Chapter 3 Accounting Officers

This chapter sets out the personal responsibilities of all accounting officers in central government.
Essentially accounting officers must be able to assure parliament and the public of high standards of
probity in the management of public funds. This chapter is drawn to the attention of all accounting
officers when they are appointed.

3.1.1. Each organisation in central government - department, agency, trading fund, NHS body, NDPB or
arm's length body - must have an accounting officer. This person is usually its senior official. The
accounting officer in an organisation should be supported by a board structured in line with the
Corporate Governance Code. 3.1.2. Formally the accounting officer in a public sector organisation is the
person who parliament calls to account for stewardship of its resources. The standards the accounting
officer is expected to deliver are summarised in box 3.1. The equivalent senior business managers of
other public sector organisations are expected to deliver equivalent standards.

3.2 Appointment of accounting officers

3.2.1. The Treasury appoints the permanent head of each central government department to be its
accounting officer. Where there are several accounting officers in a department, the permanent head is
the principal accounting officer.

3.2.2. Within departments, the Treasury also appoints the chief executive of each trading fund as its
accounting officer.

3.2.3. In turn the principal accounting officer of each department normally appoints the permanent
heads:

⚫ of its executive agencies, as agency accounting officers for their agencies; and

⚫ of other ALBs (including all NDPBs), as accounting officers for these bodies; and

at their discretion, additional accounting officers for defined part(s) of the department's business.

3.2.4. In the case of appointment of principal accounting officers of departments and accounting officers
of trading funds, the relevant department should send a draft letter of appointment directly to the
Treasury Office of Accounts team via

12

[email protected] for the signature of the Treasury Permanent Secretary. This should
be done at least fourteen calendar days before the accounting officer is due to take up their role.

3.2.5. In the case of appointment of an accounting officer for an arm's length body, the body should
liaise with its sponsoring department to arrange a letter of appointment from the principal accounting
officer. Again, this should be done at least fourteen calendar days before the accounting officer is due to
take up their role. The private office of the principal accounting officer should then promptly notify the
TOA team.

3.2.6. These actions ensure that the register of accounting officers is kept up to date and that
appropriate training can be arranged.

3.2.7. If the timeframes above cannot be met, or in the event of a temporary gap between the standing
down of an accounting officer and the appointment of a new accounting officer, the department should
contact the TOA team to discuss the appropriate mechanism to ensure accountability arrangements are
maintained.

3.2.8. Template letters of appointment can be found on gov.uk. The TOA team is happy to assist in the
preparation of these letters.

3.3 Special responsibilities of accounting officers

Box 3.1: standards expected of the accounting officer's organisation

Acting within the authority of the minister(s) to whom they are responsible, the accounting officer
should ensure that the organisation, and any ALBs it sponsors, operates effectively and to a high
standard of probity. The organisation should:

governance

⚫ have a governance structure which transmits, delegates, implements and enforces decisions

⚫ have trustworthy internal controls to safeguard, channel and record resources as intended

• work cooperatively with partners in the public interest

⚫ operate with propriety and regularity in all its transactions

⚫ treat its customers and business counterparties fairly, honestly and with integrity

⚫ offer appropriate redress for failure to meet agreed customer standards

• give timely, transparent and realistic accounts of its business and decisions, underpinning public
confidence;

decision-making

• support its ministers with clear, well-reasoned, timely and impartial advice

13
⚫ make all its decisions in line with the strategy, aims and objectives of the organisation set by ministers
and/or in legislation

⚫ take a balanced view of the organisation's approach to managing opportunity and risk

⚫ impose no more than proportionate and defensible burdens on business;

financial management

⚫ use its resources efficiently, economically and effectively, avoiding waste and extravagance

⚫ plan to use its resources on an affordable and sustainable path, within agreed limits

⚫ carry out procurement and project appraisal objectively and fairly, using cost benefit analysis and
generally seeking good value for the Exchequer as a whole

⚫ use management information systems to gain assurance about value for money and the quality of
delivery and so make timely adjustments

⚫ avoid over defining detail and imposing undue compliance costs, either internally or on its customers
and stakeholders

⚫ have practical documented arrangements for controlling or working in partnership with other
organisations, as appropriate

⚫ use internal and external audit to improve its internal controls and performance.

3.3.1. It is important that each accounting officer takes personal responsibility for ensuring that the
organisation they manage delivers the standards in box 3.1. In particular, the accounting officer must
personally sign: the accounts; the annual report the governance statement (see annex 3.1); and having
been satisfied that they have been properly prepared to reflect the business of the organisation, must
personally approve: voted budget limits; and the associated Estimates Memorandum.

3.3.2. The accounting officer of a corporate arm's length body should arrange for a board member to
sign the accounts as well as signing them himself or herself, if (unusually) they are not a member of the
board.

3.3.3. There are several other areas where accounting officers should take personal responsibility.

Regularity and propriety (see box 2.4), including securing Treasury

approval for any expenditure outside the normal delegations or outside the subheads of Estimates.

• Affordability and sustainability: respecting agreed budgets and avoiding unaffordable longer term
commitments, taking a proportionate view about other demands for resources.
14

Value for money: ensuring that the organisation's procurement, projects and processes are
systematically evaluated to provide confidence about suitability, effectiveness, prudence, quality, good
value judged for the Exchequer as a whole, not just for the accounting officer's organisation (eg using
the Green Book1 to evaluate alternatives).

· Control: the accounting officer should personally approve and confirm their agreement to all Cabinet
Committee papers and major project or policy initiatives before they proceed.

Management of opportunity and risk to achieve the right balance commensurate with the institution's
business and risk appetite.

• Learning from experience, both using internal feedback (eg through managing projects and
programmes using techniques such as PRINCE2), and from right across the public sector.

• Accounting accurately for the organisation's financial position and transactions: to ensure that its
published financial information is transparent and up to date; and that the organisation's efficiency in
the use of resources is tracked and recorded.

3.3.4. In the case of principal accounting officers, these responsibilities apply to the business of the
whole departmental group.

3.4 Accounting officer assessments

3.4.1. Accounting officers should routinely scrutinise significant policy proposals or plans to start or vary
major projects and then assess whether they measure up to the standards in box 3.2.

Box 3.2: the standards expected for projects and proposals

• Regularity: the proposal has sufficient legal basis, parliamentary authority, and Treasury authorisation;
and is compatible with the agreed spending budgets.

• Propriety: the proposal meets the high standards of public conduct and relevant Parliamentary control
procedures and expectations.

• Value for money: in comparison to alternative proposals or doing nothing, the proposal delivers value
for the Exchequer as a whole.

Feasibility: the proposal can be implemented accurately, sustainably, and to the intended timetable.

3.4.2. A systematic written accounting officer assessment helps to ensure good decision making and
provides positive assurance that the four standards have been properly considered.
1 https://www.gov.uk/government/collections/the-green-book-and-accompanying-guidance-and-
documents

15

3.4.3. An accounting officer assessment should be produced for projects or programmes which form
part of the Government Major Projects Portfolio (GMPP):

alongside the request for the accounting officer's approval of the Outline Business Case (or at the point
when it enters the GMPP if this is later)

⚫ at subsequent stages of the project if it departs from the four standards or the agreed plan - including
any contingency - in terms of costs, benefits, timescales, or level of risk, which informed the accounting
officer's previous approval

• if the Senior Responsible Owner (SRO) of the project decides one is merited at any other stage of the
project

3.4.4. In addition, it is good practice to prepare an accounting officer assessment for each novel and
contentious transaction or proposal involving the use of public funds. This may be particularly useful
where it is not possible to produce a fully developed business case, for example due to lack of time
and/or data, or the risk environment is higher than usual. The Treasury often asks spending departments
and organisations for such analyses before clearing them to proceed, as will the National Audit Office
(NAO) when conducting any review of the issue.

3.4.5. Beyond that, in many cases, the normal governance procedures, such as production and approval
of business cases, should provide sufficient assurance against the accounting officer standards, without
need for a bespoke accounting officer assessment.

3.4.6. All draft accounting officer assessments must be signed off by the organisation's senior officer for
finance (usually Finance Director, Chief Financial Officer or Director General for Finance) or alternate
senior member of the finance function within the department before being submitted to the Accounting
Officer for final sign off.

3.4.7. Whenever an accounting officer assessment is produced for a GMPP project, a summary of the
key points should also be prepared and published. Accounting officers may also choose to publish similar
information from assessments made in other circumstances at their discretion.

3.4.8. Further guidance on producing and publishing accounting officer assessments can be found in
Accounting Officer Assessments: guidance.2

3.5 Working with other organisations

3.5.1. It often makes sense for two or more departments to work together to deliver public services. In
such circumstances, each accounting officer remains personally responsible for the resources of their
own organisation. It is good practice for participating bodies to document their respective
responsibilities, for example by way of a memorandum of understanding.

3.5.2. It may also be the case that, in assessing a project or proposal, the accounting officer will want to
draw on expertise from another department or public body. Where this happens, the accounting officer
may ask the organisation to provide written assurances of the robustness of the analysis and any
underlying

2 www.gov.uk/government/publications/accounting-officer-assessments

16

methodology. However, the ultimate judgement in each case lies with the accounting officer personally.

3.6 Directions

3.6.1. The accounting officer cannot simply accept the minister's aims or policy without examination.
Each departmental accounting officer should take care to bring to the attention of their minister(s) any
conflict between the minister's instructions and the standards set out in box 3.2.

3.6.2. Where a departmental accounting officer determines that a proposal does not meet one or more
of these standards, the best next step is to consider whether the policy or proposed course of action can
be modified to make it fit. If not, and the minister decides it is nevertheless appropriate to continue with
the proposal, the accounting officer should ask their senior minister for a formal written direction to
proceed. An oral direction should be confirmed promptly in writing.

3.6.3. Before finalising a direction request, it is good practice for accounting officers to discuss the
matter with the Treasury. Often, by their nature, issues that might call for a ministerial direction are
novel, contentious, or repercussive, and therefore require explicit Treasury consent. Where this is the
case, Treasury consent should be obtained before the direction request is finalised.

3.6.4. As always, the ultimate judgement in each case must lie with the accounting officer personally.
The acid test is whether the accounting officer could justify the proposed activity if asked to defend it.

3.6.5. There is no set form for requesting a direction, though the accounting officer should be specific
about their nature and the standard or standards that is/are not satisfied.

3.6.6. When a direction is made, the Accounting Officer should:

⚫ follow the minster's direction without further ado

⚫ promptly copy the direction request, the direction and other papers the accounting officer considers
relevant to the Comptroller and Auditor General and the Treasury Officer of Accounts

⚫ unless it is in the public interest that the matter is kept confidential, arrange for the direction request
and direction itself to be published on the GOV.UK website promptly, notifying the chairs of the PAC and
the relevant departmental select committee as soon as this occurs

⚫ where confidentiality is required, in addition to copying to the Comptroller and Auditor General and
the Treasury Officer of Accounts as usual, share the direction request and the direction with the chairs
of the PAC and the relevant departmental select committee, along with an explanation of when they
expect the need for confidentiality to fall away and publication to take place

if asked, explain the minister's course of action - this respects ministers' rights to frank advice, while
protecting the quality of internal debate.

17

3.6.7. A direction on regularity or propriety ground does not change that position

- that is it does not make the action regular or proper. It is important to note that a direction does not
permit unlawful action and does not protect against a court finding unlawfulness.

3.7 Public Accounts Committee

3.7.1. The PAC may hold public hearings on the accounts of central government organisations laid in
parliament (see section 1.6). In practice most PAC hearings focus on NAO value for money studies. The
NAO seeks to agree the text of these reports with the accounting officer(s) concerned so there is a clear
undisputed evidence base for PAC scrutiny.

3.7.2. When a hearing is scheduled, the PAC normally invites the accounting officer(s) of the relevant
institution(s) to attend as witness(es). An accounting officer may be accompanied by appropriate
officials. Where it is appropriate, and the PAC agrees, an accounting officer may send a substitute. The
PAC may also invite other witnesses who may not be public servants to give insight into the background
of the subject in hand.

3.7.3. In answering questions, the accounting officer should take responsibility for the organisation's
business, even if it was delegated or if the events in question happened before they were appointed
accounting officer. In response to specific PAC or Select Committee requests, previous accounting
officers may also attend relevant PAC hearings. Recalls of this kind should be assessed case by case,
depending on the circumstances. They are acceptable if the business in issue was recent, and where the
former accounting officer has had an opportunity to comment before publication on any NAO report
which the PAC is to investigate. 3.7.4. The PAC expects witnesses to give clear, accurate and complete
evidence. If evidence is sensitive, witnesses may ask to give it in private. Witnesses may offer
supplementary notes if the information sought is not to hand at the meeting. Any such notes should be
provided within one week unless the PAC is willing to grant an extension. They should do so without
delay.

3.7.5. The TOA (or an alternate) attends all PAC hearings. This enables the PAC to explore any more
general issues arising out of the hearing.

3.7.6. The evidence given by accounting officers at public hearings often feeds into reports published by
the PAC. These reports detail its findings, conclusions and recommendations.

3.7.7. For each PAC report, the government responds to recommendations by means of Treasury
Minutes presented to Parliament by a Treasury minister, indicating those the government accepts and
those it does not accept. For those it accepts, Treasury Minutes will include target implementation
dates. For those it does not accept, they will set out reasons for non-acceptance.

3.7.8. In addition, government departments and organisations are required to report twice annually to
Parliament on progress in implementing Committee recommendations accepted by government.
Treasury Minute Progress Reports are used for this purpose.

18

3.7.9. The PAC expects the government to respond promptly and transparently through both the initial
Treasury Minute and subsequent Progress Reports. Accounting officers should ensure the internal
clearance processes within their organisation are arranged to fit with deadlines for responses.

3.7.10. In addition, if a department determines it is necessary to revise the target date for implementing
an agreed recommendation, the accounting officer should write immediately to the PAC, copied to the
Treasury Officer of Accounts, and provide a detailed explanation for the deferral. Departments should
not leave notification of the delay in implementation until the publication of the next Treasury Minutes
Progress Report.

3.8 When the accounting officer is not available

3.8.1. Each public sector organisation must have an accounting officer available for advice or decision as
necessary at short notice. When the accounting officer is absent and cannot readily be contacted,
another senior official should deputise. 3.8.2. If a significant absence is planned, the principal accounting
officer may invite the Treasury to appoint a temporary acting accounting officer.

3.8.3. In these circumstances, a temporary acting accounting officer stands in the shoes of the principal
accounting officer. They are not acting on behalf of the Principal Accounting Officer but are personally
responsible to Parliament in their own right. Their decisions are not subject to ratification by the
principal accounting officer and their role should only be activated if the principal accounting officer is
unable to fulfil their obligations. To all intents and purposes the temporary acting accounting officer
replaces the principal accounting officer.

3.8.4. A similar logic can also apply for an accounting officer in an arm's length body (ALB), whereby the
arrangement must be agreed and formalised between the department and the ALB.

3.9 Conflicts of interest

3.9.1. Sometimes an accounting officer faces an actual or potential conflict of interest. There must be no
doubt that the accounting officer meets the standards described in box 3.1 without divided loyalties.
Possible ways of managing this issue include:

for a minor conflict, declaring the conflict and arranging for someone other than the accounting officer
to make a decision on the issue(s) in question

⚫ for a significant but temporary conflict, inviting the Treasury (or the sponsor department, as the case
may be) to appoint an interim accounting officer for the period of the conflict of interest

⚫ for serious and lasting conflicts, resignation.

3.10 Arm's length bodies

3.10.1. The responsibilities of accounting officers in departments and in arm's length bodies (ALBs) are
essentially similar. Accounting officers in ALBs must also

19

take account of their special responsibilities and powers. In particular, they must respect the legislation
(or equivalent) establishing the organisation and terms of the framework document agreed with the
sponsor department. See chapter 7 for more. 3.10.2. The framework document (or equivalent) agreed
between an ALB and its sponsor always provides for the sponsor department to exercise meaningful
oversight of the ALB's strategy and performance, pay arrangements and/or major financial transactions,
eg by monthly returns, standard delegations and exception reporting. The sponsor department's
accounts consolidate those of its ALBS so its accounting officer must be satisfied that the consolidated
accounts are accurate and not misleading.

3.10.3. Overall, the accounting officer of a sponsor department should make arrangements to satisfy
himself or herself that that the ALB has systems adequate to meet the standards in box 3.1. Similarly,
the accounting officer of an ALB with a subsidiary should have meaningful oversight of the subsidiary. It
is not acceptable to establish ALBS, or subsidiaries to ALBs, in order to avoid or weaken parliamentary
scrutiny.
3.10.4. Exceptionally, the accounting officer of a sponsor department may need to intervene if an ALB
drifts significantly off track, eg if its budget is threatened, its systems are badly defective or it falls into
disrepute. This may include replacing some or all of the leaders of the ALB, possibly even its accounting
officer.

3.10.5. There are sensitivities about the role of the accounting officer in an ALB which is governed by an
independent fiduciary board, eg a charity or company. The ALB's accounting officer, who will normally
be a member of the board, must take care that their personal legal responsibilities do not conflict with
their duties as a board member. In particular, the accounting officer should vote against any proposal
which appears to cause such a conflict; it is not sufficient to abstain. 3.10.6. Moreover, if the chair or
board of such an ALB is contemplating a course of action that is inconsistent with the standards in box
3.1, then the accounting officer should follow the procedure set out in the organisation's framework
document. This process is similar to what happens in departments (see section 3.6), but will be tailored
to reflect the position of the organisation's board, which is often appointed under statute.

3.11 In the round

3.11.1. It is not realistic to set firm rules for every aspect of the business with which an accounting
officer may deal. Sometimes the accounting officer may need to take a principled decision on the facts in
circumstances with no precedents. Should that happen, the accounting officer should be guided by the
standards in box 3.1 in assessing whether there is a case for seeking a direction for any of the factors in
box 3.2. It is essential that accounting officers seek good outcomes for the Exchequer as a whole,
respecting the key principles of transparency and parliamentary approval for management of public
resources.

3.11.2. In addition, there may be occasions where it is necessary to respond urgently to events, reducing
the time available for analysis and requiring the accounting officer to make an assessment. In such
circumstances, all available options may carry more uncertainty and more risk than would be acceptable
in more normal times.

20

Here, in assessing value for money and feasibility, the accounting officer must assess the relative merits
and costs of alternatives (including doing nothing).

3.11.3. Sometimes, it is possible to do no more than identify the scale of the problem to be tackled and
then examine why the proposed action should both be effective and have tolerable cost. Wherever
proposals or projects are taken forward, accounting officer should identify and assess risks, and design
and operate the most effective risk treatment activities (including controls) possible in the time
available. 3.11.4. The Treasury stands ready to help accounting officers think such issues through.

21
Chapter 4

Governance and Management

Public sector organisations should have good quality internal governance and sound financial
management. Appropriate delegation of responsibilities and effective mechanisms for internal reporting
should ensure that performance can be kept on track. Good practice should be followed in procuring
and managing resources and assets; hiring and managing staff; and deterring waste, fraud and other
malpractice. Central government departments have some specific responsibilities for reporting,
including to parliament.

4.1.1 Each public sector organisation should establish governance arrangements appropriate to its
business, scale and culture. The structure should combine efficient decision making with accountability
and transparency.

4.1.2 In doing so, central government departments should be guided by the Corporate Governance
Code3. Each public sector organisation needs clear leadership, normally provided by a board. Box 4.1
sets out best practice for departmental boards.

Box 4.1: best practice for boards in central government departments

chaired by the department's most senior minister, with junior ministers as members comparable
numbers of official and non-executive members, including a lead non- executive and a professionally
qualified finance director (see annex 4.1)

meeting at least quarterly

sets the department's strategy to implement ministers' policy decisions leads the department's business
and determines its culture

ensures good management of the department's resources – financial, assets, people

decides risk appetite and monitors emerging threats and opportunities

steers performance to keep it on track using regularly updated information about progress

keeps an overview of its ALBs' activities

4.1.3 It is good practice for ALBS to use similar principles. In many ALBs some structural features, such as
board composition, derive from statute but considerable discretion may remain. In some organisations it
is usual, or found valuable, for the board to include members with designated responsibility or
expertise, eg for regional affairs or for specialist professional skills.

4.1.4 In order to carry out its responsibilities each board needs to decide, and document, how it will
operate. Box 4.2 outlines the key decisions. It is not
3 https://www.gov.uk/government/publications/corporate-governance-code-for-central-government-
departmentsfor both the code and the good practice guidance

22

exhaustive. Once agreed, the working rules should be reviewed from time to time to keep them
relevant. Boards should challenge themselves to improve their working methods, so that their processes
can achieve and maintain good modern business practice.

Box 4.2: key decisions for boards

mission and objectives

delegations and arrangements for reporting performance

procedures and processes for business decision making

scrutiny, challenge and control of significant policies, initiatives and projects

risk appetite and risk control procedures, eg maintaining and reviewing a risk register

control and management of associated ALBS and other partnerships

arrangements for refreshing the board

arrangements for reviewing the board's own performance

accountability - to the general public, to staff and other stakeholders (see section 4.13)

how the insights of non-executives can be harnessed

how often the board's working rules will be reviewed

4.2 Working methods

4.2.1 The accounting officer of each organisation is accountable to parliament for the quality of the
administration that they leads. The administrative standards expected are set out in the Civil Service
Code4 and the Ombudsman's Principles of Public Administration5. They allow considerable flexibility to
fit with each organisation's obligations and culture. It is against these standards that failure to deliver is
assessed.

4.2.2 Another fundamental concept is the Treasury's leadership position in

managing public expenditure, and setting the rules under which departments and their ALBS should
deploy the assets, people and other resources under their control. In turn each public sector
organisation should have robust and effective systems for their internal management. Box 4.3 outlines
the key decisions each organisation needs to make.

4.2.3 To help the Treasury carry out this task properly:

departments should provide the Treasury with accurate and timely

information about in-year developments - their expenditure,

performance against objectives and evolution of risk (eg serious unforeseen events or discovery of
fraud);

ALBs should provide their sponsor departments with similar information; and

4 http://www.civilservice.gov.uk/about/values

5 http://www.ombudsman.org.uk/improving-public-service/ombudsmansprinciples

23

the established mechanisms for controlling and reporting public

expenditure, including Treasury support or approval where necessary, should be respected.

4.2.4 In particular, departments should consult the Treasury (and ALBs their sponsor departments) at an
early stage about proposals to undertake unusual transactions or financing techniques. This applies
especially to any transactions which may have wider implications elsewhere in the public sector (see
paragraph 2.3.4 and box 2.3). 4.2.5 Working with the accounting officer, the finance director of each
public sector organisation has special responsibility for seeing that the standards described in this
chapter are respected. Annex 4.1.sets this out in more detail.

Box 4.3: essentials of effective internal decision making

choice

active management of the portfolio of risks and opportunities

appraisal of alternative courses of action using the techniques in the Green Book, and including
assessment of feasibility to achieve value for money

where appropriate, use of models (see annex 4.2) or pilot studies to provide evidence on which to make
decisions among policy or project choices

active steering of initiatives, eg reviews to take stock at critical points of projects

operation

appropriate internal delegations, with a single senior responsible officer (SRO) for each significant
project or initiative, and a single senior person leading each end to end process

prompt, regular and meaningful management information on costs (including unit costs), efficiency,
quality and performance against targets to track progress and value for money

proportionate administration and enforcement mechanisms, without unnecessary complexity

use of feedback from internal and external audit and elsewhere to improve performance regular risk
monitoring, to track performance and experience and make adjustments in response

afterwards

mechanisms to evaluate policy, project and programme outputs and outcomes, including whether to
continue, adjust or end any continuing activities arrangements to draw out and propagate lessons from
experience

4.3 Opportunity and risk

4.3.1 Embedded in each public sector organisation's internal systems there should be arrangements for
recognising, tracking and managing its opportunities and risks. Each organisation's governing body
should make a considered choice about its desired risk appetite, taking account of its legal obligations,
ministers' policy decisions, its business objectives, and public expectations of what it should deliver.

24

This can mean that different organisations take different approaches to the same opportunities or risks.

4.3.2 There should be a regular discipline of reappraising the opportunities and risks facing the
organisation since both alter with time and circumstances, as indeed may the chosen responses. This
process should avoid excessive caution, since it can be as damaging as unsuitable risk taking. The
assessment should normally include:

maintaining a risk register, covering identified risks and contingent risks from horizon scanning;

reputational risks, since poor performance could undermine the credibility, and ultimately the
creditworthiness, of the Exchequer as a whole;

consideration of the dangers of maintaining the status quo;

plans for disaster recovery;

appraisal of end to end risks in critical processes and other significant activities.

4.3.3 In making decisions about how to manage and control opportunity and risk, audit evidence and
other assurance processes can usefully inform choice. Audit, including internal audit, can provide
specific, objective and well-informed assurance and insight to help an organisation evaluate its
effectiveness in achieving its objectives. It is good practice for the audit committee to advise the
governing board of a public sector organisation on its key decisions on governance and managing
opportunities and risks. It is also a good discipline for this process to include evaluating progress in
implementing PAC recommendations, where they have been accepted.

4.3.4 In turn the board should support the accounting officer in drawing up the governance statement,
which forms part of each organisation's annual accounts. See annex 3.1. Further guidance about
managing risks is in annex 4.3 and the Orange Book.

4.4 Insurance

4.4.1 In the private sector risk is often managed by taking out insurance. In central government it is
generally not good value for money to do so. This is because the public sector has a wide and diverse
asset portfolio; a reliable income through its ability to raise revenue through taxation; and access to
borrowed funds more cheaply than any in the private sector. In addition commercial providers of
insurance also have to meet their own costs and profit margins. Hence the public purse is uniquely able
to finance restitution of damaged assets or deal with other risks, even very large ones. If the
government insured risk, public services would cost more. 4.4.2 However, there are some limited
circumstances in which it is appropriate for public sector organisations to insure. They include legal
obligations, and occasions

6 Eg ALBs should insure vehicles where the Road Traffic Act requires it

25

where commercial insurance would provide value for money. Further information about insurance
generally is in annex 4.4.

4.5 Control of public expenditure

4.5.1 The Treasury coordinates a system through which departments are allocated budget control totals
for their public expenditure. Each department's allocation covers its own spending and that of its
associated ALBS. Within the agreed totals, it has considerable discretion over setting priorities to deliver
the public services for which it is responsible.
4.5.2 Each public sector organisation should run efficient systems for managing payments (see box 4.4).
It should also keep its use of public resources within the agreed budgets, take the limits into account
when entering into commitments, and generally ensure that its spending profile is sustainable.

4.5.3 Any major project, programme or initiative should be led by a senior responsible owner (SRO). It is
good practice to aim for continuity in such appointments.

Box 4.4: essentials of systems for committing and paying funds

Selection of projects after appraisal of the alternatives (see the Green Book), including the central
clearance processes for larger commitments.

Open competition to select suppliers from a diverse range, preferably specifying outcomes rather than
specific products, to achieve value for money (see annexes 4.6 and 4.7).

Where feasible, procurement through multi-purchaser arrangements, shared services and/or standard
contracts to drive down prices.

Effective internal controls to authorise acquisition of goods or services (including vetting new suppliers),
within any legal constraints.

Separation of authorisation and payment, with appropriate controls, including validation and recording,
at each step to provide a clear audit trail.

Checks that the goods or services acquired have been supplied in accordance with the relevant
contract(s) or agreement(s) before paying for them.

Payment terms chosen or negotiated to provide good value.

Accurate payment of invoices: once and on time, avoiding lateness penalties (see annex 4.8).

A balance of preventive and detective controls to tackle and deter fraud, corruption and other
malpractice (see annex 4.9).

Integrated systems to generate automatic audit trails which can be used to generate accounts and
which both internal and external auditors can readily check.

Periodic reviews to benefit from experience, improve value for money or to implement developments in
good practice.

7 Eg where private sector contractors take out single-site insurance policies because they are cheaper
than each individual party

insuring themselves separately.

8 See annex 4.5.

26

4.6 Receipts

4.6.1 Public sector organisations should have arrangements for identifying, collecting and recording all
amounts due to them promptly and in full. Outstanding amounts should be followed up diligently. Key
features of internal systems of control are suggested in box 4.5.

4.6.2 Public sector organisations should take care to track and enforce debts promptly. The presumption
should be in favour of recovery unless it is uneconomic to do so.

Box 4.5: essential features of systems for collecting sums due

Adequate records to enable claims to be made and pursued in full. Routines to prevent unauthorised
deletions and amendments to claims.

Credit management systems to manage and pursue amounts outstanding. Controls to prevent diversion
of funds and other frauds.

Clear lines of responsibility for making decisions about pressing claims increasingly more firmly, and for
deciding on any abatement or abandonment of claims which may be merited.

Arrangements for deciding upon and reporting any write-offs (see annex 4.10). Audit trails which can
readily be checked and reported upon both internally and externally.

4.7 Non-standard financial transactions

4.7.1 From time to time public sector organisations may find it makes sense to carry out transactions
outside the usual planned range, eg:

write-offs of unrecoverable debts or overpayments;

recognising losses of stocks or other assets;

long term loans or gifts of assets.

4.7.2 In each case it is important to deal with the issue in the public interest, with due regard for probity
and value for money. Annexes 4.10 to 4.12 set out what is expected when such transactions take place
in central government, including notifying parliament.

4.7.3 Where an organisation discovers an underpayment, the deficit should be made good as soon as is
practicable and in full. If there has been a lapse of time, for example caused by legal action to establish
the correct position, it may be appropriate to consider paying interest, depending on the nature of the
commitment to the payee and taking into account the reputation of the organisation and value for
money for the Exchequer as a whole (see also section 4.11).

4.7.4 Similarly, public sector organisations may have reason to carry out current transactions which
would not normally be planned for. These might be:

extra contractual payments to service providers;

27

extra-statutory payments to claimants (where a similar statutory scheme exists);

ex gratia payments to customers (where no established scheme exists);

or

severance payments to employees leaving before retirement or before the end of their contract and
involving payments above what the relevant pension scheme allows.

4.7.5 Again it is important that these payments are made in the public interest, objectively and without
favouritism. The disciplines parliament expects of central government entities are set out in annex 4.13,
which explains the notification procedure to be followed for larger one-off transactions of this kind. The
steps to be considered when setting up statutory or extra-statutory compensation schemes are
discussed in annex 4.14.

4.8 Unusual circumstances

4.8.1 Sometimes public sector organisations face dilemmas in meeting their commitments. They may
have a legal or business obligation which would be uneconomic or inappropriate to carry out assiduously
to the letter. In such cases it can be justifiable to seek a pragmatic, just and transparent alternative
approach, appropriately reported to parliament in the organisation's annual accounts. One-off schemes
of this kind are always novel and so require Treasury approval, not least because they may also require
legislation or have to rest on the authority of a Supply and Appropriation Act (see section 2.5). Box 4.6
suggests precedented examples.

Box 4.6: examples of one-off pragmatic schemes

A court ruling could mean that a public sector organisation owed each of a large number of people a
very small sum of money. The cost of setting up and operating an accurate payment scheme might
exceed the total amount due. The organisation could instead make a one-off payment of equivalent
value to a charity representing the recipient group.

A dispute with a contractor might conclude that the contractor owed a public sector organisation an
amount too big for it to meet in a single year while staying solvent. The customer might instead agree
more favourable payment terms, with appropriate safeguards, if this arrangement provides better value
for money.

4.9 Staff

4.9.1 Each public sector organisation should have sufficient staff with the skills and expertise to manage
its business efficiently and effectively. The span of skills required should match the organisation's
objectives, responsibilities and resources, balancing professional, practical or operational skills and
policy makers, and recognising the value of each discipline. Succession and disaster planning should
ensure that the organisation can cope robustly with changes in the resources available, including
unforeseen disruption.

4.9.2 Public sector organisations should seek to be fair, honest and considerate employers. Some
desirable characteristics are suggested in box 4.7.

28

Box 4.7: public sector organisations as good employers

selection designed to value and make good use of talent and potential of all kinds fairness, integrity,
honesty, impartiality and objectivity

professionalism in the relevant disciplines, always including finance

arrangements to make sure that staff are loaded cost effectively

management techniques balancing incentives to improve and disciplines for poor performance

diversity valued and personal privacy respected

mechanisms to support efficient working practices, both normally and under pressure arrangements for
whistleblowers to identify problems privately without repercussions.

4.9.3 Similarly public sector employers have a right to expect good standards of conduct from their
employees. The qualities and standards expected of civil servants are set out in the Civil Service Code.
Other public sector employees should strive for similar standards, appropriate to their context.

4.10 Assets
4.10.1 All public sector organisations own or use a range of assets. Each organisation needs to devise an
appropriate asset management strategy to define how it acquires, maintains, tracks, deploys and
disposes of the various kinds of assets it uses. Annex 4.15 discusses how to set up and use such a
strategy.

4.10.2 It is good practice for public sector organisations to take stock of their assets from time to time
and consider afresh whether they are being used efficiently and deliver value for public funds. If there is
irreducible spare capacity there may be scope to use part of it for other government activities, or to
exploit it commercially for non-statutory business.

4.11 Standards of service

4.11.1 Poor quality public services are not acceptable. Public sector organisations should define what
their customers, business counterparties and other stakeholders can expect of them.

4.11.2 Standards can be expressed in a number of ways. Examples include guidelines (eg response
times), targets (eg take-up rates) or a collection of customer rights in a charter. Even where standards
are not set explicitly, they may sometimes be inferred from the way the provider organisation carries
out its responsibilities; so it is normally better to express them directly.

4.11.3 Whatever standards are set, they should be defined in a measurable way, with plans for
recording performance, so that delivery can be readily gauged. It is good practice to use customer
feedback, including from complaints, to reassess from time to time whether standards or their proxies
(milestones, targets, outcomes) remain appropriate and meaningful.

4.11.4 Where public sector organisations fail to meet their standards, or where they fall short of
reasonable behaviour, it may be appropriate to consider offering remedies. These can take a variety of
forms, including apologies, restitution (eg

29

supplying a missing licence) or, in more serious cases, financial payments. Decisions about financial
remedies - which should not be offered routinely - should include taking account of the legal rights of
the other party or parties and the impact on the organisation's future business.

4.11.5 Any such payments, whether statutory or ex gratia, should follow good practice (see section
4.13). Since schemes of financial redress often set precedents or have implications elsewhere, they
should be cleared with the Treasury before commitments are made, just as with any other public
expenditure out of the normal pattern (see sections 2.1 to 2.4).

4.12 Complaints

4.12.1 Those public sector organisations which deal with customers directly should strive to achieve
clear, accurate and reliable standards for the products and services they provide. It is good practice to
arrange for complaints about performance to be reviewed by an independent organisation such as an
ombudsman.

4.12.2 Often such review processes are statutory. The activities of central government departments and
the NHS are open to review by the PHSO9, whose Principles of Good Complaints Handling10 sets out
generic advice on complaints handling and administration of redress (see also annex 4.14). After
investigation of cases of specific complaint, the PHSO can rule on whether injustice or hardship can be
attributed to maladministration or service failure, and may recommend remedies, either for individual
cases or for groups of similar cases. If departments decline to follow the PHSO's advice, they should lay a
memorandum in parliament explaining why.

4.13 Transparency

4.13.1 All public sector organisations should operate as openly as is compatible with the requirements of
their business. In line with the statutory public rights11, they should make available timely information
about their services, standards and performance. This material should strike a careful balance between
protecting confidentiality and open disclosure in the public interest.

4.13.2 All public sector organisations should adopt a publication scheme routinely offering information
about the organisation's activities. They should also publish regular information about their plans,
performance and use of public resources. 4.13.3 The published information should be in sufficient detail,
and be sufficiently regular, to enable users and other stakeholders to hold the organisation and its
ministers to account. Benchmarks can help local users to evaluate local performance more easily.

4.13.4 The primary document of record for central government departments is the report and accounts,
which should consolidate information about the relevant ALBs. It should include a governance
statement (see annex 3.1).

9 http://www.ombudsman.org.uk/

10 http://www.ombudsman.org.uk/improving-public-service/ombudsmansprinciples

11 Eg Freedom of information act 2000, Data protection act 1998, Environment information regulations
2004 and the Re-use of public sector information regulations 2005.

30

4.13.5 In addition, the Treasury is responsible for publishing certain aggregate information about use of
public resources, for example Whole of Government Accounts (WGA) consolidating all central and local
government organisations' accounts and comparisons of outturn with budgets. The Office for National
Statistics (ONS) also uses input from data gathered by the Treasury to publish the national accounts.
4.13.6 In certain areas of public business it is also important or desirable to provide adequate public
access to physical assets. Unnecessary or disproportionate restrictions should be avoided. Managed
properly, this can be a valuable mechanism to promote inclusion and enhance public accountability.

4.14 Dealing with initiatives

4.14.1 Public sector organisations need to integrate all the advice in this handbook when introducing
new policies or planning projects. Each is unique and will need bespoke treatment. The checklist in box
4.8 brings the different factors together. It applies directly to central government organisations but the
principles will be of value elsewhere.

31

Box 4.8: factors to consider when planning policies or projects

design

• Has the proposal been evaluated against alternative options, including doing nothing? • Should there
be pilot testing before full roll out?

• Are the controls agreed and documented clearly? Have the risks and opportunities been considered
systematically? Is the change process resilient to shocks? What contingencies might arise?

• Is the intended intervention proportionate to the identified need?

• What standards should be achieved? How will performance be tracked and assessed? Could the
proposal be simplified without loss of function?

• If partner(s) are involved, is the allocation of responsibilities appropriate?

• Will the proposal be efficient, effective and offer good value for money?

• Is the policy sustainable in the broadest sense? Should it have a sunset clause?

• Does the planned activity meet high standards of probity, integrity and honesty?

• Will the proposal deliver the desired outcome to time and cost?

• Does the accounting officer assess the initiative as compatible with the public sector standards?

control

• What prior agreement is required, if any?

• How will internal governance and delegation work? Will it be effective? Is it transparent? Should there
be an SRO?
• Is there adequate legislation? If not, what is needed to make the action lawful?

• How will the proposal be financed? Is there budget and Estimate cover? Is it appropriate to charge to
help finance the service? Are charges set within the law?

• Is the proposed action within the department's delegated authorities?

• What financial techniques will be used to manage rollout, implementation and operation?

• Are project and programme management techniques likely to be useful?

• How will the intended new arrangements be monitored and efficiency measured?

• How will feedback be used to improve outcomes?

• Does the design inhibit misuse and counter fraud? What safeguards are needed?

• Has the risk of fraud been assessed to help inform policy or project design?

• How will the associated risks be tracked and the responses adjusted?

• What intervention will be possible if things go off track?

• Would it be possible to recover from a disaster promptly?

accountability

• How should parliament be told of the proposal and kept informed of progress?

• What targets will be used? Are they sufficiently stretching?

• Is public access called for? How?

• Is the policy or service fair and impartial?

• Will its administration be open, transparent and accessible?

• Should there be customer standards? How are complaints used to improve performance?

• Should there be arrangements for redress after poor delivery?

• Is enforcement required? If so, is it proportionate?

• Is an appeal mechanism needed?

• Is regulation called for?

learning lessons

• What audit arrangements (internal and external) are intended?

• What information about the activity will be published? How and how often?

• When and how will the policy or project be evaluated to assess its cost and benefits and to

determine whether it should continue, be adjusted, replaced or ceased?

22

32

Chapter 5 Funding

This chapter explores the means by which central government organisations may obtain funds in order
to finance public expenditure. The Treasury operates disciplines to respect parliament's concern to
prevent unauthorised expenditure.

5.1.1 Most public expenditure is financed from centrally agreed multi-year budgets administered by the
Treasury, which oversees departments' use of their budget allocations. In the main, departments have
considerable discretion about how they distribute these budget allocations, which are expressed net of
relevant income. The main source of receipts to be netted off is fees and charges (see chapter 6).

5.1.2 The Treasury oversees and directs the rules that departments should respect in managing their
budgets. Departments are expected to live within their allocations for each financial year, with some
limited exceptions, eg for certain demand led services. The budgeting framework is explained in the
Consolidated Budgeting Guidance, which is refreshed each year.

5.2 Grants

5.2.1 Each central government department decides how much of its budget provision it should cascade
to its ALBs in each year of the multi-year agreement. Departments may pay them grants (for specific
purposes) and grants-in-aid (unspecific support) to finance their spending; though it is the net spending
of the ALB that scores in the departmental budget. Annex 5.1 explains more about grants. 5.2.2 Budgets
and Estimates plan net spending and include all spending of ALBs however it is financed. In general it is
sensible to consider arrangements for protecting the Exchequer interest through clawback of specific
grants should the purposes for which they are agreed not materialise (annex 5.2).

5.3 Estimates

5.3.1 The multiyear departmental budgets agreed collectively among ministers do not of themselves
confer authority to spend or commit resources. Parliamentary agreement, usually through the Supply
Estimate process, is also essential (see box 2.1).

5.3.2 Departmental Estimates are put to parliament covering one financial year at a time, in the spring.
Each covers the net expenditure of a department and its ALBs (ie all spending in budgets and any voted
spend outside of budgets). For the year ahead, the provision sought should be taut and realistic, without
padding. The Supply and Estimates Guidance Manual has more detail.

33

5.3.3 Before the summer recess, the provision sought in the Estimate is formally authorised in a Supply
and Appropriation Act, which sets net expenditure limits for the year. The Act is then the legal authority
for public expenditure within the ambit of the Estimate. The ambit itemises a specific range of permitted
activities and income streams for the year.

5.3.4 Within a financial year, there is some scope for transferring (through virement) provision from one
section or subhead to another within any of the control limits in the same Estimate. There is scope for
adjusting Estimate provision through a Supplementary Estimate late in the year if circumstances change.
A Supplementary Estimate should show all movements between sections, even if they would otherwise
have been dealt with through virement.

5.3.5 Departmental Select Committees may examine departmental witnesses on the plans contained in
Estimates. Usually such hearings take place after Estimates are laid in parliament but before they are
voted into law.

5.3.6 If there is underspending against Estimate provision in one year, it cannot automatically be carried
forward to a later year. If a department wants to spend resources it did not consume in a previous year,
it needs Treasury approval and must also obtain fresh parliamentary authority to spend in the year(s)
concerned.

5.3.7 Like budgets, Estimates are set net of income. But parliament needs to be made aware of receipts
since Estimates authorise gross expenditure, normally using statutory powers. Annex 5.3 explains more
about of types of receipt. Chapter 6 contains guidance about setting and adjusting fees and charges.

5.3.8 Occasionally an Estimate sets a negative limit for permitted resources. This happens if income is
expected to exceed the relevant gross expenditure. Similarly a Supplementary Estimate can be negative
if provision for spending is to fall within a given year.

5.3.9 A department's Estimate for a year includes all spending within its agreed budget for that year, as
well as any voted non-budget spending. Not all of this amount requires voted parliamentary approval
since some items, such as Consolidated Fund Standing Services, are paid direct from the Consolidated
Fund. Hence only the voted parts of the Estimate requiring parliamentary approval appear in the Supply
and Appropriation Act. Of course the disciplines on public funds (box 3.1) apply to all the activities
described in the Estimate and accounts whether within the Act or not.

5.4 Excess Votes

5.4.1 Accounting officers have an important role in overseeing the integrity of the Estimates for which
they are responsible. In particular, accounting officers are responsible for ensuring that Estimates are in
good order (see section 2.2).

5.4.2 The Treasury presents parliament each year with a Statement of Excesses to request retrospective
authority for any unauthorised resources consumed above the relevant limits or outside the ambit of
the Estimate. Parliament takes these excesses seriously. The PAC or departmental select committee may
call witnesses to account in person or ask for a written explanation.

5.4.3 The Statement of Excesses includes two kinds of excess:

34

5.3.3 Before the summer recess, the provision sought in the Estimate is formally authorised in a Supply
and Appropriation Act, which sets net expenditure limits for the year. The Act is then the legal authority
for public expenditure within the ambit of the Estimate. The ambit itemises a specific range of permitted
activities and income streams for the year.

5.3.4 Within a financial year, there is some scope for transferring (through virement) provision from one
section or subhead to another within any of the control limits in the same Estimate. There is scope for
adjusting Estimate provision through a Supplementary Estimate late in the year if circumstances change.
A Supplementary Estimate should show all movements between sections, even if they would otherwise
have been dealt with through virement.

5.3.5 Departmental Select Committees may examine departmental witnesses on the plans contained in
Estimates. Usually such hearings take place after Estimates are laid in parliament but before they are
voted into law.

5.3.6 If there is underspending against Estimate provision in one year, it cannot automatically be carried
forward to a later year. If a department wants to spend resources it did not consume in a previous year,
it needs Treasury approval and must also obtain fresh parliamentary authority to spend in the year(s)
concerned.

5.3.7 Like budgets, Estimates are set net of income. But parliament needs to be made aware of receipts
since Estimates authorise gross expenditure, normally using statutory powers. Annex 5.3 explains more
about of types of receipt. Chapter 6 contains guidance about setting and adjusting fees and charges.

5.3.8 Occasionally an Estimate sets a negative limit for permitted resources. This happens if income is
expected to exceed the relevant gross expenditure. Similarly a Supplementary Estimate can be negative
if provision for spending is to fall within a given year.

5.3.9 A department's Estimate for a year includes all spending within its agreed budget for that year, as
well as any voted non-budget spending. Not all of this amount requires voted parliamentary approval
since some items, such as Consolidated Fund Standing Services, are paid direct from the Consolidated
Fund. Hence only the voted parts of the Estimate requiring parliamentary approval appear in the Supply
and Appropriation Act. Of course the disciplines on public funds (box 3.1) apply to all the activities
described in the Estimate and accounts whether within the Act or not.

5.4 Excess Votes

5.4.1 Accounting officers have an important role in overseeing the integrity of the Estimates for which
they are responsible. In particular, accounting officers are responsible for ensuring that Estimates are in
good order (see section 2.2).

5.4.2 The Treasury presents parliament each year with a Statement of Excesses to request retrospective
authority for any unauthorised resources consumed above the relevant limits or outside the ambit of
the Estimate. Parliament takes these excesses seriously. The PAC or departmental select committee may
call witnesses to account in person or ask for a written explanation.

5.4.3 The Statement of Excesses includes two kinds of excess:

•spending above the amount provided in an Estimate; and

irregular expenditure outside the ambit, eg on an unauthorised service.

5.4.4 Parliament usually regards the latter as particularly unsatisfactory because it means that the
department concerned has flouted parliament's intentions12 and may have defective systems of
control. The auditor may identify such excesses as spending not covered by statutory powers, even if the
total amount spent does not exceed the voted limit.

5.4.5 Expenditure in excess of provision on an activity agreed by parliament is also to be avoided since
the authority of a Supply and Appropriation Act is just as essential as specific statutory authority (box
2.1). It is possible, with Treasury agreement, to raise the amount in an Estimate during the course of the
year in a Supplementary. But otherwise accounting officers should reduce, reprioritise or postpone use
of resources to keep within the provision parliament has agreed for the year.

5.5 Commitments

5.5.1 Parliament is not bound 13 to honour ministers' commitments unless and until there are statutory
powers to meet them and it authorises public funds to finance them (through an Estimate) in a given
year. This discipline is especially important when ministers plan a new service.

5.5.2 Because commitments can evolve into spending, they should always be scrutinised and appraised
as stringently as proposals for consumption (box 4.8 may help). Some departments may agree with the
Treasury blanket authority for defined and limited ranges of non-statutory commitments, eg indemnities
for board members and commitments taken on the normal course of business. All other non statutory
commitments are novel, contentious or repercussive, so Treasury approval is always essential before
they are undertaken.
5.5.3 Public sector organisations should give parliament prompt and timely notice of any significant new
commitments, whether using existing statutory powers or to be honoured through future legislation.
Non statutory contingent liabilities (above a specified threshold) should always be notified in this way.
The process is set out in annex 5.4.

patterns; but persistent underperformance against the agreed rate of return should not be tolerated.

5.7.3 A department needs specific statutory power to issue PDC, together with supply cover to pay it out
of the Consolidated Fund. Sometimes instead of a specific issue of PDC, the legislation establishing (or
financially reconstructing) a public sector business deems an issue of PDC to the new business.
Dividends on PDC, and any repayments of PDC, are paid to the sponsor department of the business.

5.7.4 Further information about the use of PDC can be found in Consolidated Budgeting guidance.15

5.8 Borrowing by public sector organisations

5.8.1 Some public sector organisations, eg certain trading funds, are partly financed through loans
provided through the sponsor department's Estimate; or from the National Loans Fund (NLF). In these
cases Treasury consent and specific legal powers are always required. Limits and other conditions are
common. See annex 5.5 for more.

5.8.2 NLF and Voted loans can only be made if there is reasonable expectation that the loan will be
serviced and repaid promptly. Similarly, when ALBS borrow, their sponsor departments explicitly stand
behind them and so should scrutinise borrowers' creditworthiness, not just relying on their track
records, in order to satisfy themselves that such loans are sound. For NLF loans, if timely repayment
could not realistically be expected, the loan would be unlawful.

5.8.3 Should a department become aware of concerns about the security of outstanding loans (either its
own or an ALB's), it should warn the Treasury promptly and consider what action it can take to reduce or
otherwise mitigate any potential loss. If a loan becomes irrecoverable, remedial treatment should be
agreed with the Treasury and then notified to parliament.

5.8.4 The NLF cannot make a loss. So the interest rates charged on NLF loans, whether fixed or variable,
must be higher than the rates at which the NLF could raise funds for a similar period. Early repayment is
sometimes possible, eg if the borrower has windfall receipts, but never simply to refinance on terms
more favourable to the borrower because a fee is charged to match the Exchequer costs when a loan
ends early. This is because the NLF finances the amount outstanding using money market instruments
sold at the time the loan was made, and must continue to service those instruments. So the Exchequer
as a whole would make a loss if the NLF offered cheaper replacement loans.

5.8.5 While NLF loans are repaid to the NLF, voted loans are repaid to the Consolidated Fund. The
treatment of repayments and interest payments in Estimates and accounts is discussed in the
Consolidated Budgeting Guidance, the Estimate Manual and the FREM. The Treasury accounts for NLF
transactions in the NLF's accounts. Any proposed write-offs must be notified to parliament after
obtaining Treasury agreement: see annex 5.5
15 https://www.gov.uk/government/publications/consolidated-budgeting-guidance-2021-to-2022

5.9 External borrowing

5.9.1 Public sector organisations may borrow from private sector sources only if the transaction delivers
better value for money for the Exchequer as a whole. Because non-government lenders face higher
costs, in practice it is usually difficult to satisfy this condition unless efficiency gains arise in the delivery
of a project (eg PFI). Treasury agreement to any such borrowing, including by ALBS, is also essential.
Nevertheless it can sometimes be expedient for public sector bodies to borrow short term, for example
by overdraft.

5.9.2 When a sponsor department's ALB borrows, the department should normally arrange to guarantee
the loan to secure a fine rate. This is not always possible, eg when a guarantee would rank as a state aid
(see annex 4.7). A department which guarantees a loan normally16 needs a specific statutory power as
well as Estimate provision. On exceptional occasions temporary non-statutory loans may be possible.
5.9.3 The case for a guarantee should be scrutinised as thoroughly as if indeed a loan were made. Since
guarantees always entail entering into contingent liabilities, parliament must be notified when a loan
guarantee is given, using the reporting procedures in annex 5.4.

5.9.4 Occasionally there is a case for an ALB to borrow in foreign currency in its own name rather than
the government's. Because this can affect the credit standing of the government as a sovereign
borrower, and may well cost more, it is essential to consult the Treasury beforehand. The same
principles apply to the borrowing of any bodies, such as subsidiaries, for which a department's ALBS are
responsible.

5.10 Multiple sources of funding

5.10.1 Sometimes public sector organisations derive funding from more than one source. Examples of
funding other than voted funds include national insurance contributions (which are dedicated to the
National Insurance Fund), lottery funding and charitable funding. All of these alternatives usually come
with specific conditions attached.

5.10.2 Organisations in this position should segregate and account separately for the different streams
of funding so that they can apply the relevant terms and conditions to each. In particular, where a
source of funding is designated to a particular purpose, it is rarely appropriate to use another instead. In
those circumstances switching is novel and contentious and thus requires Treasury approval.

5.10.3 When there is doubt about how to handle multiple streams of funding, it is good practice to
consult the Treasury.

5.11 Cash management

5.11.1 The various organisations in central government together handle very large flows of public funds.
At the end of each working day, the Exchequer must either borrow from the money market or place
funds on deposit with the money market,
16 The Concordat applies here in just the same way as to spending - see annex 2.3

38

depending on the net position reached after balancing outflows to finance expenditure against inflows
from taxes and other sources.

5.11.2 So there is considerable advantage to be gained for the Exchequer as a whole by minimising this
net position. In practice this means gathering balances together at the end of each working day. In
aggregate all these accounts make up the Exchequer Pyramid, managed by the Treasury. Most funds are
held with the Government Banking Service.

5.11.3 It is essential for central government organisations to minimise the balances in their own
accounts with commercial banks. Were each to retain a significant sum in its own account with such
banks, the amount of net government borrowing outstanding on any given day would be appreciably
higher, adding to interest costs and hence worsening the fiscal balance.

5.11.4 Each central government organisation should establish a policy for its use of banking services. See
annex 5.6 for guidance. Sponsor departments should also make sure that their ALBS are aware of the
importance of managing this aspect of their business efficiently and effectively (see box 7.2).

5.12 Other financing techniques

5.12.1 Depending on its circumstances, purposes and risk profile, a public sector organisation may
consider using financial instruments provided by the commercial markets. Among these techniques are
foreign currency transactions and various hedging instruments designed to control or limit business
risks, for example those arising out of known requirements for specific future purchases of market
priced commodities. Mundane possibilities are use of credit or debit cards, in order to secure faster
settlements.

5.12.2 As with making decisions about other policies and projects, an organisation considering using
unfamiliar financing techniques should evaluate them carefully, especially to assess value for money.
The checklists in boxes 4.5 and 4.6 have reminders of factors that may need to be considered. As such
transaction(s) are almost always novel, contentious or repercussive, it is essential to consult the
Treasury.

5.12.3 Any organisation using a new or non-standard technique should ensure that it has the
competence to manage, control and track its use and any resulting financial exposures, which may vary
with time. In particular, departments should consult the Treasury before using derivatives for the first
time (and ALBs their sponsoring departments).

5.12.4 When assessing an unfamiliar financing technique, it is important to remember that providers of
finance and complex financial instruments intend to profit from their business. And providers' costs of
finance are always inferior to the UK government's cost of borrowing. So it is usually right to be cautious
about any novel techniques. The Treasury will always refuse proposals to speculate. Offers which appear
too good to be true usually are.

5.12.5 As with managing other business, parliament may ask accounting officers to justify any decisions
about use of financial transactions, especially if with hindsight they have not achieved good value for
money.

39

6.2.2 This approach is simply intended to make sure that the government neither profits at the expense
of consumers nor makes a loss for taxpayers to subsidise. It requires honesty about the policy objectives
and rigorous transparency in the public interest.

6.2.3 As elsewhere, organisations supplying public services should always seek to control their costs so
that public money is used efficiently and effectively. The impact of lower costs should normally be
passed on to consumers in lower charges. Success in reducing costs is no excuse for avoiding the
principles in this guidance.

6.2.4 This chapter applies to all fees and charges set by ministers and by an extensive range of public
bodies: departments, trading funds, NDPBs, the NHS, non- devolved services in Scotland, Wales and
Northern Ireland, and most public corporations. Departments should be able to satisfy themselves that
their ALBs can deliver the financial objectives for the services they charge for. This chapter also applies
when one public organisation supplies another with goods or services; and to certain statutory local
authority charges set by ministers.

6.3 Setting a charge: standard practice

6.3.1 When a charge for a public service is to be made, it is normally necessary to rely on powers in
primary legislation. The legislation should be designed so that ministers decide, or have significant
influence over, both the structure of the charge and its level. It is common to frame primary legislation
in general terms, using secondary legislation to settle detail.

6.3.2 Treasury consent is required for all proposals to extend or vary charging schemes. This holds even
if the primary legislation does not call for it, or the delegated authorities within which the organisation
operates would otherwise allow

it.

6.3.3 It is sometimes possible to rely on secondary legislation rather than primary to determine charges:

an order under $56 of the Finance Act 1973;

restructuring of charges can sometimes be achieved by an order under s102 of the Finance (no 2) Act
1987 (see box 6.1).

Box 6.1: restructuring charges using S.102

A s102 order can extend or vary powers in existing primary legislation.

It can permit restructuring by specifying factors to be taken into account when setting fees.

Explicit prior Treasury consent is always essential.

But

A s102 order cannot create a power for new charges where no primary legislation exists.

Nor can it lift restrictions in (or in any other way undermine) primary legislation. Parliament is usually
sceptical because s102 substitutes secondary for primary legislation.

41

6.3.4 When deciding the level of a charge, it is important to define:.

the range(s) of services for which a charge is to be made;

how any categories of service are to be differentiated, if at all, in setting charges.

6.3.5 The standard approach is that the same charge should apply to all users of a defined category of
service, so recovering full costs for that category of service. Different charges may be set for objectively
different categories of service costing different amounts to provide. Box 6.2 shows how this can work.

Box 6.2: how different charges can apply to different categories of service Different categories could be
recognised by:

distinguishing supply differences, eg in person, by post or online

priorities, eg where a quicker service costs more

quality, eg charging more for a premium service with more features

recognising structural differences, where it costs more to supply some consumers.

6.3.6 However, different groups of customers should not be charged different amounts for a service
costing the same, eg charging firms more than individuals. Similarly, cross subsidies are not standard
practice, eg charging large businesses more than small ones where the cost of supply is the same.
6.3.7 Charges within and among central government organisations should normally also be at full cost,
including the standard cost of capital. Any different approach would cause one party to make a profit or
loss not planned in budgets agreed by ministers collectively; while the customer organisation(s) would
conversely face charges higher or lower than full costs. A number of objectionable consequences might
flow from this. For instance, a question of state aid could arise; or private sector consumers of the
customer organisation might be charged distorted fees. 6.3.8 Shared services (box 6.3) are a special case
of charging within the public

sector.

Box 6.3: shared services

It is often possible to make economies of scale by arranging for several public service organisations to
join together to deliver services cheaper, eg by using their joint purchasing power. One organisation
supplies the other(s). Since all the parties should lower their costs, the accounting officer of each
organisation should have no difficulty in recognising improved value for money for the Exchequer as a
whole and so justify going ahead.

Public sector organisations supplying (or improving) shared services should consult the Treasury at an
early stage of planning. Typically supplier organisations face the cost of setting up provision on a larger
scale than they need for their own use. As with setting up any new service, plans in budgets should
amortise initial costs so that they can be recovered over an appropriate period from the start of the
service. More detail on shared services is in section 7.5.

It is not acceptable for supplier organisations to plan to profit from, or subsidise, supply to customer
organisations in the public sector. Nor is it acceptable for accounting officers to resist shared services
just because the impact on their own organisation is not perceived to be favourable.

42

6.4 Setting a charge: non-standard approaches

6.4.1 Ministers' policy objectives for a service where a charge is levied may not fit the standard model in
section 6.3. In such cases it may be possible to deliver the policy objective in another way. Some ways of
doing this are described below. Explicit Treasury consent, and often formal legal authority, is always
required for such variations. It is desirable to consult the Treasury at an early stage to make sure that
the intended strategy can be delivered.

Charging below cost

6.4.2 Where ministers decide to charge less than full cost, there should be an agreed plan to achieve full
cost recovery within a reasonable period. Each case needs to be evaluated on its merits and obtain
Treasury clearance. If the subsidy is intended to last, this decision should be documented and
periodically reconsidered.

Charging above cost

6.4.3 ONS normally classifies charges higher than the cost of provision, or not clearly related to a service
to the charge payer, as taxes. Such charges always call for explicit ministerial decision as well as specific
statutory authority. The Treasury does not automatically allow departments to budget for net
expenditure associated with above cost charges. Netting off, or netting off up to full costs, may be
agreed in certain instances, considering each case on its merits.

6.4.4 Sometimes when a change of this kind is classified as a tax, departments also propose to assign its
revenue. The Treasury always treat such proposals with caution (see 5.6.3).

Cross subsidies

6.4.5 Cross subsidies always involve a mixture of overcharging and undercharging, even if the net effect
is to recover full costs for the service as a whole. So cross subsidised charges are normally classified as
taxes. They always call for explicit ministerial decision and parliamentary approval through either
primary legislation or a s102 order.

Information services

6.4.6 In the public interest, information may be provided free or at low charge. This approach recognises
the value of helping the general public obtain the data they require to function in the modern world.
There are some exceptions - see annex 6.2. 6.5 Levies

6.5.1 Compulsory levies, eg payments for licences awarded by statutory regulators, or duties to finance
industry specific research foundations, are normally classified as taxation. Such levies may be justified in
the wider public interest, not because they provide a direct beneficial service to those who pay them.
Depending on the circumstances, the Treasury may allow regulators to retain the fees charged if this
approach is efficient and in the public interest.

6.5.2 As with other fees and charges, levies should be designed to recover full costs. If the legislation
permits, the charge can cover the costs of the statutory body, eg a

43

regulator could recover the cost of registration to provide a licence and of

associated supervision. It may be appropriate to charge different levies to different kinds of licensees,
depending on the cost of providing different kinds of licences (see box 6.2).

6.6 Commercial services

6.6.1 Some public sector services are discretionary, ie no statute underpins them. Services of this kind
are often supplied into competitive markets, though sometimes the public sector supplier has a
monopoly or other natural advantage.

6.6.2 Charges for these services should be set at a commercial rate. The rate should deliver a
commercial return on the use of the public resources deployed in supplying the service. So the financial
target should be in line with market practice, using a risk weighted rate of return on capital relevant to
the sector concerned. The rate of return used in pricing calculations for sales into commercial markets
should be:

for sales into commercial markets, in line with competitors' assessment of their business risk, rising to
higher rates for more risky activities; or

where a public sector body supplies another, or operates in a market without competitors, the standard
rate for the cost of capital (see annex 6.1).

6.6.3 If a publicly provided commercial service does not deliver its target rate of return, outstanding
deficits should be recovered, eg by adjusting charges. Any objective short of achieving the target rate of
return calls for ministerial agreement, and should be cleared with the Treasury. But discretionary
services should never undermine the supplier organisation's public duties, including its financial
objective(s).

6.6.4 It is important for public suppliers of commercial services to respect competition law. Otherwise
public services using resources acquired with public funds might disturb or distort the fair operation of
the market, especially where the public sector provider might be in a dominant position: see annex 6.3.

6.7 Disclosure

6.7.1 It is important that parliament is fully informed about use of charges. Each year the annual report
of the charging organisation should give:

the amounts charged

full costs and unit costs

total income received

the nature and extent of any subsidies and/or overcharging

the financial objectives and how far they have been met.
6.7.2 To keep parliament properly informed, Estimates should display details of expected income from
charges. The Estimates Manual explains how the controls work.

44

6.7.3 The FREM sets out the information public sector organisations should publish in their accounts. It
should include analysis of income.

6.8 Taking stock

6.8.1 As with any other use of public resources, it is important to monitor performance so that the
undertaking can be adjusted as necessary to stay on track. It is good practice to review the service
routinely at least once a year, to check, and if appropriate revise, the charging level. At intervals, a more
fundamental review is usually appropriate, eg on a timetable compatible with the dynamics of the
service. Box 6.4 suggests some issues to examine.

Box 6.4: reviewing a public service for which a charge is made

Is it still right for a public sector body to use public resources to supply the service? Are there any
related services for which there might be a case for charging?

Does the business structure still make sense? Are the assets used for the service adequate?

How can efficiency and effectiveness be improved so that charges can be lower or offer better value?

Is the financial objective right?

For a statutory (or other public sector) service, if full costs are not recovered, why not?

For a commercial service, does the target rate of return still reflect market rates?

Is it still appropriate to net off against costs any agreed charges above cost?

Is there scope to secure economies of scale by developing a shared service?

What developments might change the business climate?

Do any discretionary services remain a good fit for the business model and wider objectives?

Should any underused assets be redeployed, used to make a commercial return, or sold?
Would another business model (eg licensing, contracting out, privatising) be better?

45

Chapter 7

Working with others

It often makes sense for public sector organisations to work with partners to deliver public services. This
chapter outlines how sponsor departments should keep track of their ALBs, and where necessary
control their activities. It is important that the public interest and the need to keep parliament informed
are given priority in setting up and operating these relationships.

7.1 The case for working in partnership

7.1.1 Public sector organisations may be able to deliver public services more successfully if they work
with another body. Central government departments may find it advantageous to delegate certain
functions to ALBs that can be free to concentrate on them without conflict of interest. Or it may be
helpful to harness the expertise of a commercial or civil society sector organisation with skills and
leverage not available to the public sector.

7.1.2 Any such relationship inevitably entails tensions as well as opportunities. The autonomy of each
organisation needs to be buttressed by sufficient accountability to give parliament and the public
confidence that public resources are used wisely. 7.1.3 It can be important that an ALB is demonstrably
independent. This in itself does not determine the ALB's form or structure. Independence is achieved by
specifying how the ALB is to operate. Functional independence is compatible with financial oversight by
the ALB's parent department and with accountability.

7.1.4 It is generally helpful to deal with any potential conflicts head on by deciding at the outset how the
relationship(s) between the parties should work. The key issues to tackle are set out in box 7.1.

Box 7.1: Issues for partnerships with public sector members

The decision to engage with a partner should rest on evaluation of a business case assessed against a
number of alternatives, including doing nothing.

Conflicts of interest should be identified so that handling strategies can be agreed, eg by establishing
early warning processes or safeguards.

other.

The cultural fit of the partners should be close enough to give each confidence to trust the

Accountability for use of public funds should not be weakened.

The terms of engagement, including governance, should be documented in a framework agreement or
equivalent (see box 7.2).

7.2 Setting up new arm's length bodies

7.2.1 When a sponsor department sets up a new ALB, the nature of the new body should be decided
early in the process. It is sensible for the functions of the new body to help determine this choice. Annex
7.1 offers advice and sources of guidance on setting up a new ALB and compares the characteristics of
agencies, non- departmental public bodies (NDPBs) and non-ministerial departments (NMDs).
Departments should consult the Treasury and the Cabinet Office about making the choice.

46

7.2.2 In general, each new ALB should have a specific purpose, distinct from its parent department.
There should be clear perceived advantage in establishing a new organisation, such as separating
implementation from policy making; demonstrating the integrity of independent assessment;
establishing a specialist identity for a professional skill; or introducing a measure of commercial
discipline. It is sensible to be sceptical about setting up a new ALB, since it will often add to costs.

7.2.3 ALBS cannot be given authority to make decisions proper to ministers, nor to perform functions
proper to sponsor departments. Only rarely is a non-ministerial department the right choice as NMDs
have limited accountability to parliament2. Nor is it acceptable to use a royal charter to establish a
public sector body since such arrangements deny parliament control and accountability.

7.2.4 A sponsor department cannot relinquish all responsibility for the business of its ALBS by
delegation. It should have oversight arrangements appropriate to the importance, quality and range of
the ALB's business. Normally new, large, experimental or innovative ALBS need more attention from the
sponsor than established or small ALBs doing familiar or low risk business. And the sponsor department
always needs sufficient reserve powers to reconstitute the management of each ALB should events
require it (see section 3.8). .

7.2.5 The sponsor department should plan carefully to make sure that its oversight arrangements and
the internal governance of any new ALB are designed to work together harmoniously without
unnecessary intrusion. The ALB also needs effective internal controls and budgetary discipline so that it
can live within its budget allocation and deliver its objectives. And the sponsor department must have
sufficient assurance to be able to consolidate its ALBs' accounts with its own. 7.2.6 There is a good deal
of flexibility about form and structure. It may be expedient, for example, to set up an organisation which
is eventually to be sold as a Companies Act company. Or certain NDPBS may operate most effectively
when constituted as charities. Mutual structures can also be attractive. Innovation often makes sense.
The standard models are all capable of a good deal of customisation. 7.2.7 If the PAC decides to
investigate an ALB, the accounting officers of both the ALB and its sponsor department should expect to
be called as witnesses. The PAC will seek to be satisfied that the sponsor's oversight is adequate.
7.3 What to clarify

7.3.1 When documenting an agreement with a partner, public sector organisations should analyse the
relationship and consider how it might evolve. The framework document (or equivalent) should then be
kept up to date as the partnership develops. Box 7.2 contains terms which should always be considered
for inclusion. The list is not exhaustive.

2 The sponsor department also has less control as each NMD has its own budget, Estimate and annual
accounts. So if a ministerial department transfers work to an NMD, there is a greater risk of excess votes
in each.

47

Box 7.2: framework terms for partnership agreements

purpose

The aims of the relationship and its working remit.

Its standards, key objectives and targets.

governance and accountability

The legal relationship, including any financial or other limits.

Any statutory requirements relating to the functions of the partnership.

The governance of any ALB: its board structure, how its members are appointed (and disappointed).
How the partnership should work, eg regular meetings of senior people.

The extent to which any department is responsible to parliament for the conduct of a partner (essential
for partnerships between departments and ALBs).

Any other important features of the sponsorship role of the public sector partner, eg acting as intelligent
shareholder or consulting third parties.

How any relationships with departments other than the sponsor should operate.

Any arrangements for regular reporting on performance to the public and/or

parliament.

Plans for any evolution (eg into a mutual) after a period of ALB status.

Any arrangements for successor activity, eg establishing similar partnerships elsewhere. decision making

How strategic decisions about the future of the partnership will be made, with timetable, terms for
intervention, break points, dispute resolution procedures, termination process.

How the chain of responsibility should work, eg stewardship reporting, keeping track of efficiency, risk
assessment, project appraisal, management of interdependencies. How the partnership will identify,
manage and track opportunities and risks.

The status of the staff; and how they are to be hired, managed and remunerated. How any professional
input (eg medical, scientific) is to be managed and quality assured.

Arrangements for taking stock of performance and learning lessons from it. Arrangements for
intervention when necessary.

financial management

The financial relationship of the partners, eg:

Any founding capital (including assets, goods, financial sums or other valuables) Any periodic grants and
their terms

How the partnership's corporate plan and annual target(s) are to be agreed

How asset management and capital projects are to be decided and managed How cashflow is to be
managed, and current expenditure financed

The distribution of income and profit flows

Any financial targets, eg Return on capital employed (roce)

How any charges to customers or users are to be set

Any agreed limits on the partnership's business.

Monitoring, financial reporting, regular liaison and any other tracking arrangements. Internal and
external audit arrangements, with any relevant accounts directions. Arrangements for consolidation of
accounts (essential for ALBs)

48

7.3.2 In framing founding documentation, the partners should adopt a proportionate approach.
Parliament expects that public funds will be used in a way that gives reasonable assurance that public
resources will be used to deliver the intended objectives.

7.3.3 In this process the aim should be to put the accounting officers of the parties in a position to take a
well informed view on the current status of the relationship, enabling timely adjustments to be made as
necessary. It is good practice to develop structured arrangements for regular dialogue between the
parties to avoid misunderstandings and surprises.

7.3.4 Further advice about framework documents is in annex 7.2. It is important that such documents fit
the business to which they relate (rather than following precedent or copying a standard model).

7.4 Agencies

7.4.1 Each agency is either part of a central government department or a department in its own right.
Agencies are intended to bring professionalism and customer focus to the management and delivery of
central government services, operating with a degree of independence from the centre of their home
departments. Some are also trading funds (see section 7.8).

7.4.2 Each agency is established with a framework document on the lines sketched out in box 7.2. With
the exception of those agencies which are trading funds (see section 7.8), they are normally funded
through public expenditure supplied by Estimates. Departments should consult the Treasury and
Cabinet Office about the preparation of their framework documents.

7.5 Departments working together

7.5.1 To promote better delivery and enhance efficiency, departments often find it useful to work with
other government departments (or ALBs). This can make sense where responsibilities overlap, or both
operate in the same geographical areas or with the same client groups - arrangements loosely
categorised as joined up government. Such arrangements can offer opportunities for departments to
reduce costs overall while each partner plays to its strengths.

7.5.2 Such relationships can be constituted in a number of different ways. Some models are sketched in
box 7.3. The list is not exhaustive.

61

49
Box 7.3: examples of joined up activities in central government

one partner can act as lead provider selling services (such as IT, HR, finance functions) to other(s) as
customers, operating under service level agreement(s)

cost sharing arrangements for common services (eg in a single building), allocated in line with an
indicator such as numbers of staff employed or areas of office space occupied

joint procurement using a collaborative protocol

a joint venture project with its own governance, eg an agency or wholly owned company, selling services
to a number of organisations, some or all of which may be public sector

an outsourced service, delivering to several public sector customers

7.5.3 Shared services often need funding to set up infrastructure, eg to procure IT. This could be agreed
in a spending review, or customers could buy in to the partnership by transferring budget provision to
the lead provider. Each of the accounting officers involved should be satisfied that the project offers
value for money for the Exchequer as a whole. The provider's charges should be at cost, following the
standard fees and charges rules (see chapter 6).

7.5.4 In any joint activity, there must be a single accounting officer so that the lines of responsibility are
clear. If the PAC decides to investigate, the accounting officers of each of the participants should expect
to be summoned as witnesses.

7.6 Non-departmental public bodies

7.6.1 Non-departmental public bodies (NDPBs) may take a number of legal forms, including corporates
and charities. Most executive NDPBS have a bespoke structure set out in legislation or its equivalent (eg
a Royal Charter3). This may specify in some detail what task(s) the NDPB is to perform, what its powers
are, and how it should be financed. Sometimes primary legislation contains powers for secondary
legislation to set or vary the detail of the NDPB's structure. Annex 7.1 has links to more about NDPBs.

7.6.2 Each NDPB is a special purpose body charged with responsibility for part of the process of
government. Each has a sponsor department with general oversight of its activity. The sponsor
department's report and accounts consolidates its NDPBS' financial performance.

7.6.3 NDPBS show considerable variety of structures and working methods, with scope for innovation
and customisation. Some NDPBS may also need to work with other organisations as well as with their
sponsor. All this should be documented in the framework document (see annex 7.2).

7.6.4 NDPBs' sources of finance vary according to their constitution and function. Box 7.4 shows the
main options available.

3 This route is no longer used - see Section 2.5.

50

Box 7.4: sources of finance for NDPBS

specific conditional grant(s) from the sponsor department (and/or other departments) general (less
conditional) grant-in-aid from the sponsor department

income from charges for any goods or services the NDPB may sell

income from other dedicated sources, eg lottery funding

public dividend capital

7.6.5 In practice NDPBS always operate with some independence and are not under day-to-day
ministerial control. Nevertheless, ministers are ultimately accountable to parliament for NDPBs'
efficiency and effectiveness. This is because ministers: are responsible for NDPBs' founding legislation;
have influence over NDPBs' strategic direction; (usually) appoint their boards; and retain the ultimate
sanction of winding up unsatisfactory NDPBs.

7.7 Public corporations

7.7.1 Some departments own controlling shareholdings in public corporations or Companies Act
companies, perhaps (but not necessarily) as a step toward disposal. Public corporations' powers are
usually defined in statute; but otherwise all the disciplines of corporate legislation apply. UKGI, which
specialises in strategic management of corporates, may be a good way of managing departments'
responsibilities as shareholders.

7.7.2 Sponsor departments should define any contractual relationship with a corporate in a framework
document adapted to suit the corporate context while delivering public sector disciplines. The financial
performance expected should give the shareholder department a fair return on the public funds
invested in the business. Box 7.5 offers suggestions. This approach may also be appropriate for a trading
fund, especially if it is to become a Companies Act company in time. 7.7.3 A shareholder department
may also use a company it owns as a contractor or supplier of goods or services. It is a good discipline to
separate decisions about the company's commercial performance from its contractual commitments, so
avoiding confusion about objectives. So there should be clear arm's length contracts between the
company and its customer departments defining the customer-supplier relationship(s).

51

Box 7.5: outline terms for a relationship with a public corporation

the shareholder's strategic vision for the business, including the rationale for public ownership and the
public sector remit of the business
the capital structure of the business and the agreed dividend regime, with suitable incentives for
business performance

the business objectives the enterprise is expected to meet, balancing policy, customer, shareholder and
any regulatory interests

the department's rights and duties as shareholder, including:

governance of the business

procedure for appointments (and disappointments)

financial and performance monitoring

any necessary approvals processes

the circumstances of, and rights upon, intervention

details of any other relationships with any other parts of government

7.8 Trading funds

7.8.1 All trading funds are established under the Trading Funds Act 1973. Their activities are not
consolidated with their sponsor departments' business. They must finance their operations from trading
activity.

7.8.2 Each trading fund is set up through an order subject to affirmative resolution. Before an order can
be laid in parliament, the Treasury needs to be satisfied that a proposed trading fund can satisfy the
statutory requirement that its business plan is sustainable without additional funding in the medium
term. A period of shadow operation as a pilot trading fund may help inform this assessment.

7.8.3 Each trading fund must be financed primarily from its trading income. In particular, each trading
fund is expected to generate a financial return commensurate with the risk of the business in which it is
engaged. In practice this means the target rate of return should be no lower than its cost of capital. The
actual return achieved may vary a little from one year to the next, reflecting the market in which the
trading fund operates.

7.8.4 The possible sources of capital for trading funds are shown in box 7.6. They are designed to give
trading funds freedom from the discipline of annual Estimate funding. The actual mix for a given trading
fund must be agreed with the sponsor department (if there is one) and with the Treasury, subject to any
agreed limits, eg on borrowing.

7.8.5 Further detail about trading funds is in annex 7.3. Guidance on setting charges for the goods and
services trading funds sell is in chapter 6.

52
Box 7.6: sources of capital for trading funds

public dividend capital (equivalent to equity, bearing dividends - see annex 7.4) reserves built up from
trading surpluses

long or short term borrowing (either voted from a sponsor department or borrowed from the National
Loans Fund if the trading fund is a department in its own right) temporary subsidy from a sponsor
department, voted in Estimates

finance leases

7.9 Non-ministerial departments

7.9.1 A very few central government organisations are non-ministerial departments (NMDs). It is
important that there is some clear rationale for this status in each case.

7.9.2 NMDs do not answer directly to any government minister. They have their own accounting
officers, their own Estimates and annual reports, and settle their budgets directly with the Treasury.
However, some ministerial department must maintain a watching brief over each NMD so that a
minister of that department can answer for the NMD's business in parliament; and if necessary take
action to adjust the legislation under which it operates. A framework document should define such a
relationship.

7.9.3 This limited degree of parliamentary accountability must be carefully justified. It can be suitable for
a public sector organisation with professional duties where ministerial input would be inappropriate or
detrimental to its integrity. But the need for independence is rarely enough to justify NMD status. It is
possible to craft arrangements for NDPBS which confer robust independence. Where this is possible it
provides better parliamentary accountability, and so is to be preferred.

7.10 Local government

7.10.1 A number of central government departments make significant grants to local authorities. Some
of these are specific (ring fenced). Most are not, allowing local authorities to set out their own priorities.

7.10.2 Nevertheless parliament expects assurances that such decentralised funds are used
appropriately, ie that they are spent with economy, efficiency and effectiveness, and not wasted nor
misused. The quality of the assurance available differs from that expected of central government
organisations because local authorities' prime accountability is to their electorates.

7.10.3 For these relationships a framework document is not usually the most fruitful approach. Instead.
Central government departments should draw up an annual account of how their accounting officers
assure themselves that grants to local government are distributed and spent appropriately; and how
underperformance can be dealt with. This account forms part of the governance statement in the report
and accounts of each department affected (see annex 3.1).

7.10.4 Similar considerations apply to the NHS and centrally funded schools.

53

35

7.11 Innovative structures

7.11.1 Sometimes central government departments have objectives which more easily fit into bespoke
structures suited to the business in hand, or to longer range plans for the future of the business. Such
structures might, for example, include various types of mutual or partnership.

7.11.2 Proposals of this kind are by definition novel and thus require explicit Treasury consent. In each
case, proposals are judged on their merits against the standard public sector principles after examining
the alternatives, taking account of any relevant experience. The Treasury will always need to understand
why one of the existing structures will not serve: eg the NDPB format has considerable elasticity in
practice. Boxes 4.8 and 7.2 may help with this analysis.

7.12 Outsourcing

7.12.1 Public sector organisations often find it satisfactory and cost effective to outsource some services
or functions rather than provide them internally. Candidates have included cleaning, security, catering
and IT support. A wider range of services is potentially suitable for this treatment. Innovative
approaches should be explored constructively.

7.12.2 The first step in setting up any outsourcing agreement should be to specify the service(s) to be
provided and the length of contract to be sought. At that stage it is usually desirable to draw up an
outline business case to help evaluate whether outsourcing makes financial and operational sense. Any
decision to outsource should then be made to achieve value for money for the Exchequer as a whole.

7.12.3 It is good practice to arrange some form of competition for all outsourcing, as for other kinds of
procurement. If services are likely to be required at short notice - for example legal services for advice
on opportunities, threats or other business pressures which emerge with little warning - it is good
practice to arrange a competition to establish a standing panel of providers whose members can be
called upon to deal with rapidly emerging needs.

7.12.4 Contracting out does not dissolve responsibility. Public sector organisations using a contractor
should set in place systems to track and manage performance under the contract. It may be appropriate
to plan for penalties for disruption and/or failure if the contractor cannot deliver. The PAC may need to
be satisfied that the arrangements for contracting out entail sufficient accountability for the use of
public funds.

7.13 Private finance

7.13.1 Where properly constructed and managed, public sector organisations can use private finance
arrangements to construct assets and/or deliver services with good value for money. Structured
arrangements where the private sector puts its own funds at risk can help deliver projects on time and
within budget. 7.13.2 It is important to carry out a rigorous value for money analysis to determine
whether these benefits are likely to exceed the additional cost of using private finance. Contracting
organisations should also make sure that they are able to afford such arrangements over their working
lifetimes, taking account, as far

54

as possible, of the risk of difficult future financial environments. It is not good practice to embark on a
private finance arrangement if it is dependent on other separate financial transactions taking place
during the project's lifetime

7.13.3 Procurement using private finance is a flexible, versatile and often effective technique, so it
should be considered carefully as a procurement option. Contracts should normally be built up using
standard terms and guidance published by the Treasury (see Annex 7.4). Departure from standard
guidance needs to be approved by the Treasury.

7.14 Commercial activity

7.14.1 When public bodies have assets which are not fully used but are to be retained, it is good practice
to consider exploiting the spare capacity to generate a commercial return in the public interest. This is
essentially part of good asset management.

7.14.2 Any kind of public sector asset can and should be considered. Candidates include both physical
and intangible assets, for example land, buildings, equipment, software and intellectual property (see
annex 4.15). A great variety of business models is possible.

7.14.3 Such commercial services always go beyond the public sector supplier's core duties. Because
these assets concerned have been acquired with public funds, it is important that services are priced
fairly: see chapter 6. It is also important to respect the rules on state aids: see annex 4.7. Central
government organisations should work through the checklist at box 7.7.

Box 7.7: planning commercial exploitation of existing assets

define the service to be provided

establish that any necessary vires and (if necessary) Estimate provision exist
identify any prospective business partners and run a selection process

if the proposed activity is novel, contentious, or likely to set a precedent elsewhere, obtain Treasury
approval

take account of the normal requirements for propriety, regularity and value for money

7.14.4 While it makes sense to make full use of assets acquired with public resources, such activity
should not squeeze out, or risk damaging, a public sector organisation's main objectives and activities.
Similarly, it is not acceptable to acquire assets just for the purpose of engaging in, or extending,
commercial activity. If a public sector supplier's commercial activity demands further investment to keep
it viable, reappraisal is usually appropriate. This should consider alternatives such as selling the business,
licensing it, bringing in private sector capital, or seeking other way(s) of exploiting the underused
potential in the assets or business.

7.14.5 It is a matter of judgement when departments should inform parliament of the existence, or
growth, of significant commercial ventures. It is good practice to consult the Treasury in good time on
this point so that parliament can be kept properly informed and not misled.

55

7.15 Working with civil society bodies

7.15.1 Central government organisations may find they can deliver their objectives effectively through
relationships with civil society bodies: ie charities, social, voluntary or community institutions, mutual
organisation, social enterprises or other not-for-profit organisations. Such partnerships can achieve
more than either the public or the civil society sector can deliver alone. For example, using a civil society
sector organisation can provide better insight into demand for, and suitable means of delivery of public
services.

7.15.2 It is good practice to plan relationships with civil society partners through a framework
document, as with other partnerships. Some guidelines on how these relationships can work well in
harmony with policy and spending decisions are in the Civil Society Compact4.

7.15.3 In this kind of relationship a public sector organisation may fund activities, make grants, lend
assets, or arrange other transfers to a civil society sector body performing or facilitating delivery of
services. It is desirable to build in safeguards to ensure that resources are used as intended (see annex
5.2). This gives parliament confidence that voted resources are used for the purposes it has approved.

7.15.4 The safeguards to be applied should be agreed at the start of the relationship. Customisation in
nearly always essential. It is often right to require clawback, ie to agree terms in which public sector
donors reclaim the proceeds if former publicly owned assets are sold.

4
https://www.gov.uk/government/publications/compact-the-agreement-between-government-and-the-
voluntary-community-sector

56

Annex 1.1

The Comptroller and Auditor General

Supported by staff of the National Audit Office (NAO), the Comptroller and Auditor General (C&AG) is
the independent auditor of nearly all central government institutions. Using extensive statutory rights of
access to records, the C&AG provides direct advice and assurance to Parliament.

A1.1.1 The C&AG is an officer of the House of Commons appointed by The Queen. They are responsible
for the audit of most central government institutions. This work is carried out under his or her direction
by NAO staff (see www.nao.org.uk) or by contracting out. NAO is in the public sector but independent of
central government. A1.1.2 The C&AG is appointed for a single non-renewable term of ten years; and
can only be removed from office by The Queen on an address of both Houses of Parliament. The NAO's
statutory board advises and supports the C&AG - for example, on the NAO's strategic direction and the
associated resource requirements. Audit related decisions such as which examinations to perform and
the specific audit and reporting approach, are matters solely for the independent C&AG to decide.
A1.1.3 The NAO is financed by an Estimate submitted jointly by the C&AG and the NAO chair to the
Public Accounts Commission (TPAC), a committee of the House of Commons. NAO's expenditure may
include discretionary activities permitted under statute if approved by NAO's board and subsequently by
TPAC through its scrutiny of the NAO's Estimate.

Audit

A1.1.4 In order to carry out financial audit work, the C&AG has extensive statutory rights of access to
information held by a wide range of public sector organisations. This material is also required to compile
Whole of Government Accounts, and extends to the records of many contractors and recipients of
grants. The C&AG also has a right to obtain information about, and explanations of, any of this evidence.
A1.1.5 The C&AG is responsible for the financial audit of virtually all central government organisations,
providing an audit opinion on their annual financial and reporting to Parliament. The C&AG may be
appointed the auditor of government companies as a requirement of statute or on an 'agreement' basis
with an individual entity as necessary. Financial audits are carried out in accordance with International
Standards on Auditing (UK and Ireland).

A1.1.6 In addition, the C&AG may carry out audits of particular areas of central government expenditure
to establish whether public funds have been used economically, efficiently and effectively. Selection of
these value for money (vfm) examinations - having taken account of any proposals made by the
Committee of
57

Public Accounts - is entirely at the C&AG's discretion, as is the manner in which they are carried out and
reported. The C&AG has the same level of access for vfm examinations as for financial audit. Central
government bodies must ensure that such access is provided for within the terms and conditions of
contracts and agreements with third party contractors, sub-contractors and grant recipients.

A1.1.7 In the event of the C&AG requiring access to sensitive documents to inform his work - for
example, policy papers such as Cabinet, or Cabinet Committee, papers - then public sector organisations
should cooperate with NAO requests for access to such information, irrespective of its classification or
other sensitivity. It is important to work closely with NAO to explain fully any publication sensitivities
that may exist. While the final decision about the contents of his or her reports must rest with the
C&AG, such close working ensures sensitivities can be properly taken into account as the report content
is finalised.

A1.1.8 The Public Accounts Committee (PAC) may decide to invite witnesses to discuss the findings of-
both financial audits and vfm examinations. The PAC may also initiate other hearings on related matters.

The Comptroller function

A1.1.9 An important part of the C&AG's responsibilities is oversight of payments from the Consolidated
Fund and the National Loans Fund. In response to requests from the Treasury, NAO staff establish that
the sums paid out of these funds each business day are made in accordance with legislation. Once the
authorisations (credits) are given, the Treasury may make drawings from these funds to finance the
Exchequer's commitments.

58

Money resolutions

A2.1.5 A money resolution is required1 for legislation which creates a charge upon public funds, either
by way of new resource expenditure or by remission of debt. Further advice on money resolutions
should be sought from Parliamentary Clerks. A2.1.6 The responsible department should clear the draft
with the Treasury at official level. When agreed, the Treasury will arrange for a copy initialled by the
Financial Secretary to be returned to Counsel.

Box A2.1A: examples of legislation matters which require explicit Treasury approval

as a direct charge (a Consolidated Fund standing service), or

indirectly, ie "out of monies to be provided by Parliament" (through Estimates):

- expenditure proposals affecting public expenditure as defined in the current public expenditure
planning total, eg rates of grant

- contingent liabilities, including powers to issue indemnities or to give guarantees

- loans taken from the National Loans Fund (NLF)- provisions for writing off NLF debt

- use of public dividend capital (PDC)- provisions involving the assets and liabilities of the CF and NLF-
borrowing powers

- fees and charges, including changes in coverage

- the form of government accounts and associated audit requirements

- public service manpower

- pay and conditions (eg superannuation and early severance terms) of civil servants pay and conditions
of board members of statutory organisations

- creation of (or alteration to) new statutory bodies and related financial arrangements

- provisions affecting grant recipients, including grants in aid

- provisions on audit usually giving the C&AG right of access

Ways and Means resolutions

A2.1.7 A ways and means resolution is required in the House of Commons where legislation directs the
payment of money raised from the public to the Consolidated Fund (this technically constitutes the
raising of money for the Crown to spend). Some legislation may require both a money resolution and a
ways and means resolution.

A2.1.8 Departments should clear ways and means resolutions with the Treasury. Further advice should
be sought from parliamentary clerks.

Explanatory Notes

A2.1.9 Except for finance, consolidation and tax law rewrite bills, departments should prepare
explanatory notes for all government bills. The main items to be covered are set out in box A2.1B.
Guidance on preparation is on the Cabinet Office website2.

By virtue of Standing Order 49 of the House of Commons

2 https://www.gov.uk/government/publications/guide-to-making-legislation

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Box A2.1B: Legislation authorising expenditure: explanatory notes

1. Financial effects of the legislation:

Estimates of expenditure expected to fall on

- the Consolidated Fund (CF), distinguishing between Consolidated Fund standing services and

charges to be met from Supply Estimates; or the National Loans Fund (NLF)

Estimates of any other financial consequences for total public expenditure (i.e. in addition to costs which
would fall on the CF or NLF) as defined in the current public- expenditure planning total;

Estimates of any effects on local government expenditure

2. Effects of the legislation on public service manpower:

Forecasts of any changes (or postponement of changes) to staff numbers in

government departments expected to result from the legislation;

Forecasts of the likely effects to other public service manpower levels, for example in non-departmental
public bodies and local authorities.

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Box A2.1B: Legislation authorising expenditure: explanatory notes

1. Financial effects of the legislation:

Estimates of expenditure expected to fall on

- the Consolidated Fund (CF), distinguishing between Consolidated Fund standing services and

charges to be met from Supply Estimates; or the National Loans Fund (NLF)

Estimates of any other financial consequences for total public expenditure (i.e. in addition to costs which
would fall on the CF or NLF) as defined in the current public- expenditure planning total;

Estimates of any effects on local government expenditure

2. Effects of the legislation on public service manpower:

Forecasts of any changes (or postponement of changes) to staff numbers in

government departments expected to result from the legislation;

Forecasts of the likely effects to other public service manpower levels, for example in non-departmental
public bodies and local authorities.

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Annex 2.2

Delegated authorities

This annex expands on the requirement for departments to obtain Treasury consent to their public
expenditure and the process of delegated authorities.

A2.2.1 Treasury approval for expenditure is one aspect of the convention that Parliament expects the
Treasury to control all other departments in matters of finance and public expenditure. Accounting
officers are responsible (see first bullet of paragraph 3.3.3) for ensuring that prior Treasury approval is
obtained in all cases where it is needed.

A2.2.2 The need for Treasury approval embraces all the ways in which departments might make public
commitments to expenditure, not just Estimates or legislation, important as they are. Box A2.2A
identifies the main ways in which the need can arise. It may not be exhaustive.

A2.2.3 Treasury approval:

must be confirmed in writing, even where initially given orally;

• cannot be implied in the absence of a reply;

• must be sought in good time to allow reasonable consideration before decisions are required.

A2.2.4 Departmental ministers should be made aware when Treasury consent is required in addition to
their own.

Box A2.2A: where Treasury approval is required

public statements or other commitments to use of public resources beyond the agreed budget plans

guarantees, indemnities or letters of comfort creating contingent liabilities

any proposals outside the department's delegated limits

all expenditure which is novel, contentious or repercussive, irrespective of size, even if it appears to
offer value for money taken in isolation

where legislation requires it

fees and charges

Where Treasury approval has been overlooked, the case should immediately be brought to the
Treasury's attention.

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Delegation

A2.2.5 Formally, Treasury consent is required for all expenditure or resource commitments. In practice,
the Treasury delegates to departments' authority to enter into commitments and to spend within
predefined limits without specific prior approval from the Treasury (but see A.2.2.12 for exceptions).
Delegated authorities may also allow departments to enter into commitments to spend (eg contingent
liabilities) and to deal with special transactions (such as some write-offs) without prior approval.

A2.2.6 Such delegated authorities strike a balance between the Treasury's need for control in order to
fulfil its responsibilities to Parliament and the department's freedom to manage within its agreed budget
limits and Parliamentary provision. A2.2.7 Departments should not take general Treasury approval of an
Estimate as approval for specific proposals outside delegated limits even if provision for them is included
in the Estimate.

A2.2.8 The Treasury may also work through the Cabinet Office to set certain expenditure controls
applicable across central government1.

Setting delegated authorities

A2.2.9 While the standard terms for inclusion in delegated authorities are set out in box A2.2B, HMT has
produced a single template delegation letter which must be used to set delegated limits for central
government departments and ALBs. Departments should appreciate that delegated authorities for
certain kinds of expenditure can be modified or removed entirely if the Treasury is not satisfied that the
department is using them responsibly.

A2.2.10 In establishing delegated authorities, the Treasury will:

agree with the department how it will take spending decisions (e.g. criteria and/or techniques for
investment appraisal, project management and later evaluation);

establish a mechanism for checking the quality of the department's decision-taking (e.g. by reviewing
cases above a specified limit, or giving full delegation but requiring a schedule of completed cases of
which a sample may be examined subsequently); and
encourage delegation of authority within the department to promote effective financial management. In
general, authority should be delegated to the point where decisions can be taken most efficiently. It is
for the accounting officer to determine how authority should be delegated to individual managers.

Box A2.2B: standard terms for delegated authorities

a clear description of each item delegated

1 https://www.gov.uk/government/collections/cabinet-office-controls

63

the extent of each delegation, usually in financial terms, but potentially also in qualitative terms, eg all
items of a certain kind to require approval

any relevant authorities, eg the enabling legislation or letter from a Treasury minister the relevant
budget provision

the relevant section of the department's Estimate

any effective dates

arrangements for review. HMT requires that delegated authority limits be reviewed annually.

A2.2.11 In turn departments should agree delegated authorities with their arm's length bodies, making
use of the template delegated authority letter. Delegations to ALBs should be no greater than
departments' own delegated authorities.

Departments must seek HMT approval for the delegated authorities they agree with their ALBs.

A2.2.12 There are some areas of expenditure and resource commitments which the Treasury cannot
delegate: see box A.2.2C.

Box A2.2C: where authority is never delegated

items which are novel, contentious or repercussive, even if within delegated limits items which could
exceed the agreed budget and Estimate limits

contractual commitments to significant spending in future years for which plans have not been set

items requiring primary legislation (eg to write off NLF debt or PDC)

any item which could set a potentially expensive precedent

where Treasury consent is a specific requirement of legislation

A2.2.13 Strictly, the Treasury cannot delegate its power of approval where there is a statutory
requirement for Treasury approval. But in practice it can be acceptable to set detailed and objective
criteria where Treasury approval can be deemed without specific examination of each case. This may be
appropriate to avoid a great deal of detailed case-by-case assessment. The Treasury may ask for
intermittent sampling to check that this arrangement is operating satisfactorily.

Failure to obtain Treasury authority

A2.2.14 All expenditure which falls outside a department's delegated authority and has not been
approved by the Treasury, is irregular. It cannot be charged to departmental Estimates. Similarly, any
resources committed or expenditure incurred in breach of a condition attached to Treasury approval is
irregular.

A2.2.15 Where resource consumption or expenditure is irregular, the Treasury may be prepared to give
retrospective approval if it is satisfied that:

• it would have granted approval had it been approached properly in the first place; and

the department is taking steps to ensure that there is no recurrence.

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65

66

Requests for retrospective approval should follow the same format as requests submitted on time.

A2.2.16 If the Treasury does not give retrospective approval or authorise write-off of irregular
expenditure, the department must inform the NAO. The Treasury may also draw the matter to the
attention of the responsible accounting officer. The C&AG may then qualify his or her opinion on the
account and the PAC may decide to hold an oral hearing. In the case of voted expenditure, the Treasury
will present an excess vote to Parliament to regularise the situation.

A2.2.17 It is unlawful to commit resources or incur expenditure without Treasury consent, where such
consent is required by statute. In such cases retrospective consent cannot confer legality. Such
consumption cannot, therefore, be regularised. A2.2.18 In cases of unlawful expenditure, the
responsible accounting officer must note the department's accounts accordingly and notify the NAO. It
will then be for the C&AG to decide whether to report on the matter to Parliament with the relevant
accounts and whether to draw it to the attention of the PAC.

A2.2.19 The C&AG and the Treasury cooperate closely on questions of authority for expenditure. The
C&AG may bring a department's attention to any cases where the department:
•

has ignored or wrongly interpreted a Treasury ruling;

is attempting to rely on a mistaken delegated authority, eg where the delegation has been changed or
where consent was given orally only;

has committed resources or incurred expenditure which the Treasury might not have approved had it
been consulted.

A2.2.20 Departments should bring such cases to the attention of the Treasury, indicating clearly the NAO
interest. The Treasury and NAO keep each other in touch with such cases.

Annex 2.3

PAC Concordat of 1932

A2.3.1 The PAC has had long standing concerns about how the government gains authority from
Parliament for each area of spending.

A2.3.2 In the mid 19th century it became customary for governments to gain Parliamentary authority for
some areas of expenditure simply by use of the Contingencies Fund, without troubling to obtain specific
powers for them. Shortly after its formation in 1862, the PAC protested about this practice, partly
because it involved less stringent audit. It urged that the Contingencies Fund should be used only for in-
year funding of pressing needs, and that all continuing and other substantive spending should be
submitted to the Estimates process with due itemisation.

A2.3.3 By 1885 the PAC had become concerned that the authority of the Estimate and its successor
Appropriation Act was not really sufficient either:

"... cannot accept the view in a legal, still less in a financial, sense that the distinct terms of an Act of
Parliament may be properly overridden by a Supplementary Estimate supported by the Appropriation
Act... this matter ... is one of great importance from a constitutional point of view ..."

A2.3.4 While the Treasury agreed in principle, the practice did not die out because in 1908 the PAC again
complained:

"... while it is undoubtedly within the discretion of Parliament to override the provisions of an existing
statute by a vote in Supply confirmed by the Appropriation Act, it is desirable in the interests of financial
regularity and constitutional consistency that such a procedure should be resorted to as rarely as
possible, and only to meet a temporary emergency".

A2.3.5 The PAC reverted to the issue in 1930 and again in 1932, citing a number of cases involving
various departments. It was concerned to specify how far an annual Appropriation Act could be
regarded as sufficient authority for the exercise of functions by a government department in cases
where no other specific statutory authority exists. It took the view that:

"... where it is desired that continuing functions should be exercised by a government department,
particularly where such functions may involve financial liabilities extending beyond a given financial
year, it is proper, subject to certain recognised exceptions, that the powers and duties to be exercised
should be defined by specific statute".

A2.3.6 In reply, the Treasury Minute said:

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19

67

"... while it is competent to Parliament, by means of an annual vote embodied in the Appropriation Acts,
in effect to extend powers specifically limited by statute, constitutional propriety requires that such
extensions should be regularised at the earliest possible date by amending legislation, unless they are of
a purely emergency or non-continuing character”.

"I

while... the Executive Government must continue to be allowed a certain measure of discretion in asking
Parliament to exercise a power which undoubtedly belongs to it, they agree that practice should
normally accord with the view expressed by the Committee that, where it is desired that continuing
functions should be exercised by a government department (particularly where such functions involve
financial liabilities extending beyond a given year) it is proper that the powers and duties to be exercised
should be defined by specific statute. The Treasury will, for their part, continue to aim at the observance
of this principle".

A2.3.7 With this Concordat, the matter still lies.

A2.3.8 Use of the Supply and Appropriation Acts as authority for expenditure is discussed in annex 2.4.

Annex 2.4 New services

A2.4.1 Chapter 2 (box 2.1) sets out the essential conditions for authorisation of public spending. New
services are exceptions, ie services for which parliament would normally expect to provide authorising
legislation but has not yet done so. They can include altering the way in which an existing service is
delivered as well as services not previously delivered.

When the Supply and Appropriation Act suffices

A2.4.2 Notwithstanding the general rules ion box 2.1, in some circumstances it is not necessary to have
specific enabling legislation in place. Parliament accepts that agreement to the Estimate1 is sufficient
authority for the kinds of expenditure listed in boxes 2.5 or 2.6. The content of these boxes is
reproduced in box A2.4A. They can all be considered part of business as usual.

Box A2.4A: Expenditure parliament accepts may rest on a Supply and Appropriations Act

routine administration costs: employment costs, rent, cleaning etc;

lease agreements, eg for photocopiers;

expenditure using prerogative powers, notably defence of the realm and international treaty
obligations;

temporary services or continuing services of low cost, provided that there is no specific legislation
covering these matters before parliament and existing statutory restrictions are respected, specifically

O initiatives lasting no more than two years, eg a pilot study or one off intervention; or O expenditure of
no more than £1.75m a year (amount adjusted from time to time).

A2.4.3 It is important not to exceed these limits. The Treasury has agreed in the Concordat (see annex
2.3) to seek to make sure they are respected. So departments should consult the Treasury before relying
upon them.

Anticipating a bill

A2.4.4 In addition, parliament is prepared to accept that departments may undertake certain
preparatory work while a bill is under consideration and before royal assent. Examples are listed in box
A2.4B.

1 Which becomes a Supply and Appropriation Act once it has been through its parliamentary stages

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Box A2.4B: expenditure that can be incurred before royal assent

pilot studies informing the choice of the policy option (because this process is part of designing,
modifying or even deciding to abandon the policy);

scoping studies designed to identify in detail the implications of a proposal in terms of staff numbers,
accommodation costs and other expenditure to inform the legislative process;

in-house project teams and/or project management boards;

use of private sector consultants to help identify the chosen policy option, assist with scoping studies or
other work informing the legislative process;
work on the legislative process associated with the new service.

A2.4.5 Departments may be able to finance activities such as those in box A2.4B out of their existing
resources. When this happens, departments should make sure that the ambit2 of the relevant Estimate
covers the planned expenditure.

A2.4.6 It is also important to understand in which areas of new business parliament does expect the
normal rigour for authorisation (box 2.1) to apply. For the avoidance of doubt, some examples are
shown in box A2.4C.

Box A2.4C: expenditure which may not normally incurred before royal assent significant work associated
with preparing for or implementing the new task enabled by a bill, eg renting offices hiring expert
consultants or designing or purchasing significant IT equipment;

recruitment of chief executives and board members of a new public sector organisation; recruitment of
staff for a new public sector organisation.

Providing for a new service

A2.4.7 Some new services go well beyond the examples in box A2.4B. They include such things as paying
a new grant, providing a new registration service, transforming the delivery of existing service or setting
up a new public sector organisation. Even if a bill providing for a new service is before parliament, the
activity the bill provides for cannot normally go ahead before royal assent. It is therefore good practice
to plan the timetable for achieving the new service so that it is compatible with the bill timetable.

A2.4.8 Sometimes it is convenient to use a paving bill to provide the necessary powers to get a new
service under way quickly. A paving bill can provide powers to allow expenditure which would be
nugatory if the subsequent detailed legislation for the new service does not proceed, eg employing
consultants to design a significant IT or regulatory system. Paving bills are usually short, though they
may be contentious (and time consuming) as they can prompt parliamentary discussion of the
underlying substance of the measure.

2 See paragraph 3.9 of the Estimates' Manual

69

A2.4.9 Departments which do not use paving bills may want to make an early start on legislation
contained in a bill during its passage through parliament. Usually the spending in question lacks both
adequate statutory underpinning and authorisation in Estimates.

A2.4.10 In these circumstances there is a risk that allowing the spending to proceed might be wasteful if
royal assent is not achieve as expected. So it is good practice to try to find other ways of making
progress with the policy without anticipating royal assent.
A2.4.11 If, nevertheless. a department wants to spend early on matters to be empowered by a bill
before parliament, it may make a claim for an advance from the Contingencies Fund with a plan to repay
it out of the next Estimate when agreed3. The spending must meet the conditions in box A2.4D.

Box A2.4D: Criteria for drawings on the Contingencies Fund

the bill in question must have reached second reading in the Commons; and

the bill must be virtually certain to achieve royal assent with minimal change, preferably within a year;
and

genuine urgency in the public interest, ie where postponing expenditure until after royal assent would:

cause additional wasteful expenditure or

lose (not just defer) efficiency savings; or

cause other damage or public detriment.

A2.4.12 The Treasury judges applications for access to the Contingencies Fund cautiously and on their
merits. It is important to note that neither political imperative nor ministerial preference is relevant to
making this assessment.

A2.4.13 In rare circumstances a Contingencies Fund advance may be awarded to make senior
appointments to a new public sector body being set up under a bill. When this is allowed, the people
appointed must be clear that if for any reason the legislation fails, the provisional appointments would
have to be cancelled.

Notifying parliament

A2.4.14 The instances described in this annex all mean that parliament has less control over certain
items of public expenditure than it would normally expect. Departments should therefore take great
care to keep parliament informed of what is happening and why.

A2.4.15 A timely written ministerial statement giving the amounts involved and their timing is the
essential minimum before Contingencies Fund resources can be released. If possible an oral explanation
at second reading, or a separate oral statement, is desirable. In addition there should be:

notes in the explanatory memorandum and impact assessment to the relevant bill; and

3 See section 5.8 of the Estimates Manual

70

notes in the relevant Estimate - especially important if a department

wants to anticipate secondary legislation which a bill will empower.

A2.4.16 If the effect of the measure changes significantly, parliament should be given timely information
to keep it abreast of developments.

A2.4.17 It is good practice to keep the Treasury informed of the disclosure intended. The Treasury pulls
all information about anticipation of parliamentary agreement together and publishes it annually at the
close of each session.

Directions

A2.4.18 The exceptions in this annex to the requirements of box 2.1 provide a lot of scope for pragmatic
progress of essential government business. The advice in this annex may be regarded as judicious
extensions of the requirements of propriety, and acceptable only if parliament is not misled.

A2.4.19 But sometimes even these easements are not enough. If the Accounting Officer is unable to
design the minister's policy to fit within the standards in this annex, he or she will need to seek a
ministerial direction (see section 3.4). The usual rules about disclosure of course apply.

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Annex 3.1

The Governance Statement

It is fundamental to each accounting officer's responsibilities to manage and control the resources used
in his or her organisation. The governance statement, a key feature of the organisation's annual report
and accounts, manifests how these duties have been carried out in the course of the year. It has three
components: corporate governance, risk management and, in the case of some departments, oversight
of certain local responsibilities.

Purpose

A3.1.1 Each accounting officer (AO) delegates responsibilities within his or her organisation so as to
control its business and meet the standards set out in box 3.1 (see chapter 3). The systems used to do
this should give adequate insight into the business of the organisation and its use of resources to allow
the AO to make informed decisions about progress against business plans and if necessary steer
performance back on track. In doing this the AO is usually supported by a board.

A3.1.2 These responsibilities are central to the AO's duties. To carry them out the AO needs to develop a
keen sense of the risks and opportunities the organisation faces. In the light of the board's assessment
of the organisation's appetite for risk, the AO needs to decide how to respond to the evolving perceived
risks. A3.1.3 The governance statement, for which the AO takes personal responsibility, brings together
all these judgements about use of public resources as part of the annual report and accounts. It should
give the reader a clear understanding of the dynamics and control structure of the business. Essentially,
it records the stewardship of the organisation. Supplementing the accounts, it should provide a sense of
the organisation's vulnerabilities and resilience to challenges.

Preparing the governance statement

A3.1.4 The governance statement is published in each organisation's annual report and accounts. It
should be assembled from work through the year to gain assurance about performance and insight into
the organisation's risk profile, its responses to the identified and emerging risks and its success in
tackling them.

A3.1.5 There is no set template for the governance statement.

A3.1.6 The AO and the board have a number of inputs into this process:

the board's annual review of its own processes and practices, informed by the views of its audit
committee on the organisation's assurance arrangements;

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insight into the organisation's performance from internal audit, including an audit opinion on the quality
of the systems of governance, management and risk control;

feedback from the delegation chain(s) within the organisation about its business, its use of resources, its
responses to risks, the extent to which in year budgets and other targets have been met, and any other
internal accountability mechanisms; including:

bottom-up information and assessments to generate a full appreciation of performance and risks as they
are perceived from within the organisation;

end-to-end assessments of processes, since it is possible to neglect interdependent and compounded

risks if only the components are considered;

a high level overview of the organisation's business so that systemic risks can be considered in the
round;

any evidence from internal control failures or poor risk management;

potentially, information from whistleblowers;

material from any arm's length bodies (ALBS) connected with the organisation which may shed light on
the performance of the organisation or its board.

A3.1.7 It is important that the governance statement covers the material factors affecting the
organisation in the round, not neglecting the more serious (if remote) risks1, emerging technology and
other cutting edge developments. It should also mention any protective security concerns in suitably
careful terms2, with details reported to the external auditor.

Content of governance statement

A3.1.8 With the board's support, it is for the AO to decide how to:

organise the governance statement;

take account of input from within the organisation and from the board and its committees;

where relevant, integrate information about the organisation's ALBs, some of which may be material to
the consolidated organisation;

provide an explanation of how the department ensures that use of any resources granted to certain
locally governed organisations (including the NHS) is satisfactory. See A3.1.12.

A3.1.9 Box A3.1A summarises subjects that should always be covered.

1 Including the external risks identified in the National Risk Assessment

2 As set out in the Security Policy Framework

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A3.1.10 All the items in this box are important. The risk assessment is critical. This is where the AO,
supported by the board, should discuss how the organisation's risk management and internal control
mechanism work, and why they were chosen to deliver reasonable assurance about prevention,
deterrent or other appropriate action to manage the actual and potential problems or opportunities
facing the organisation. Avoiding lengthy description of process, it should assess the evidence about the
effectiveness in practice of the risk management processes in place. In doing so it should face frankly up
to any revealed deficiencies as risks have materialised.

Box A3.1A: essential features of the governance statement

the governance framework of the organisation, including information about the board's committee
structure, its attendance records, and the coverage of its work;

the board's performance, including its assessment of its own effectiveness; highlights of board
committee reports, notably by the audit and nomination committees;
an account of corporate governance, including the board's assessment of its compliance with the
Corporate Governance Code, with explanations of any departures; information about the quality of the
data used by the board, and why the board finds it acceptable;

where relevant (for certain central government departments), an account of how resources made
available to certain locally governed organisations are distributed and how the department gains
assurance about their satisfactory use;

a risk assessment (see annex 4.3), including the organisation's risk profile, and how it is managed,
including, subject to a public interest test:

any newly identified risk

a record of any ministerial directions given

a summary of any significant lapses of protective security (eg data losses).

A3.1.11 In putting together the governance statement, the AO needs to take a view on the extent to
which items are significant enough to the welfare of the organisation as a whole to be worth recording.
There are no hard and fast rules about this. Some factors to take into account are suggested in box
A3.1B.

Box A3.1B: deciding what to include in the governance statement

might the issue prejudice achievement of the business plan? – or other priorities? could the issue
undermine the integrity or reputation of the organisation? what view does the board's audit committee
take on the point? what advice or opinions have internal audit and/or external audit given? could
delivery of the standards expected of the AO (box3.1) be at risk? might the issue increase the risk of
fraud or other misuse of resources? does the issue put a significant programme or project at risk?

could the issue divert resources from another significant aspect of the business?

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could the issue have a material impact on the accounts?

might national security or data integrity be put at risk?

Accounting Officer System Statements

A3.1.12 Government departments should include in their governance statements a summary account of
how they achieve accountability for the grants they distribute to local government, schools, similar local
government organisations and/or the NHS. It should cover:

an account of how resources are distributed, eg in response to needs or desired change;

how the AO gains assurance about probity in the use of public funds;

how the AO achieves or encourages value for money in the local use of grants, eg through local
arrangements which provide incentives to achieve good value;

the use the AO makes of disaggregated information about

performance, including investigating apparent outliers and/or requiring those responsible locally to
explain their results.

A3.1.13 This part of the governance statement should usually be backed by an accounting officer
systems statement, which are published on gov.uk.3 Guidance on accounting officer system statements
can be found online. The system statement must be clear on the core data and information flows that
the system will rely on. An understanding of these core data requirements should be developed
collaboratively with the entities to be included within the system statement and with users to meet the
need for effective accountability locally and nationally.

A3.1.14 Accounting officer system statements should evolve to reflect improving practice. Where a
Department proposes making major changes, it should contact Treasury and also consider consulting
the relevant Parliamentary committees by providing them with a draft and the opportunity to comment.
External audit

A3.1.15 The organisation's external auditor will review the governance statement for its consistency
with the audited financial statement. The external auditor may report on:

any inconsistency between evidence collected in the course of the audit and the discussion of the
governance statement; and/or;

any failure to meet the requirement to comply with or explain departures from the Corporate
Governance Code or any other authoritative guidance.

3 See, https://www.gov.uk/government/collections/accounting-officer-system-statements

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Annex 4.1

Finance Directors

It is government policy that all departments should have professional finance directors reporting to the
permanent secretary with a seat on the departmental board, at a level equivalent to other board
members. It is good practice for all other public sector organisations to do the same, and to operate to
the same standards. This annex sets out the main duties and responsibilities of finance directors.
The finance function

A4.1.1 The finance director of a public sector organisation should:

be professionally qualified1;

have board status equivalent to other board members;

report directly to the permanent head of the organisation;

be a member of the senior leadership team, the management board and the executive committee
(and/or equivalent bodies), and of the cross-government Finance Function.

A4.1.2 This demanding leadership role requires a persuasive and confident communicator with the
stature and credibility to command respect and influence at all levels through the organisation. Its main
features are described in box A4.1A. Many of the day-to-day responsibilities may in practice be
delegated, but the finance director should maintain oversight and control. In large part these duties
consist of ensuring that the financial aspects of the accounting officer's responsibilities are carried
through to the organisation and its arm's length bodies (ALBs) in depth.

Box A4.1A: the role of the finance director

governance

financial leadership, both within the organisation and to its ALBS, at both a strategic and operational
level

ensuring sound and appropriate financial governance and risk management

1 The term professional finance director in this context means both being a qualified member of one of
the five bodies comprising the Consultative Committee of Accounting Bodies (CCAB) in the UK and
Ireland, ie the Chartered Institute of Public Finance and Accountancy, the Institute of Chartered
Accountants in England and Wales, the Institute of Chartered Accountants of Scotland, the Institute of
Chartered Accountants i Ireland, the Association of Chartered Certified Accountants, or having
equivalent professional skills and/or qualifications; and having relevant prior experience of financial
management in either the private or the public sector.

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leading, motivating and developing the finance function, establishing its full commercial contribution to
the business
planning and delivering the financial framework agreed with the Treasury or sponsoring organisation
against the defined strategic and operational criteria

challenging and supporting decision makers, especially on affordability and value for money, by ensuring
policy and operational proposals with a significant financial implication are signed-off by the finance
function

internal controls

co-ordinating the planning and budgeting processes

applying discipline in financial management, including managing banking, debt and cash flow, with
appropriate segregation of duties

preparation of timely and meaningful management information

ensuring that delegated financial authorities are respected

selection, planning and oversight of any capital projects

ensuring efficiency and value for money in the organisation's activities

provision of information and advice to the Audit Committee

leading or promoting change programmes both within the organisation and its ALBS external links

preparing Estimates, annual accounts and consolidation data for whole of government accounts

liaison with the external auditor

liaison with PAC and the relevant Select Committee(s)

liaison with cross-government Finance Function

embedding of functional standards

A4.1.3 finance function should maintain a firm grasp of the organisation's financial position and
performance. Supporting the accounting officer, the finance director should ensure that there is
sufficient expertise in depth, supported by effective systems, to discharge this responsibility and
challenge those responsible for the organisation's activities to account for their financial performance. It
is important that financial management is taken seriously throughout each public sector organisation.

Financial leadership

A4.1.4 The finance director is responsible for leadership of financial responsibilities within the
organisation and its ALBs. He or she should ensure that the information on which decisions about the
use of resources are based is reliable. Box A4.2B explains some specific responsibilities of the role.
Box A4.1B: financial management leadership

providing professional advice and meaningful financial analysis enabling decision makers to take timely
and informed business decisions

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maintaining a long term financial strategy to underpin the organisation's financial viability within the
agreed framework

developing and maintaining an effective resource allocation model to optimise outputs

ensuring financial probity, regularity and value for money

developing and maintaining appropriate asset management and procurement strategies reporting
accurate and meaningful financial information about the organisation's performance to ONS,
parliament, the Treasury and the general public

setting the strategic direction for any commercial activities

acting as head of profession in the organisation

Internal financial discipline

A4.1.5 The finance director should maintain strong and effective policies to control and manage use of
resources in the organisation's activities. This includes improving the financial literacy of budget holders
in the organisation. Similarly, he or she should ensure that there are similar disciplines in the
organisation's ALBs. These should all draw on best practice in accounting and respect the Treasury's
requirements, including, where relevant, accounts directions. These responsibilities are described in box
A4.1C.

Box A4.1C: Financial control

enforcing financial compliance across the organisation while guarding against fraud and delivering
continuous improvement in financial control

applying strong internal controls in all areas of financial management, risk management and asset
control

establishing budgets, financial targets and performance indicators to help assess

delivery

reporting performance of both the organisation and its ALBS to the board, the Treasury and other
parties as required
value management of long term commercial contracts

ensuring that the organisation's capital projects are chosen after appropriate value for money analysis
and evaluation using the Green Book

A4.1.6 Individual finance director posts will of course have duties specific to their organisations and
contexts in addition to those set out in this annex. But all finance director posts should seek to operate
to these standards as an essential minimum.

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Annex 4.2 Use of models

In modern government modelling is important. It can guide policy development; help determine
implementation plans; and suggest how policies may evolve. Models should be controlled and
understood in their proper context, with effective quality assurance, so that they can be used to good
effect.

Control and governance

A4.2.1 Supported by the board, the accounting officer of a central government organisation should
oversee the use and quality assurance (QA) of models within the organisation. There should be sufficient
feedback for the accounting officer to be able to track progress and adjust the process.

A4.2.2 Each business critical model should be managed by a senior responsible officer (SRO) of sufficient
seniority and experience, supported by experts and specialists, to understand the use of the model in
context. Project and programme management techniques can be useful. It is good practice to avoid
changing the SRO frequently.

A4.2.3 Each model is limited by the quality of its input data and founding assumptions. So the results of
any model need to be treated with a degree of scepticism. It is vital to build sufficient governance into
each model to help its users understand the value and weaknesses of its results. The apparent precision
of mathematical models should not mislead uses into putting more weight on them than can be
justified. Transparency should be the norm in the development and use of all models.

Quality assurance

A4.2.4 Whatever the complexity of the model, its governance should include an element of structured
critical challenge to provide a sense check. It can take a number of forms: for example a steering group,
a project board or outside assessment. New or untried models tend to require more QA than those
using recognised techniques.

A4.2.5 In an organisation using a great deal of modelling, it is good practice for the accounting officer to
appoint a QA champion. Effective QA demands dispassionate scrutiny by people disengaged with the
project but with sufficient knowledge and experience to help steer the model into a successful
approach. There may be a case for ensuring that different models in different parts of the organisation
use consistent approaches.

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A4.2.6 It is always good practice to evaluate the risks associated with any model so that the ultimate
users of the model can appreciate what it can and cannot deliver. Sophisticated models may demand
specialist expertise and leadership but the vital element of constructive lay oversight should never be
skimped. Otherwise there can be a danger that flaws are overlooked because the experts concentrate
on the technical complexities.

A4.2.7 In managing a model, the SRO should consciously decide how it can provide good value for
money. There is no point, for instance, in data collection to a high degree of accuracy if the assumptions
used in the model cannot be exact. Similarly, there is a stronger case for investing in a model if it forms a
central part of a decision making process.

A4.2.8 References:

QA of government models: https://www.gov.uk/government/publications/review-of- quality-assurance-

of-government-models

Guidance on long term financial modelling:

https://www.gov.uk/government/publications/gad-services/government-actuarys-

department-services #actuarial-modelling

Following the report by Sir Nicholas Macpherson into the quality assurance of analytical models that
inform government policy, a cross-departmental working group on analytical quality assurance was
established. The Aqua Book (at the following link) is one of their key products, and provides a good
practice guide for those working with analysis and analytical models. The landing webpage also links to a
number of other associated resources on quality assurance and modelling.
https://www.gov.uk/government/publications/the-aqua-book-guidance-on-

producing-quality-analysis-for-government:

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Annex 4.3 Risk

Each public sector organisation should have systems for identifying and managing risk - both
opportunities and threats - suited to its business, circumstances and risk appetite. The board should lead
the assessment and management of risk, and support the accounting officer in drawing up the
governance statements (see annex 3.1).

The case for managing risk

A4.3.1 Every public sector organisations faces a variety of uncertainties, both positive and negative,
which can affect its success in delivering its objectives, budget and value for money. So the board of
each public sector organisation should actively seek to recognise both threats and opportunities, and to
decide how to respond to them, including how to set internal controls.

A4.3.2 Managing risk should be integrated into the normal management systems of each public sector
organisation so that it can achieve its goals and maintain a reputation of credibility and reliability. It is
for each accounting officer (AO), supported by the board, to decide how.

A4.3.3 The board should make a strategic choice about the style, shape and quality of risk management
within each organisation. This is risk tolerance, ie the extent to which the organisation is willing to
accept loss or detriment either in the performance of its regular services or in order to secure better
outcomes. Different risk tolerances will apply to different circumstances, eg mission critical programmes
or policies might find service failure scarcely tolerable, whereas investment bodies may care more about
achieving financial success even at the price of some failures. Boards should be willing to take a
proportionate approach so that less important risks do not crowd out the vital ones.

Risk management in practice

A4.3.4 The board's strategic guidance on risk appetite should permeate each organisation's
programmes, policies, processes and projects. It should determine how delegations and reporting
arrangements work so that departures from plan can be picked up and dealt with promptly.

A4.3.5 Feedback from working level should also inform each board reassessment of risk. Thus risk
management should be a continuous cycle of assessment and feedback, responding to new information
and developments. The essentials of the process are summarised in box A4.3A.

A4.3.6 Each organisation should decide how this cycle should work, in line with its circumstances,
priorities and working practices. The final word must always be for

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the AO supported by the board, taking a broad and connected view across the whole organisation.

Box A4.3A: Outline of the risk management cycle

The board defines the organisation's risk tolerance.

2

The organisation identifies and categorises its risks.

The organisation assesses the risks identified: how likely their possible impact, identifying which are
beyond tolerance and when.

The board scans the horizon for any remote overlooked risks.

The board decides which risks matter and what action should be taken, if any.

Downward delegation of management, coupled with upward reporting of risks through the organisation
enables the board to track performance

Using this feedback, the board takes a rounded overview, and may adjust decisions eg on tolerance or
on response.

8 Back to step 1 and iterate as the board chooses.

Identifying risks

A4.3.7 It is important to capture all the organisation's risks so that they can be evaluated properly in
context.

A4.3.8 There is value in getting each part of the organisation to think through its own risks. At working
level operational risks may loom large. It may only be at board level that it is really possible to scan the
horizon for emerging trends, problems or opportunities that might change the organisation's working
environment. Some of the critical risks that are easily overlooked are shown in box 4.3B.

Box A4.3B: Examples of risk which are easily missed

Information security risks: unsecured digital information can be misplaced or copied. High impact low
probability risks: remote risks with serious effect if they happen. Opportunity risks: where some choices
may close off other alternatives;.

End to end risks: which emerge when an operational chain fails simultaneously in several places in a
linked set of processes.
Inter-organisational risks; which can cause failure of the organisation's business because of links to
partners, suppliers and other stakeholders.

Cumulative risks: which happen if several risks precipitate at once, eg in response to the same trigger.

A4.3.9 As well as drawing on risk assessment from within the organisation, it may be valuable to use an
external source to make sure that nothing important has been overlooked. Sometimes different public
sector organisations can help each other out in this way, to their mutual advantage. And it can be useful
to get staff to work together to consider the subject, eg in facilitated groups.

A4.3.10 Once the organisation's risks have been identified, it is possible to draw up a risk register. This is
a list of recognised risks which can be kept up to date and which the board can review regularly. Each
organisation needs to decide how to

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prioritise its total risk exposure so that the board can take an informed strategic approach to risk for the
organisation as whole.

Responding to risk

A4.3.11 Each organisation needs to decide whether, and if so how, to respond to its identified risks.
Some standard responses are listed in box A4.3C.

Box A4.3C: Some standard responses to risk

Treat: a common response. Treatment can mean imposing controls so that the organisation can
continue to operate; or setting up prevention techniques. See box 4.3D for possible treatments.
Transfer: another organisation might carry out an activity in which it is more expert. Insurance is not
usually open to public sector organisations (see annex 4.4) but other forms of transfer are, eg using a
payroll bureau. Some risks cannot be transferred, especially reputational risk. So delegating
organisations should retain oversight of their agents, with scope for remedial action when necessary.
Terminate: it may be best to stop (or not to start) activities which involve intolerable risks or those
where no response can bring the residual risk to a tolerable level, eg failing projects where it is cheaper
to start again. This option is not always available in the public sector, which sometimes has to shoulder
difficult risks - typically remote but potentially serious ones - which the private sector can choose to
avoid.

Tolerate: for risks where the downside is containable with appropriate contingency plans; for some
where the possible controls cannot be justified (eg because they would be disproportionate); and for
unavoidable risks, eg terrorism.
Take the opportunity: boards may embrace some risks, accepting their downside perhaps with controls
or preventative action, in the expectation of beneficial outcomes. Avoiding all risk can be as
irresponsible as disregarding risk.

A4.3.12 In choosing responses, the acid test is whether the residual risk can be made acceptable after
action. All controls should be realistic, proportionate to the intended reduction of risk, and offer good
value for money. The more common types are listed in box A4.3D.

Box A4.3D: Common controls

Preventive action: measures to eliminate or limit undesirable outcomes, eg improving training or risk
awareness; or stopping transfer of digital information using datasticks. Beware of imposing unnecessary
costs or damaging innovation.

Corrective controls: measures to deal with damaging aspects of realised risks, eg clauses to recover the
cost of failure of a contract. Includes contingency planning.

Directive controls: measures designed to specify the way in which a process is carried out to rule out
some obvious potential damage, eg hygiene requirements.

Detective controls: measures to identify damage so that it can be remedied quickly. Especially useful
where prevention is not appropriate, but can be a useful cross check elsewhere, eg stock controls.

A4.3.13 However it is treated, it is usually impossible to eliminate all risk. It would often be poor value
for money to do so were it possible. So it is good practice to associate application of controls with
contingency planning to cope with resolution of damage when risks precipitate. Many organisations find
it useful to dry run these plans: first to check that they work, second to make sure they are
proportionate and third to boil out any unnecessary features they may have.

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The Board

A4.3.14 Risk management is a key governance task for the board. It should take a strategic view of risk in
the organisation in the round, factoring together all the relevant input it can reasonably use. For
example, it may consider to what extent risks interact, cumulate or cancel each other out. And
consideration of risk should feature in all the board's significant decisions.

A4.3.15 It is good practice for the board to consider risk regularly as part of its normal flow of
management information about the organisation's activities. It is good practice for each layer of
management to give upward assurance about its performance, so reinforcing responsibility through the
structure.
A4.3.16 It is up to each board to decide how frequently it wants to consider risk. Some set regular
timetables to consider the whole risk register, while some choose to look at parts of the risk register in a
regular sequence. Scrutiny of this kind enables the board to assess developments in context and make
confident decisions about their relevance and significance.

A4.3.17 It is good practice for the board to make these assessments on the advice of its Audit
Committee, though it should form its own view. Audit committees can also add value by chasing up
implementation of the organisation's responses to PAC reports. Each Audit Committee should be chaired
by a non-executive board member, drawing on input from the organisation's internal reporting and
internal audit functions.

A4.3.18 Having weighed the identified risks, the board should also seek to distinguish unidentified risks,
some of which may be remote. Box 4.3B offers some possibilities though it is not exhaustive. This
process may lead the board to reconsider its strategy on risk tolerance.

A4.3.19 A useful focus of board risk work is supporting the AO in preparation of the governance
statement for publication in its annual report (se annex 3.1). It should include an account of how the
organisation has responded to risk and what it is doing both to contain and manage risk; and also to rise
to opportunities.

A4.3.20 More generally, the board should make sure that lessons are learned from the organisation's
experience. This applies particularly to perceived failures, eg an unforeseen risk or a crystallised risk
which turned out more damaging than expected. But it is equally true of successes, especially those
where risk was managed well, to see whether there is anything to be gained by repeating effective
techniques elsewhere.

A4.3.21 Finally, the board should consider whether the organisation's risks are being treated
appropriately. If damage has been prevented, it may be possible to adjust the existing response to risk
to achieve equally successful results by less expensive or less invasive techniques, eg replacing physical
controls with security

cameras.

Departmental Groups

A4.3.22 Nearly all government departments sponsor one or more arm's length bodies (ALBs) for which
they take ultimate responsibility while allowing them a degree of (or sometimes considerable)
independence (see chapter 7). The accounts

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of these ALBS are consolidated with their sponsor department's accounts, emphasising that the sponsor
stands behind them.
A4.3.23 It follows that each department board should consider the group's risk profile including the
businesses of its ALBs. The potential liabilities of some ALBs (eg in the nuclear field) can be so great that
they may overshadow the department's own, so this is essential hygiene.

A4.3.24 References:

The Orange Book: https://www.gov.uk/government/publications/orange-book

Other Treasury risk guidance:

http://webarchive.nationalarchives.gov.uk/20130129110402/http://www.hm-

treasury.gov.uk/psr_governance_risk_riskguidance.htm

NAO report on Managing risks in government: http://www.nao.org.uk/report/managing-risks-in-

government/

GAD's practical guide to strategic risk management:

https://www.gov.uk/government/publications/strategic-risk-management

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Annex 4.4 Insurance

Central government organisations should not generally take out commercial insurance because it is
better value for money for the taxpayer to cover its own risks. However, there are some circumstances
where commercial insurance is appropriate. This annex sets out the issues to be considered. This
guidance applies to departments and their arms-length bodies.

A4.4.1 Central government organisations should not normally buy commercial insurance to protect
against risk. Since the government can pool and spread its own risks, there is little need to pay the
private sector to provide this service. In general it is cheaper for the government to cover its own risks.

A4.4.2 However, in certain circumstances, as part of forming a risk management strategy, the
accounting officer in a public sector organisation may choose to purchase commercial insurance to
protect certain parts of the organisation's portfolio. Such decisions should always be made after a cost
benefit analysis in order to secure value for money for the Exchequer as a whole. Some acceptable
reasons for using insurance are set out in box A4.4A.

Box A4.4A: Where commercial insurance may provide value for money

Building insurance as a condition of the lease and where the lessor will not accept an indemnity:
commercial insurance may be taken out where the cost of accommodation, together with the cost of
insurance, is more cost effective than other accommodation options.
Overall site insurance: private sector contractors and developers usually take out a single-site insurance
policy because it is cheaper than each individual party insuring themselves separately. So a client
organisation may be able to cover its risks at little or no extra cost.

Insurance of boilers and lifts: which may be a condition of taking out a lease, and typically involves
periodic expert inspection designed to reduce the risk of loss or damage.

Commercial initiatives: because these activities are outside the government's core responsibilities,
losses on a department's discretionary commercial activities could reduce resources available for its
core activities (see chapter 7). It will usually therefore make sense to insure them. Any goods used for
services sold to other parts of central government should not, however, be insured.

Where commercial insurance is integral to a project: eg, where private contractors insist, it may be
appropriate to purchase insurance even if the net benefit is negative. But this may be a sign that the
project needs restructuring to avoid any requirement to buy

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commercial insurance, perhaps through letters of comfort or statements of support. The costs and
benefits of taking out insurance should be included in the appraisal of the project as a whole.

A4.4.3 Some ALBS may be in a slightly different position to central government departments. Box A4.4B
gives examples of some items they may choose to insure commercially.

Box A4.4B: Items ALBs may insure

items the ALB is required to insure, eg vehicles where the Road Traffic Acts require it. physical assets
where a cost benefit analysis supports the case for insurance and the sponsor department agrees.

goods owned by ALBS receiving less than 50% of their income from the Exchequer (through grant-in-aid
or fees and charges). Commercial insurance protects the risk to the Exchequer from claims from third
parties.

items used by an ALB for income generation schemes to supplement the approved level of public
spending. Commercial insurance is appropriate to cover the risks lest costs or losses could not be met
out of receipts.

Appraising the options

A4.4.4 Decisions on whether to buy insurance should be based on objective cost- benefit analysis, using
guidance in the Green Book1. Box A4.4C outlines some factors which are often worth considering in
such assessments.

Box A4.4C: Costs and benefits which could be included in assessments

Costs:

the insurance premium which may be paid

the administrative cost of managing claims with the insurance company Benefits:

transfer of risk, valued at the expected compensation for the insured losses

claims handling, where the insurance company will manage claims against third parties

the value of guaranteed business recovery: the potential reduction in the time taken to reinstate losses,
reducing business interruption

Setting fees and charges

A4.4.5 If a central government organisation insures risks arising in supplying a service for which a fee or
charge is levied, the actual premium payments should be included in the calculation of costs when
deciding the fee or charge. Similarly, where a central government organisation self-insures, the notional
cost of premium payments should be taken into account. See Chapter 6 for further details.

1 https://www.gov.uk/government/publications/the-green-book-appraisal-and-evaluation-in-central-
governent

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Claims administration

A4.4.6 Managing claims against third parties can be time-consuming and require expert attention.
Insurance companies may be better placed than public sector organisations to deal with claims
economically and efficiently. So contracting-out claims administration to an insurance company might
be more cost-effective than retaining the work in-house.

Reporting

A4.4.7 Departments should inform their Treasury spending team of:

·

any decision to use the services of commercial insurance companies

any reviews of insurance, or alternatives to insurance, that might contain lessons of wider application.

A4.4.8 In turn ALBs should consult their sponsor departments in similar circumstances.

Dealing with losses

Uninsured losses (except traffic accidents)

A4.4.9 Where a loss occurs or a third-party claim is received, public sector organisations should initially
consider whether the loss should be made good or the claim accepted. Thus:

loss of or damage to assets: the question of repair or replacement should always be carefully
considered, taking account of the need for

the asset and current policies. This decision is, in effect, a new

investment decision and should be appraised accordingly;

third-party claims: the justification for the claim should be carefully considered with appropriate legal
advice.

A4.4.10 If the organisation decides to repair or replace an asset, or meet a third party claim, it should
normally expect to meet the cost from within its existing allocations. The Treasury does not routinely
entertain bids for additional resources in such cases. If a bid did arise the Treasury would consider it on
its merits and in the light of the resources available, in the same way as other bids for increases in
provision. Similarly, ALBS should not normally expect their sponsor departments to meet claims for
reimbursement of loss.

Insured losses

A4.4.11 Public sector organisations should make insurance claims in accordance with the terms of the
policy.

A4.4.12 ALBS may retain amounts paid under commercial insurance policies to meet expenditure
resulting from losses or third-party claims. If it is decided not to replace or to repair an insured asset, the
sponsor department may reduce any grant in aid payable to the ALB.

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Claims between public sector organisations

A4.4.13 If two uninsured departments are involved in an incident causing loss to one or other, it is
immaterial to the Exchequer whether one claims on the other for the damage. For small claims it would
not be value for money for the Exchequer to make interdepartmental adjustments in the case of minor
damage. Similar waiver arrangements should apply up to mutually agreed limits between other public
sector organisations. But waiver arrangements of this kind are not appropriate where there are rights of
claim against third parties. It will always be regarded as novel, contentious, or repercussive for one
central government organisation to seek legal redress from another central government organisation
through the courts, meaning that Treasury consent is always required.

A4.4.14 Box A4.4D shows how to proceed when one central government organisation makes a larger
claim against one or more others.

Box A4.4D: Handling claims between public sector organisations

Insurance status

All insured

All uninsured

Settlement of claims

Insurers settle claims

Organisation(s) at fault negotiate about whether to reimburse the other(s)

Organisation at fault uninsured, other organisation(s) insured

Insured organisation claims on its insurance policy. Uninsured organisation(s) deal with claims from the
insurers on the basis of strict legal liability

Organisation at fault insured, other organisation(s) Uninsured organisation(s) seek financial satisfaction
uninsured through the insurers of the organisation(s) at fault

Vehicles

A4.4.15 Most ALBS insure third-party vehicle claims to comply with the Road Traffic Acts. Public sector
organisations that are not insured for traffic accidents should refer any third-party claims, either for or
against, to the Treasury Solicitor who acts on behalf of the government.

A4.4.16 Many claims between public sector organisations involving damage to, or loss caused by,
vehicles, can be handled using the arrangements in paragraph A4.4.13.

A4.4.17 Vehicles travelling in EU countries must comply with Directives. These require vehicles operating
in another's territory to be covered by insurance to the extent required by the legislation in territory of
the journey, unless there are acceptable alternative arrangements, eg indemnities.
Loans

A4.4.18 When government assets are loaned to a body other than a public sector organisation which
does not insure, it is important to protect the interests of the lending organisation. So the borrower
should insure against damage or loss of the

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assets from the time of receipt and against claims by third parties including its own employees. An
indemnity by the borrower is an acceptable substitute if the lender is satisfied that the borrower could
and would meet any damage or other loss.

A4.4.19 Public sector organisations are usually expected to meet the cost of insuring any government
assets (eg. equipment or stores) held by a contractor in the normal course of business. The cost of any
insurance against risks arising from negligence or wilful misconduct by the contractor's employees
should be borne by the contractor. These arrangements should be explicitly set out in the relevant
contract.

A4.4.20 Public sector organisations which borrow objects of value from a non- government body should
normally offer the owner an indemnity against damage or loss. Such indemnities should leave no doubt
as to the extent and duration of the borrowing organisation's liability. And they may need to be
reported if they fall within the parliamentary reporting requirements (see annex 5.4).

A4.4.21 Borrowers should only take out commercial insurance for loaned items of value if the owner
insists upon it, or if the borrower has reason to believe that commercial insurance would be more cost
effective than giving an indemnity.

Employers' liability

A4.4.22 The Crown is not bound by the Employers' Liability (Compulsory Insurance) Act 1969. So
departments need not insure the risks outlined in the Act. Decisions on whether to insure should be
taken on value for money grounds after an appraisal. Similarly, parliamentary bodies such as the
National Audit Office, the Parliamentary Commissioner (Ombudsman) and the Independent
Parliamentary Standards Authority need not insure against employers' liability risks as they are
exempted under the Employers' Liability (Compulsory Insurance) (Amendment) Regulations 2011 (SI
2011/686).

A4.4.23 A body funded by grant in aid need not insure against employers' liability risks. This is because
the Employers' Liability (Compulsory Insurance) Regulations 1998 (SI 1998/2573) provide exemption for
any body (or person who may be an employer) holding a certificate issued by a government department.
Again, the decision on whether to insure will depend on a value for money assessment. If the
organisation chooses not to insure, responsibility for the issue of certificates in accordance with the Act
rests with the department responsible for paying grant in aid, provided that it is satisfied that this is the
appropriate course.

A4.4.24 The scope of the certificate should be strictly confined to the risks with which the Employers'
Liability (Compulsory Insurance) Act 1969 is concerned, and may not be extended to any other risks. It
should be in the form set out in Box A4.4E. Departments should ensure that the circumstances in which
certificates have been issued are reviewed from time to time, so that certificates may be revoked if
circumstances change.

Box: 4.4.E: form of exemption certificate

In accordance with the provisions of paragraph 1 of Schedule 2 of the Employers' Liability (Compulsory
Insurance) Regulations 1998 (SI 1998/2573), the Minister of ......./Secretary of State for....... hereby
certifies that any claim established against [here specify the body or person] in respect of any liability to
[here specify the employees involved] of the kind mentioned in section

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1(1) of the Employers' Liability (Compulsory Insurance) Act 1969 will, to any extent to which it is
otherwise incapable of being satisfied by the aforementioned employer, be satisfied out of moneys
provided by parliament.

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Annex 4.5

Senior Responsible Owner Accountability

A4.5.1 Senior Responsible Owners (SRO) for Major Projects (as defined in the Government's Major
Project Portfolio) are in a special position in that they are expected to account for and explain the
decisions and actions they have taken to deliver the projects for which they have personal responsibility.
This line of accountability should be made clear to SROs in their appointment letter which is published
on GOV.UK.

A4.5.2 The Government publishes on an annual basis a list of the SROs for the Government's Major
Project Portfolio (as defined by the Infrastructure and Projects Authority).

A4.5.3 Where a Committee wishes to take evidence from an SRO of one of these major projects it will be
on the understanding that the SRO will be expected to account for the implementation and delivery of
the project and for their own actions. Appointment letters will make clear the point at which an SRO
becomes directly accountable for the implementation of the project in question. The SRO will also be
able to disclose to the Committee where a Minister or official has intervened to change the project
during the implementation phase in a way which has implications for cost and/or timeline of
implementation. In this respect the SRO should also be able to disclose their advice about any such
changes.

A4.5.4 Accounting Officers are ultimately accountable for the performance of all the business under
their control, including major projects for which an individual SRO has direct accountability and
responsibility. And in this respect, if a Select Committee calls for evidence from an SRO, the Accounting
Officer of the department may also be called to support the SRO at a hearing.

A4.5.5 This line of direct accountability for SROS does not alter the special position and relationship of
Accounting Officers with the PAC.

A4.5.6 The Government Functional Standard GovS 002: Project Delivery sets the expectations for the
direction and management of portfolios, programmes and projects for all government departments and
arm's length bodies. An SRO should refer to this standard to ensure the breadth of practices required for
successful delivery are used. https://www.gov.uk/government/publications/project-delivery- functional-
standard

A4.5.7 Further information on the accountability, relationship to other key leadership roles in project
delivery and the selection and appointment of an SRO is available in Infrastructure and Project Authority
guidance on the role of the senior responsible owner.
https://www.gov.uk/government/publications/the-role-of-the- senior-responsible-owner

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A4.5.8 Further information is available in Cabinet Office guidance for officials from departments and
agencies on giving evidence to Parliamentary Select Committees (the Osmotherly Rules).

93

Annex 4.6 Procurement

It is important to secure value for money in asset management through sound procurement. Public
sector organisations should normally acquire goods and services through fair and open competition,
acting on Cabinet Office advice. This annex provides an overview of the policy framework for public
procurement.

A4.6.1 Good procurement practice demands that public sector organisations buy the goods, works and
services they need using fair and open procurement processes, guarding against corruption and meeting
the standards in MPM. World Trade Organisation (WTO) agreements and many of the UK's trade deals
underpin these principles. The specific responsibilities are set out in box A4.6A.
Box A4.6A: checklist of key purchasing responsibilities

General

value for money, normally through competition;

compliance with legal obligations including those imposed by international agreements; follow
Government Procurement Service1 policies and standards on public procurement. Management
approach

leadership on the importance of procurement in delivering objectives;

define roles and responsibilities of key staff, with adequate separation of duties;

promote awareness (including in ALBS) of the importance of procurement policy and the GPS guidance.

Planning and engagement

Skills

clarify objectives of procurement from the start

consider how the procurement strategy could attract a diverse range of suppliers including SMEs and
civil society organisations;

consider collaborative or shared procurement with other organisations to maximise purchasing power;

design procurement strategy and engage with the market early and well before competition starts;

consult GPS on any difficult legal issues.

use procurement professionals throughout;

1 https://www.gov.uk/government/organisations/crown-commercial-service

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ensure that there is sufficient skills capacity in undertaking and managing procurements and projects.

Review
apply the GatewayTM review process;

draw issues which may have wider implications to the Cabinet Office's attention.

A4.6.2 This guidance is intended to be fully consistent with the UK's international obligations. It does not
create any rights or legal obligations.

Value for money

A4.6.3 Value for money is a key concept (see paragraph 3.3.3 and box A4.6B). It means securing the best
mix of quality and effectiveness for the least outlay over the period of use of the goods or services
bought. It is not about minimising up front prices. Whether in conventional procurement, market
testing, private finance or some other form of public private partnership, finding value for money
involves an appropriate allocation of risk.

Box A4.6B: securing value for money

Cost: the key factor is whole life cost, not lowest purchase price. Whole life cost takes into account the
cost over time, including capital, maintenance, management, operating and disposal costs. For complex
procurements, whole-life cost can be very different from initial price.

Quality: paying more for higher quality may be justified if the whole life cost is better, for example,
taking into account maintenance costs, useful life and residual value. The purchaser should determine
whether increased benefits justify higher costs.

Perspective: each public sector organisation's procurement strategy should seek to achieve the best
value outcome for the Exchequer as a whole, not just for the organisation itself. This should be designed
in before the invitation to tender is published.

Collaborative procurement: in the vast majority of cases, standardising and aggregating procurement
requirements will deliver better value for money. Public sector organisations, including smaller ones,
should therefore collaborate as far as possible on procurement in line with GPS practice.

A4.6.4 Purchasers need to develop clear strategies for continuing improvement in the procedures for
acquisition of goods, works and services. Public sector organisations should collaborate with each other,
following guidance, in order to secure economies of scale, unless they can achieve better value for the
Exchequer as a whole some other way. Smaller suppliers should have fair access to see if they able to
deliver better value for money.

Legal framework

A4.6.5 Public sector organisations are responsible for ensuring that they comply with the law on
procurement (see box A4.6C) taking account of Cabinet Office guidance2.

The user's requirement

A4.6.6 Procurement should help deliver relevant departmental and government-wide strategies and
policies. The procuring organisation should establish that the supply sought is really needed, is likely to
be cost effective and affordable. And the published specification should explain clearly what outcomes
are required, since this is crucial to obtaining the supply required. Once it is decided that third party
procurement appears better value for money than provision in-house, a

2 Cabinet Office guidance: https://www.gov.uk/government/organisations/crown-commercial-service

95

range of models should be considered, for example employee-led mutuals and joint ventures as well as
more traditional outsourcing.

Box A4.6C: the legal framework for public procurement

international obligations, notably WTO agreements

domestic legislation, including subordinate legislation implementing directives;

contract and commercial law in general

domestic case law

The procurement process and suppliers

A4.6.7 Competition promotes economy, efficiency and effectiveness in public expenditure. Works, goods
and services should be acquired through competition unless there are convincing reasons to the
contrary, and where appropriate should comply with domestic advertising rules and policy as well as
relevant obligations imposed on the UK by its international agreements. The form of competition chosen
should be appropriate to the value and complexity of the goods or services to be acquired.

A4.6.8 Public sector organisations should aim to treat suppliers responsibly to maintain good
reputations as purchasers (see box A4.6D), taking account of the government's Procurement pledge to
help stimulate economic growth3.

Box A4.6D: relationships with suppliers

high professional standards in the award of contracts

clear procurement contact points

adequate information for suppliers to respond to the bidding process

the outcome of bids announced promptly

feedback to winners and losers on request on the outcome of the bidding process

high professional standards in the management of contracts

prompt, courteous and efficient responses to suggestions, enquiries and complaints

A4.6.9 In carrying out efficient sourcing projects, central government should follow best practice.

A4.6.10 One such approach is LEAN approach4 whose principles are designed to make doing business
with government more efficient and cost-effective (for both buyers and suppliers) to support economic
growth.

A4.6.11 During the evaluation stage of sourcing, it is important to for public sector procuring
organisations to:

establish the propriety of candidate suppliers - taking account of the requirement to exclude those
convicted of, for example, fraud, theft, fraudulent trading or cheating HMRC;

3 Procurement Pledge (http://www.cabinetoffice.gov.uk/resource-library/our-procurement-pledge)

4 https://www.gov.uk/government/publications/lean-sourcing-guidance-for-public-sector-buyers

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assess suppliers' economic and financial standing to gain confidence of their capacity to carry out fully
what the buyer requires within the pre-determined timescale and deliver value for money;

secure value for money (see box A.4.6B), using relevant and consistent criteria for evaluating the key
factors (cost, size, sustainability, design etc).

Contracts

A4.6.12 In drawing up contracts, purchasers should, where possible:

use model terms and conditions developed in the light of collective experience and which may help
avoid prejudicing the position of others using the same supplier;

avoid variation of price clauses in contracts of less than two years' duration; and

Include prompt payment clauses.

A4.6.13 Purchasers cannot enter into contracts with other parts of the legal entity to which they belong,
so different parts of the Crown cannot contract with each other. Instead internal agreements which fall
short of being contracts are used (typically service level agreements). These may have all the hallmarks
of contracts other than scope for legal enforcement.

Central purchasing bodies and agencies

A4.6.14 Central government organisations are required to use the services and collaborative
procurement deals managed by the Government Procurement Service on behalf of government5.
A4.6.15 If public sector purchasers employ private sector agents to undertake procurement on their
behalf they should:

Taxation

require compliance with the law (see box A4.6C);

ensure clear allocation of responsibilities; and

where appropriate, obtain the agent's indemnity against any costs incurred as a result of its failure to
comply with the legal framework on its behalf.

A4.6.16 Central government bodies should:

base procurement decisions independent of any tax advantages that may arise from a particular bid;

avoid contractors using offshore jurisdictions, consistent with international obligations and the
government's stated objectives on tax transparency and openness;

be vigilant in not facilitating tax arrangements with suppliers or their agents that are detrimental or
disadvantageous to the Exchequer. Public sector organisations need to take special care in relation to
the tax arrangements of public appointees (see Cabinet Office guidance);

5 Cabinet Office guidance: https://www.gov.uk/government/organisations/crown-commercial-service

6 Cabinet Office guidance: Procurement Policy Note - Tax arrangements of Public Appointees

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employ internal management processes to ensure that transactions that give rise to questions of
propriety of tax arrangements are brought to the accounting officer's or, if necessary, ministers'
attention.

A4.6.17 In the case of bids under the Private Finance (PF2), it is particularly important to ensure that
comparisons of competing bids take account of any tax planning by bidders. The Treasury's Green Book
provides for a tax adjusted Public Sector Comparator to allow for the (usually) material tax difference
between a PF2 option and the wholly public sector alternative. It would be inappropriate to apply this to
bids where tax planning has cancelled out this effect. A4.6.18 Public procurement projects involving the
transfer of real estate or assets that are likely to appreciate in value can often give rise to specific tax
issues, in particular liability to capital gains tax. If public sector organisations are negotiating with bodies
that wish to structure procurement proposals in this way, they should consult the Treasury and HMRC at
an early stage to identify the likely tax implications and assess the proposal for propriety generally.

Further guidance

A4.6.19 Central sources of guidance on procurement and related issues include:

the Government Commercial Function

(https://www.gov.uk/government/organisations/government-commercial-function)

the Treasury's Green Book on project appraisal and evaluation in central government

(https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/179

349/green book_complete.pdf.pdf);

Department for Business, Energy and Industrial Strategy guidance on compliance with the subsidy
obligations arising from the UK's international agreements
(https://www.gov.uk/government/publications/complying-with-the-uks- international-obligations-on-
subsidy-control-guidance-for-public-authorities)

Procurement Policy Notes

(https://www.gov.uk/government/collections/procurement-policy-notes);

The Crown Commercial Service (https://www.crowncommercial.gov.uk/); Cartels and bid-rigging

(https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/284

413/oft435.pdf); and

HM Revenue and Customs on tax avoidance issues (http://www.hmrc.gov.uk/avoidance/).

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Annex 4.7

Subsidies
A4.7.1 The transition period which followed the UK's departure from the European Union ended on 31
December 2020, and EU law ceased to have any force in the UK (save in those areas provided for by the
Withdrawal Agreement).1 UK public bodies must continue ensure compliance with all relevant domestic
and international subsidies rules, including World Trade Organisation commitments and commitments
the UK has entered into under bilateral Trade Agreements.

A4.7.2 In certain areas the government has published updated guidance, which can be found on gov.uk.
Accounting Officers should be aware that obligations arising from domestic and international law are
binding for the whole public sector and assist their partner organisations in complying where new
obligations have arisen.

Box A4.7A: further guidance

BEIS guidance on complying with international obligations on subsidy control -

https://www.gov.uk/government/publications/complying-with-the-uks-international-obligations-on-

subsidy-control-guidance-for-public-authorities

1 This annex has been retitled 'Subsidies' from 'State aids' to reflect this.

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Annex 4.8

Expenditure and payments

As part of the process of authorising and controlling commitments and expenditure of public funds,
public sector organisations should time their expenditure and payments to provide good value for public
money.

A4.8.1 Public sector organisations should use good commercial practice in managing the flows of
expenditure and commitments they deal with. Box 4.3 has some sound high level principles. These need
to be interpreted in the context of each organisation's business, in line with current legislation and using
modern

commercial practice. The actual techniques used may thus change from time to time and from place to
place.

A4.8.2 In particular, public sector organisations should;

explain payment procedures to suppliers;

agree payment terms at the outset and stick to them;

pay bills in accordance with agreed terms, or as required by law;

tell suppliers without delay when an invoice is contested; and

settle quickly when a contested invoice gets a satisfactory response.

A4.8.3 Public sector organisations are also bound by legislation1 aiming to ensure that in commercial
transactions, the payment period does not exceed 30 calendar days after the debtor receives an invoice.
Further advice is available from the Cabinet Office and BEIS.

A4.8.4 However, the Government recognises that the public sector should set a strong example by
paying promptly. Central government departments should aim to pay 80% of undisputed invoices within
5 days. They should also include a clause in their contracts requiring prime contractors to pay their
suppliers within 30 days. The principles in Box 4.4 must still be applied to all payments. Further guidance
is available2.

1 The Late Payment of Commercial Debts (Interest) Act 1998 (as amended by The Late Payment of
Commercial Debt Regulations

2002 (SI 1674) and the Late Payment of Commercial Debt Regulations 2013).

2 The Prompt Payment Code http://www.promptpaymentcode.org.uk./

100

Payments outside the normal pattern

A4.8.5 Payments in advance of need should be exceptional, and should only be considered if a good
value for money case for the Exchequer can be made. Even then, as advance payments lead to higher
Exchequer financing costs, such payments are novel and contentious and require specific Treasury
approval. Advance payment should never be used to circumvent expenditure controls or budgetary
limits. A4.8.6 In particular, it is not good value for money for public sector organisations to act as a
source of finance to contractors who have access to other forms of loan finance. So advance payments
to contractors (ie payments made before equivalent value is received in return) should only be
considered if, for example, a price discount commensurate with the time value of the funds in question
can provide a good value for money case. Exceptions to these guidelines, which would not normally
require specific Treasury approval, include:

service and maintenance contracts which require payment when the contract commences, provided
that the service is available and can be called on from the date of payment;

grants to small voluntary or community bodies where the recipient needs working capital to carry out
the commitment for which the grant is paid and private sector finance would reduce value for money;
minor services such as training courses, conference bookings or magazine subscriptions, where local
discretion is acceptable; and
prepayments up to a modest limit agreed with the Treasury, where a value for money assessment
demonstrates clear advantage in early payment.

A4.8.7 Interim payments may have an element of prepayment and so public sector organisations should
consider them carefully before agreeing to them. However, if they are genuinely linked to work
completed or physical progress satisfactorily achieved, preferably as defined under a contract, they may
represent acceptable value for public funds. Taking legal advice as necessary, organisations should,
however, consider whether:

the contractor's reduced need for working capital should be reflected in reduced prices;

the contractor should provide a performance bond in the form of a bank guarantee to deal with possible
breach of contract.

A4.8.8 Public sector organisations should not, however, use interim payments to circumvent public
spending controls. For example, it is not acceptable to make payments where value has not been
received, simply to avoid underspending. A4.8.9 Deferred payments are generally not good practice.
They normally mean paying more to compensate the contractor for higher financing costs and are thus
poor value for money (at the margin the Exchequer can always borrow more cheaply than the private
sector). So any proposal for deliberate late payment is potentially novel and contentious. Any central
government organisation considering deferred payments must thus seek Treasury approval before
proceeding.

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Annex 4.9 Fraud

Governance in public sector organisations includes arrangements for preventing, countering and dealing
with fraud. This annex provides further detail.

A4.9.1 Accounting officers are responsible for managing public sector organisations' risks, including
fraud. Each organisation faces a range of fraud risks specific to its business, from internal and external
sources. The Fraud Act 2006 recognises that a criminal offence of fraud arises from causing a loss to an
individual or legal entity through the intentional misdeclaration of information; knowingly withholding
information; or through an abuse of position. The risk of a given fraud is usually measured by the
probability of its occurring and its impact in monetary and reputational terms should it occur. Fraud can
also have other impacts including undermining the delivery of government policy objectives and
outcomes and physical or societal harm.

A4.9.2 In broad terms, managing the risk of fraud involves:

assessing the organisation's overall vulnerability to fraud;

identifying the areas most vulnerable to fraud risk;

•

evaluating the scale of fraud risk;

responding to fraud risk;

detecting fraud;

measuring the effectiveness of the fraud risk strategy; and

reporting fraud.

A4.9.3 The most effective way to manage the risk of fraud is to prevent it from happening by developing
an effective anti-fraud culture.

For guidance on all these areas, see Tackling Internal Fraud' and Tackling External Fraud2.

1 http://webarchive.nationalarchives.gov.uk/20130129110402/http://www.hm-treasury.gov.uk/psr
managing risk of fraud.htm

2 http://www.nao.org.uk/report/good-practice-in-tackling-external-fraud-2/

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Assessing vulnerability to fraud

A4.9.4 Each organisation should identify and assess at different levels how it might be vulnerable to
fraud with reference to the HMG standards for Fraud Risk Assessment. Fraud should be always
considered as a risk for the departments' risk register.

Evaluating the scale of fraud risk

A4.9.5 For any new major area of spend, departments shall assess the risk of and impact from fraud at
the outset when the spending is being proposed. This should identify the potential for fraud and the
different impacts that fraud could have for this spend area. Once spending is approved this should result
in the development and continued maintenance of a detailed fraud risk assessment

Responding to fraud risk

A4.9.6 The organisation's response to fraud risk should be customised to the risks it faces. Typically it
will involve some or all of the following.

•
Developing a Fraud Policy Statement, a Fraud Risk Strategy and a Fraud Response Plan (key documents
that every organisation should have). Developing and promoting an anti-fraud culture, maybe through a
clear statement of commitment to ethical behaviour to promote awareness of fraud. Recruitment
screening, training and maintaining good staff morale can also be important.

Allocating responsibilities for the overall and specific management of fraud risk so that these processes
are integrated into management.

Establishing cost-effective internal systems of control to prevent and detect fraud.

Developing the skills and expertise to manage fraud risk effectively and to respond to fraud effectively
when it arises.

Establishing well publicised avenues for staff and members of the public to report suspicions of fraud.

Responding quickly and effectively to fraud when it arises.

Establishing systems for investigations into allegations of fraud.

Using the government's Counter Fraud Function and/or Internal Audit to advise on fraud risk and
drawing on their experience to strengthen control.

Taking appropriate action (criminal, disciplinary) against fraudsters and seeking to recover losses.

Continuously evaluating the effectiveness of anti-fraud measures in reducing fraud.

Working with stakeholders to tackle fraud through intelligence sharing, joint investigations, etc.

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Having a programme of fraud risk assessment, and fraud measurement.

Having systems to report to the centre all instances and values of prevented and detected fraud from
across the organisation.

Having metrics with a financial impact based upon prevented and/or detected fraud against a baseline.

Have a programme to test for, and measure, previously undetected and unreported fraud
A4.9.7 It is good practice to measure the effectiveness of actions taken to reduce the risk of fraud.
Assurances about these measures can be obtained from Internal Audit fraud loss measurement
exercises, stewardship reporting, monitoring, or from other review bodies.

Reporting fraud

A4.9.8 Public sector organisations should retain records of internal and external frauds discovered and
actions taken, including an assessment of the value of any losses. They may need to contribute to
occasional reports and analysis of frauds. These should be reported to the centre of the government's
Counter Fraud Function via the Consolidated Data Return.

A4.9.9 Public sector organisations should also provide the Counter Fraud Function's Centre of Expertise
with details, of any novel or unusual frauds (or attempted frauds) so that this information can be shared
more widely. Public sector organisations should also consider reporting frauds and suspected fraud to
the NAO.

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Annex 4.10

Losses and write offs

This annex sets out what is expected when departments and their arms length bodies (ALBs) incur losses
or write off the values of assets, including details of when to notify parliament.

A4.10.1 As parliament does not agree or approve advance provision for potential future losses when
voting money or passing specific legislation, such transactions when they arise are subject to greater
scrutiny and control than other payments. Public sector organisations should only consider accepting
losses and write-offs after careful appraisal of the facts (including whether all reasonable action has
been taken to effect recovery - see Annex 4.11), and should be satisfied that there is no feasible
alternative. In dealing with individual cases, departments must always consider the soundness of their
internal control systems, the efficiency with which they have been operated, and take any necessary
steps to put failings right.

A4.10.2 The guidance in this chapter relates to cash and fiscal losses. It is not intended for losses that do
not impact on the fiscal position. For example, erroneous debit balances that result in an accounting
adjustment but not a cash loss should not be disclosed in the losses statement.

Levels of delegation

A4.10.3 Departments have delegated authority to deal with all losses, unless there are specific
delegations put in place, subject to paragraph A4.10.4. Box A4.10A provides examples of the different
categories of loss.
Box A4.10A: examples of losses

Losses

cash losses: physical losses of cash and its equivalents (eg credit cards, electronic transfers)

realised exchange rate and hedging losses: losses due to fluctuations in exchange rates or hedging
instruments

losses of pay, allowances and superannuation benefits paid to civil servants, members of the armed
forces and ALB employees: including overpayments due to miscalculation, misinterpretation, or missing
information; unauthorised issues; and other causes losses arising from overpayments: of social security
benefits, grants, subsidies etc losses arising from failure to make adequate charges: eg for the use of
public property.

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Losses of accountable stores

losses through fraud, theft, arson or any other deliberate act

losses arising from other causes.

Fruitless payments and constructive losses

Claims waived or abandoned

Consulting the Treasury

A4.10.4 When departments identify losses and write-offs, they should consult the Treasury, using the
guidance in Box A4.10B, irrespective of the amount of money concerned, if they:

involve important questions of principle;

raise doubts about the effectiveness of existing systems;

contain lessons which might be of wider interest;

are novel or contentious;

might create a precedent for other departments in similar circumstances;

arise because of obscure or ambiguous instructions issued centrally.

A4.10.5 Similarly, ALBS should consult their sponsor departments about similar cases. In turn
departments may need to consult the Treasury.

BoxA4.10B: consulting the Treasury on losses

Departments should consult the Treasury as soon as possible, outlining:

the nature of the case, the amount involved and the circumstances in which it arose;

the reasons for the proposed write-off, including any legal advice;

the reason for consulting the Treasury;

whether fraud (suspected or proven) is involved;

whether the case resulted from dereliction of duty;

whether failure of supervision is involved;

whether appropriate legal and/or disciplinary action has been taken against those involved including
supervisors, and, if not, why not;

whether those primarily involved will be required to bear any part of the loss; and

whether the investigation has shown any defects in the existing systems of control and, if so, what
action will be taken.

Notification to parliament

A4.10.6 Losses should be brought to parliament's attention at the earliest opportunity, normally by
noting the department's annual accounts, whether or not they may be reduced by subsequent
recoveries. For serious losses, departments

106

should also consider the case for a written statement to parliament. Departments should not hesitate to
notify parliament of any losses which it would be proper to bring to their attention.

Losses and claims records

A4.10.7 Public sector organisations should maintain an up to date record of losses. The record should
show:
the nature, gross amount (or estimate where an accurate value is unavailable), and cause of each loss;

the action taken, total recoveries and date of write-off where

appropriate; and

the annual accounts in which each loss is to be noted.

A4.10.8 A losses statement is required in annual accounts where total losses exceed £300,000.
Individual losses of more than £300,000 should be noted separately. Losses should be reported on an
accruals basis.

A4.10.9 Where efforts are still being made to secure recovery of cash losses formally written off,
charged to the accounts and noted, public sector organisations should consider including them in a
record of claims to ensure that recovery is not overlooked.

Accounting for cash losses

A4.10.10 Cash losses may initially be accounted for as debtors in annual accounts pending recovery or
write-off.

A4.10.11 When a department incurs a cash loss it should charge it to the appropriate budget subhead in
the Estimate, and for accounts recognise the cost in accordance with the FREM.

A4.10.12 Where a cash loss is wholly or partly recovered by reducing the amounts of pay or pension1
which would otherwise be due, or under statutory or other specific powers2, only the resulting
outstanding balance is treated as a loss to be written off. The sum(s) are charged to the relevant budget
boundary as if they had been paid to the individual concerned who then used the money to pay the
claim. A4.10.13 Similarly, where the loss is wholly or partly met by voluntary payments by the person
responsible or by a payment from an insurance company or other non- public source, only the net loss is
written off. If, however, there are no powers to apply the sums withheld by non-issue of pay etc, the
gross amount of the loss is written off.

A4.10.14 Generally, no note is necessary if the net loss is nil by the time the annual accounts are
finalised. There may, however, be exceptions (eg losses arising from culpable causes) where the
circumstances of the loss are such as to make it proper to bring them to the notice of parliament by
inclusion in the Losses Statement.

1 Tax must be deducted from pay or pension subject to PAYE withheld in settlement of a loss, to arrive
at the amount attributed to debt repayment.

2 For example, Queen's Regulations

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Stores losses

A4.10.15 Stores losses are, in effect, money spent without the authority of parliament. In establishing
the amount of the loss, and hence whether the annual account should be noted, the net value of the
loss after crediting any sums recovered will be the determining factor.

A4.10.16 Losses of stores arising from culpable causes should be noted in departmental records, in
accordance with normal practice. Such losses should also be noted in the annual account, to ensure that
such losses are brought to the attention of parliament in the appropriate manner, and to aid
departmental management in managing and accounting for stores.

A4.10.17 Where there is an identifiable claim against some person, the loss need not be noted
immediately. However, if the department subsequently decides to waive the claim, or finds that it
cannot be presented or enforced, the loss should be treated as an abandoned claim (see paragraph
A.4.10.24) and noted accordingly. A4.10.18 Any loss recoverable from a third party, where a decision is
taken to waive recovery because of a knock for knock agreement, should be noted as a stores loss.
A4.10.19 Where stores are to be written off, gifted, or transferred to other departments, they should be
valued in accordance with the FREM, unless circumstances justify exceptional treatment, or other
arrangements have been agreed3.

Fruitless payments

A4.10.20 A fruitless payment is a payment which cannot be avoided because the recipient is entitled to
it even though nothing of use to the department will be received in return. Some examples are in box
A4.10C.

A4.10.21 As fruitless payments will be legally due to the recipient, they are not regarded as special
payments. However, as due benefit has not been received in return, they should be treated as losses,
and brought to the attention of parliament in the same way as stores losses.

Box A4.10C: examples of fruitless payments

A fruitless payment is a payment for which liability ought not to have been incurred, or where the
demand for the goods and services in question could have been cancelled in time to avoid liability, for
example:

forfeitures under contracts as a result of some error or negligence by the department; payment for
travel tickets or hotel accommodation wrongly booked or no longer needed, or for goods wrongly
ordered or accepted;

the cost of rectifying design faults caused by a lack of diligence or defective professional practices; and

extra costs arising from failure to allow for foreseeable changes in circumstances.

3 Stores held by the Ministry of Defence may be valued according to their estimated supply price.
108

Constructive losses

A4.10.22 A constructive loss is a similar form of payment to stores losses and fruitless payments, but
one where procurement action itself caused the loss. For example, stores or services might be correctly
ordered, delivered or provided, then paid for as correct; but later, perhaps because of a change of
policy, they might prove not to be needed or to be less useful than when the order was placed.

A4.10.23 Constructive losses need not be noted in the Losses Statement in the annual accounts unless
they are significant.

Claims waived or abandoned

A4.10.24 Losses may arise if claims are waived or abandoned because, though properly made, it is
decided not to present or pursue them. Some examples are in box A4.10D.

A4.10.25 The following should not be treated as claims waived or abandoned.

any claims wrongly identified or presented, whether in error or otherwise. A claim should not, however,
be regarded as withdrawn where there is doubt as to whether it would succeed if pursued in a court of
law, or if the liability of the debtor has not or cannot be accurately assessed;

waivers or remission of tax. HMRC have special rules about remissions of tax. Departments should
consult the Treasury about treatment when a case arises; or

a claim for a refund of an overpayment which fails or is waived. This should be regarded as a cash loss.

Box A4.10D: examples of waived and abandoned claims

where it is decided to reduce the rate of interest on a loan, and therefore to waive the right to receive
the amount of the reduction

claims actually made and then reduced in negotiations or for policy reasons

claims which a department intended to make, but which could not be enforced, or were never
presented

failure to make claims or to pursue them to finality, e.g. owing to procedural delays allowing the
Limitations Acts (annex 4.11.11) to become applicable

claims arising from actual or believed contractual or other legal obligations which are not met (whether
or not pursued), e.g. under default or liquidated damages clauses of contracts
amounts by which claims are reduced by compositions in insolvency cases, or in out-of- court
settlements, other than reductions arising from corrections of facts

claims dropped on legal advice, or because the amounts of liabilities could not be determined

remission of interest on voted loans.

A4.10.26 Waivers should be noted in annual accounts in accordance with the FREM. In addition:

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a claim not presented should normally be noted at its original figure;

where more than one department is involved, each should note its records to the extent of its interest,
without attempting spurious accuracy.

There is no need to note annual accounts if claims between departments are waived or abandoned.
These are domestic matters.

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Annex 4.11 Overpayments

This annex discusses how, and how far, public sector organisations should seek to recover overpayments
- one case of special payments outside normal parliamentary process (section 4.7). In difficult cases it is
important to act on legal advice.

A4.11.1 Even good payment systems sometimes go wrong. Most organisations responsible for making
payments will sometimes discover that they have made overpayments in error.In principle public sector
organisations should always pursue recovery of overpayments, irrespective of how they came to be
made. In practice, however, there will be both practical and legal limits to how cases should be handled.
So each case should be dealt with on its merits. Some overpayment scenarios are outlined in box
A4.11A. Where recovery of overpayments is not pursued the guidance in annex A4.10 should be
followed.

Box A4.11A: possible reasons for overpayment

Contractors and suppliers

Overpayments in business transactions should always be pursued, irrespective of cause. It is acceptable

to recover by abating future payments if this approach offers value for money and helps preserve
goodwill. If the contractor resists, the overpaying organisation should consider taking legal action, taking
account of the strength of the case, and of legal advice.
Grants and subsidies

Overpayments to persons or corporate bodies should be treated as business transactions and a full
refund sought. The overpaying organisation should ask recipients to acknowledge the amount of the
debt in writing.

Pay, allowances, pensions

Overpayments to:

civil servants

members of the armed forces

employees of NDPBs

retired teachers and NHS employees

and the dependants of any of these

should be pursued, taking proper account of how far recipients have acted in good faith. Similar cases
should be treated consistently. After warning recipients, recovery through deduction from future salary
or pension is often convenient. Legal advice is often wise to make sure that proper account has been
taken of any valid defence against recovery recipients may have.

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A4.11.3 When deciding on appropriate action, taking legal advice, organisations should consider:

the type of overpayment;

• whether the recipient accepted the money in good or bad faith;

•
the cost-effectiveness of recovery action (either in house or using external companies). Advice that a
particular course of action appears to offer good value may not be conclusive since it may not take
account of the wider public interest;

any relevant personal circumstances of the payee, including defences against recovery;

the length of time since the payment in question was made; and

the need to deal equitably with overpayments to a group of people in similar circumstances.

A4.11.4 It is good practice to consider routinely whether particular cases reveal concerns about the
soundness of the control systems and their operation. It is important to put failings right.

Payments made with parliamentary authority

A4.11.5 Sometimes overpayments are made using specific legal powers but making mistakes of fact or
law. These are legally recoverable, subject to the provisions of the Limitation Acts and other defences
against recovery (see below). The presumption should always be that recovery should be pursued,
irrespective of the circumstances in which it arose.

Good faith

A4.11.6 The decision on how far recovery of an overpayment should be pursued in a particular case will
be influenced by whether the recipient has acted in good or bad faith:

where recipients of overpayments have acted in good faith, eg genuinely believing that the payment
was right, they may be able to use this as a defence (though good faith alone is not a sufficient defence);

where recipients of overpayments have acted in bad faith, recovery of the full amount overpaid should
always be sought.

A4.11.7 Recipients may be inferred to have acted in bad faith if they have wilfully suppressed material
facts or otherwise failed to give timely, accurate and complete information affecting the amount
payable. Other cases, eg those involving recipients' carelessness, may require judgement. And some
cases may involve such obvious error, eg where an amount stated is very different from that paid, that
no recipient could reasonably claim to have acted in good faith.

A4.11.8 In forming a judgement about whether payments have been received in good faith, due
allowance should be made for:

• the complexity of some entitlements, eg to pay or benefits;

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Fraud
how far the payment depended on changes in the recipient's circumstances of which he or she was
obliged to tell the payer;

the extent to which generic information was readily available to help recipients understand what was
likely to be due.

A4.11.9 If a public sector organisation is satisfied that the circumstances of an overpayment involved
bad faith on the part of the recipient, it should automatically consider the possibility of fraud in addition
to recovery action. For example, the recipient may have dishonestly given false information or
knowingly failed to disclose information. If there is evidence of fraudulent intent, prosecution or
disciplinary action should be undertaken where appropriate and practicable. A criminal conviction in
such a case will not eliminate the public debt which had resulted from the overpayment, and so
recovery of the debt should also be pursued by any available means.

Cost-effectiveness

A4.11.10 Public sector organisations should take decisions about their tactics in seeking recovery in
particular cases on the strength of cost benefit analysis of the options. Decisions not to pursue recovery
should be exceptional and taken only after careful appraisal of the relevant facts, taking into account the
legal position. The option of abating future payments to the recipient should always be considered.

Defences against recovery

A4.11.11 Defences which may be claimed against recovery include:

the length of time since the overpayment was made

• change of position

estoppel

• good consideration

hardship.

Lapse of time

A4.11.12 There can be time limitations on recovery. In England and Wales, a recipient might plead that a
claim is time-barred under the provisions of the Limitation Acts. Proceedings to recover overpayments
must generally be instituted within six years (twelve years if the claim is against the personal estate of a
deceased person) of discovery of the mistake or the time when the claimant could, with reasonable
diligence, have discovered it.
A4.11.13 When public sector organisations claim against a private sector organisation or people who
ignore or dispute the claim, the organisation should take legal advice about proceeding with the claim in
good time so that it does not become time barred.

A4.11.14 If someone claims that they have overpaid a public sector organisation, they should be told
promptly if the claim is time barred. But if, on its merits, the

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recipient organisation decides that there is a case for an ex gratia payment, it should obtain Treasury
consent if the amount involved is outside the organisation's

delegated powers. Similarly, there may be a case for ex gratia payments to make good underpayments
to government employees unless they were dilatory in making their claims.

Change of position

A4.11.15 The recipient of an overpayment may seek to rely on change of position if he or she has in
good faith reacted to the overpayment by relying on it to change their lifestyle. It might then be
inequitable to seek to recover the full amount of the overpayment. The paying organisation's reaction
should depend on the facts of the case. The onus is on the recipient to show that it would be unfair to
repay the money. This defence is difficult to demonstrate.

Estoppel

A4.11.16 A recipient who has changed his or her position may also be able to rely on the rule of
evidence estoppel if the paying organisation misled the recipient about his or her entitlement, even if
the overpayment was caused by a fault on the part of the recipient. However, a mistaken payment will
not normally of itself constitute a representation that the payee can keep it. There must normally be
some further indication of the recipient's supposed title other than the mere fact of payment.

A4.11.17 The paying organisation can be prevented from recovery even where it has made no positive
statement to the payee that the latter is entitled to the money received. If, following a demand for
repayment, the recipient can give reasons why repayment should not be made, then silence from paying
organisation would almost certainly entitle the recipient to conclude that the reply was satisfactory and
that he or she could keep the money.

A4.11.18 It is essential for public sector organisations to seek legal advice where change of position or
estoppel is offered as defence against recovery.

Good consideration
A4.11.19 Another possible defence against recovery is where someone makes a payment for good
consideration, i.e. where the recipient gives something in return for the payment. For example, payment
might be made to discharge a debt; or where the payment is part of a compromise to deal with an
honest claim. If such payments are later found to be more than was strictly due, the extent to which the
paying organisation was acting in good faith should be taken into account. Hardship

A4.11.20 Public sector organisations may waive recovery of overpayments where it is demonstrated that
recovery would cause hardship. But hardship should not be confused with inconvenience. Where the
recipient has no entitlement, repayment does not in itself amount to hardship, especially if the
overpayment was discovered quickly. Acceptable pleas of hardship should be supported by reasonable
evidence that the recovery action proposed by the paying organisation would be detrimental to the
welfare of the debtor or the debtor's family. Hardship is not necessarily limited to financial hardship;
public sector organisations may waive recovery of

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overpayments where recovery would be detrimental to the mental welfare of the debtor or the debtor's
family. Again, such hardship must be demonstrated by evidence.

Collective overpayments

A4.11.21 If a group of people have all been overpaid as a result of the same mistake, the recipients
should be treated in the same way. However, that does not mean that recovery of all such
overpayments should be automatically written off. For example, it may be legitimate to continue to
effect recovery from those who have offered to repay, or some may not be subject to the same level of
hardship. A4.11.22 Public sector organisations should decide how best to handle collective
overpayments so that they do not inhibit the maximum recovery possible. If it is deemed impractical to
pursue recovery from some members of an equivalent group, there should be no inhibition on pursuing
others who may be able to pay. There is no obligation to inform the group generally about what action is
being taken against particular members since all have the same legal obligation. Any differential
treatment should be based on advice.

A4.11.23 If a public sector organisation is minded to forgo recovery of the whole or any part of a
collective overpayment, it should consult the Treasury (or its sponsor department, as the case may be)
before telling the recipients of the overpayments. The Treasury will need to be satisfied that a collective
waiver is defensible in the public interest or as value for money. And any such waivers should be
exceptional.

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Annex 4.12

Gifts

This annex explains how departments should notify parliament of gifts, both given and received. It is
important to assure parliament that propriety has been respected through transparent reporting

A4.12.1 A gift is something voluntarily donated, with no preconditions and without the expectation of
any return. In this document, the term gift includes all transactions which are economically
indistinguishable from gifts: see box A4.12A.It is also important to be clear about transactions which do
not score as gifts. For example:

transfers of assets between government departments should generally be at full current market value;
assets transferred under a transfer of functions order to implement a machinery of government change
are generally made at no charge. In neither case are such transfers regarded as gifts;

grants and grants-in-aid are not gifts as they are made under legislation, subject to conditions, with
some expectation that the government will receive value through the furtherance of its policy
objectives.

grants in kind that are part of a planned programme of HMG support for an organisation or third
country (for example, the provision of equipment in official development assistance projects). Again,
there is an expectation that the government will receive value through the furtherance of its policy
objectives in precisely the same way as with financial support to a partner organisation or the direct
delivery of projects by government. Such grants in kind will normally be made under the same
legislation that supports other parts of the programme concerned and the purchase of the equipment
concerned will typically have been financed through provision in the department's Estimate

Box A4.12A: definition of gifts

Gifts include all transactions economically equivalent to free and unremunerated transfers from
departments to others, such as:

loan of an asset for its expected useful life

sale or lease of assets at below market value (the difference between the amount received and the
market value is the value of the gift)

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donations by departments
transfers of land and buildings, or assignment of leases, to private sector bodies at less than market
price (the gift is valued at the difference between the price agreed and the market price).

Approval

A4.12.3 Treasury approval is needed for all gifts valued at more than £300,000, and any other gifts not
covered by a department's or ALB's delegated authorities. ALBs should consult their sponsor
departments about gifts.

A4.12.4 The WMS and minute must then be laid before the House of Commons, on the same day, at
least fourteen parliamentary sitting days before the department proposes to make the gift. In cases of
special urgency, it is permissible, exceptionally, for all or part of the fourteen day notice period to fall
during an adjournment or recess, or for a shorter notice period to be given. In such cases, with Treasury
approval, the reasons for urgency should be explained.

A4.12.5 The WMS and minute must contain the standard opening and closing paragraphs in box A4.12B.
These terms have the PAC's endorsement and can be changed only with Treasury approval.

Box A4.12B: standard paragraphs for written ministerial statement and departmental minute

Opening paragraph:

It is the normal practice when a government department proposes to make a gift of a value exceeding
£300,000, for the department concerned to present to the House of Commons a minute giving
particulars of the gift and explaining the circumstances; and to refrain from making the gift until
fourteen parliamentary sitting days after the issue of the minute, except in cases of special urgency.
Closing paragraph:

The Treasury has approved the proposal in principle. If, during the period of fourteen parliamentary
sitting days beginning on the date on which this minute was laid before the House of Commons, a
Member signifies an objection by giving notice of a Parliamentary Question or a Motion relating to the
minute, or by otherwise raising the matter in the House, final approval of the gift will be withheld
pending an examination of the objection.

A4.12.6 The WMS and minute should also set out briefly the nature of the gift, its value, the
circumstances in which it is being given, and the recipient. Where the gift is to be replaced, information
about the cost and nature of the replacement, when it is expected to be acquired, and the Estimate to
which the expenditure will be charged should be included. In the case of non-voted expenditure, the
account to which the replacement cost will be charged should be quoted.

Parliamentary objections

A4.12.7 Members of Parliament may object to gifts by letter, Parliamentary Question or through an Early
Day Motion. In such cases, departments may wish to advise their ministers to take the initiative by
making contact with the MP concerned. This
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may be particularly appropriate if it is proposed to make the gift urgently or promptly on expiry of the
waiting period.

A4.12.8 Where an objection is raised, the gift should not normally be made until the objection has been
answered. In the case of an Early Day Motion, the MP should be given an opportunity to make a direct
personal representation to the Minister. The Treasury should be notified of the outcome of any
representations made by MPs.

Noting annual accounts

A4.12.9 Annual accounts should include a note on gifts made by departments if their total value exceeds
£300,000. Gifts with a value of more than £300,000 should be noted individually, with a reference to the
appropriate WMS and departmental minute. Exceptionally, where gifts are made between government
departments, the receiving department should notate its accounts, not the donor. Gifts received

A4.12.10 Departments should maintain a register detailing gifts they have received, their estimated
value and what happened to them (whether they were retained, disposed of, etc). Gifts received need
not be noted in accounts unless the Treasury or department concerned considers there is a special need
for them to be brought to parliament's attention.

A4.12.11 Donations, sponsorship or contributions, eg from developers should also be treated as gifts.

A4.12.12 When offered services on a gratuitous basis, accounting officers should consider the potential
for such services to give rise to future expenditure, as well as anti- competitiveness risks and propriety
issues more broad

A4.12.13 For example, if services may be withdrawn in the future either at the discretion of the supplier
or in the event of the supplier entering insolvency it may lead to a pressure to continue provide such
services on fee paying basis in the future. It may also be that the provision of services may lead to an
incumbency benefit for the supplier that put them at competitive advantage in any future procurement.

A4.12.14 The fact there are no upfronts costs to a proposal does not relieve the Accounting Officer of
the need to consider future costs or the need for HMT consent for novel contentious or repercussive
transactions.

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Annex 4.13 Special payments

This annex explains how public sector organisations should approach current transactions outside the
usual planned range. It is often right, or essential, to consult the Treasury beforehand. In some cases, it
is also important to notify parliament.

A4.13.1 In voting money or passing specific legislation, parliament does not and cannot approve special
payments outside the normal range of departmental activity. Such transactions are therefore subject to
greater control than other payments.

A4.13.2 Departments should authorise special payments only after careful appraisal of the facts and
when satisfied that the best course has been identified. It is good practice to consider routinely whether
particular cases reveal concerns about the soundness of the control systems; and whether they have
been respected as expected. It is also important to take any necessary steps to put failings right.

A4.13.3 Arm's length bodies should operate to similar standards as departments unless there are good
reasons to the contrary, eg overriding requirements of the statutory framework for Companies Act
companies. Departments should ensure that their oversight arrangements (see chapter 7) enable them
to be satisfied that their arm's length bodies observe the standards.

Dealing with special payments

A4.13.4 Departments should always consult the Treasury about special payments unless there are
specific agreed delegation arrangements in place (See Annex 2.2). So a department should seek Treasury
approval, in advance, for any special payment for which it has no delegated authority, or which exceeds
its authority. Similarly, ALBs should consult their sponsor departments in comparable circumstances. In
turn, the department may need to consult the Treasury.

A4.13.5 The special payments on which the Treasury may need to be consulted are summarised in box
A4.13A. The list is not exclusive. If a department is in doubt, it is usually better to consult the Treasury.

A4.13.6 In particular, it is important to consult the Treasury about any cases, irrespective of delegations,
which:

involve important questions of principle;

raise doubts about the effectiveness of existing systems;

contain lessons which might be of wider interest;

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might create a precedent for other departments;

•

may be deemed novel, contentious, or repercussive; or

arise because of obscure or ambiguous instructions issued centrally.

Box A4.13A: special payments

extra-contractual payments: payments which, though not legally due under contract, appear to place an
obligation on a public sector organisation which the courts might uphold. Typically these arise from the
organisation's action or inaction in relation to a contract. Payments may be extra-contractual even
where there is some doubt about the organisation's liability to pay, eg where the contract provides for
arbitration but a settlement is reached without it. (A payment made as a result of an arbitration award is
contractual.)

extra-statutory and extra-regulatory payments are within the broad intention of the statute or
regulation, respectively, but go beyond a strict interpretation of its terms. compensation payments are
made to provide redress for personal injuries (except for payments under the Civil Service Injury
Benefits Scheme), traffic accidents, damage to property etc, suffered by civil servants or others. They
include other payments to those in the public service outside statutory schemes or outside contracts.

special severance payments are paid to employees, contractors and others outside of normal statutory
or contractual requirements when leaving employment in public service whether they resign, are
dismissed or reach an agreed termination of contract. ex gratia payments go beyond statutory cover,
legal liability, or administrative rules, including:

payments made to meet hardship caused by official failure or delay

out of court settlements to avoid legal action on grounds of official inadequacy payments to contractors
outside a binding contract, eg on grounds of hardship.

A4.13.7 The Treasury does not condemn all special payments out of hand. Each needs to be justified
properly in the public interest against the key public sector principles set out in Chapter 1, box 1.1, with
particular emphasis on value for money since there is no legal liability. Any proposal to keep a special
payment confidential must be justified especially carefully since confidentiality could appear to mask
underhand dealing. Also financial reporting requirements and Freedom of Information legislation should
be complied with. The Treasury's bottom line is usually to ask the department to establish that the
responsible accounting officer(s) would feel able to justify the proposed payment in parliament if
challenged.

A4.13.8 Departments should also consult the Treasury about proposals for special payments above the
relevant delegated limits. They should explain:

the nature and circumstances of the case;

the amount involved;

the legal advice, where appropriate;

the management procedures followed;

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an assessment of the value for money of the case

any non-financial aspects;

whether the case in question could have wider impact.

Severance Payments

A4.13.9 Special severance payments when staff leave public service employment should be exceptional.
They always require Treasury approval because they are usually novel, contentious and potentially
repercussive. So departments should always consult the Treasury in advance when considering a special
severance payment.

A4.13.10 The Treasury adopts a sceptical approach to proposals for special severance settlements, in
particular:

precedents from other parts of the public sector may not be a reliable guide in any given case;

legal advice that a particular severance payment appears to offer good value for the employer may not
be conclusive since such advice may not take account of the wider public interest;

even if the cost of defeating an apparently frivolous or vexatious appeal will exceed the likely cost of
that particular settlement to the employer, it may still be desirable to take the case to formal
proceeding;

winning such cases demonstrates that the government does not reward failure and should enhance the
employer's reputation for prudent use of public funds.

Severance payments will only be approved where they provide value for money for the Exchequer as a
whole, rather than simply for the body concerned.

A4.13.11 Departments should not treat special severance as a soft option, eg to avoid management
action, disciplinary processes, unwelcome publicity or reputational damage. Box A4.13B sets out the
factors the Treasury needs to evaluate in dealing with special severance cases.
A4.13.12 It is important to ensure that Treasury approval is sought before any offers, whether oral or in
writing, are made. A proforma for seeking Treasury approval is available1.

A4.13.13 Departments and their ALBs are also required to seek ministerial approval (including the
approval of the Minister for the Cabinet Office) of confidentiality clauses in certain circumstances.
Cabinet Office guidance on the use and approval of such agreements is also available?.

1 https://www.gov.uk/government/publications/managing-public-money

2 https://www.gov.uk/government/publications/civil-service-settlement-agreements-special-severance-
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Box A4.13B: factors to consider in special severance cases

Any case for special severance put to the treasury should explain:

the circumstances of the case

any scope for reference to a tribunal with its potential consequences, including the legal assessment of
the organisation's chances of winning or losing the case and likely scale of any award

the management procedures followed

the value for money offered by the possible settlement

any non-financial considerations, eg where it is desirable to end someone's employment without

dismissal, perhaps because of restructuring

whether the case could have wider impact, eg for a group of potential tribunal cases

A4.13.14 Particular care should be taken to:

avoid unnecessary delays which might lead to greater severance payments than might otherwise be
merited;

avoid offering the employee concerned consultancy work after severance unless best value for money
can be demonstrated and the proposal is in line with Cabinet Office approvals and controls3;

ensure any undertakings about confidentiality leave severance transactions open to adequate public
scrutiny, including by the NAO and the PAC;
ensure special severance payments to senior staff are transparent and negotiated avoiding conflicts of
interest.

A4.13.15 Organisations seeking retrospective Treasury approval for special severance payments should
not take it for granted that approval will be provided, since such payments usually appear to reward
failure and set a poor example for the public sector generally. Requests for retrospective approval will
be considered as if the request had been made at the proper time and should contain the same level of
detail as if the case had been brought to the Treasury in advance.

Retention Payments

A4.13.16 Retention payments, designed to encourage staff to delay their departures, particularly where
transformations of ALBs are being negotiated, are also classified as novel and contentious. Such
payments always require explicit Treasury approval, whether proposed in individual cases or in groups.
Treasury approval must be obtained before any commitment, whether oral or in writing, is made.

A4.13.17 Organisations considering proposals for retention payments should subject them to strict value
for money analysis. Sponsor departments should submit a business case to the Treasury, supported by
market evidence, together with an

3 https://www.gov.uk/government/publications/cabinet-office-controls

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evaluation of the risks and costs of alternative options. The Treasury will always be sceptical of whether
they are necessary.

Reporting

A4.13.18 As parliament does not provide for special payments when voting Estimates or passing specific
legislation, special payments should be brought to parliament's attention, usually through a note in the
organisation's account. Any special severance payments for senior staff will in any case be itemised in
annual

accounts.

A4.13.19 Notification is separate from accounting treatment, which will depend on the nature of the
special payment. Special payments should be noted in the accounts even if they may be reduced by
subsequent recoveries.

A4.13.20 Special payments should be noted in annual accounts where the total value exceeds £300,000.
Individual payments of more than £300,000 should be noted separately.

Reporting to Cabinet Office

A4.13.21 Departments and their ALBs are required to report to the Minister for the Cabinet Office on a
quarterly basis any special severance payment made in connection with the termination of employment.
These returns will enable Cabinet Office to provide assurance on whether the use of special severance
payments across the Civil Service is both proportionate and appropriate, including the use of any
confidentiality clauses alongside such payments. A pro forma is available4

Civil Service-wide data on special severance payments will be published annually by the Cabinet Office.

4 https://www.gov.uk/government/publications/civil-service-settlement-agreements-special-severance-
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Annex 4.14 Remedy

Prompt and efficient complaint handling is an important way of ensuring customers receive the service
to which they are entitled and may save public sector organisations time and money by preventing a
complaint escalating unnecessarily.

If their services have been found deficient, public sector organisations should consider whether to
provide remedies to people or firms who complain. This is separate from administering statutory rights
or other legal obligations, eg to make payments to compensate. Remedies may take several different
forms and should be proportionate and appropriate.

Dealing with complaints

A4.14.1 Public sector organisations should operate clear accessible complaints procedures. They are a
valuable source of feedback which can help shed light on the quality of service provided, and in
particular how well it matches up to policy intentions. So all complaints should be investigated. The
Parliamentary and Health Service Ombudsman (PHSO) has published Principles of good complaint
handling1 to help public bodies when dealing with complaints.Systems for dealing with complaints
should operate promptly and consistently. Those making complaints should be told how quickly their
complaints can be processed. Where groups of complaints raise common issues, the remedies offered
should be fair, consistent and proportionate. A4.14.3 Public sector organisations should seek to learn
from their complaints. If an internal or external review, or a PHSO investigation, shows there are
systemic faults, defective systems or procedures should be overhauled and corrected.

Remedies

A4.14.4 As section 4.11 explains, when public sector organisations have caused injustice or hardship
because of maladministration or service failure, they should consider:
providing remedies so that, as far as reasonably possible, they restore the wronged party to the position
that they would be in had things been done correctly, and

whether policies and procedures need change, to prevent the failure reoccurring.

1 http://www.ombudsman.org.uk/improving-public-service/ombudsmansprinciples/principles-of-good-
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The remedies available

A4.14.5 Remedies can take a variety of forms, including (alone or in combination):

an apology;

an explanation;

correction of the error or other remedial action;

an undertaking to improve procedures or systems; or

financial payments, eg one off or as part of a structured settlement. A4.14.6 Financial remedies for
individual cases are normally ex gratia payments. Where a pattern develops, and a number of cases
raising similar points need to be dealt with, it may make sense to develop an extra statutory scheme
(see annex 4.13). If any such scheme seems likely to persist, the organisation concerned should consider
whether to bring forward legislation to set it on a statutory footing (see sections 2.5 and 2.6).

Designing remedies

A4.14.7 The normal approach to complaints where no financial payment is called for is to offer an
apology and an explanation. This may be a sufficient and appropriate response in itself. People
complaining may also want reassurance that mistakes will not be repeated.

A4.14.8 It may be more difficult to judge whether financial compensation is called for, and if so how
much, especially if there is no measurable financial detriment. Great care should be taken in designing
financial compensation schemes since they may set expensive precedents.
A4.14.9 Where financial remedies are identified as the right approach to service failure, they should be
fair, reasonable and proportionate to the damage suffered by those complaining. Financial remedies
should not, however, allow recipients to gain a financial advantage compared to what would have
happened with no service failure. Consideration should always be given by the public sector organisation
that the circumstances of a complaint do not involve bad faith on the part of the complainant, and the
possibility of fraudulent intent.

A4.14.10 Public sector organisations deciding on financial remedies should take into account all the
relevant factors. Some which are often worth considering are outlined in box A4.14A. The list may not
be exhaustive.

Box A4.14A: factors to consider in deciding whether financial compensation is appropriate

Whether a loss has been caused by failure to pay an entitlement, eg to a grant or benefit.

Whether someone has faced any additional costs as a result of the action or inaction of a public sector
organisation, eg because of delay.

Whether the process of making the complaint has imposed costs on the person complaining, eg lost
earnings or costs of pursuing the complaint.

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The circumstances of the person complaining, eg whether the action or inaction of the public sector
organisation has caused knock on effects or hardship.

Whether the damage is likely to persist for some time.

Whether any financial remedy would be taxable when paid to the person complaining. Any advice from
the PHSO.

A4.14.11 If a compensation payment includes an element because the person complaining has had to
wait for their award, it should be calculated as simple interest. The interest rate to be applied should be
appropriate to the circumstances and defensible against the facts. Some rates worth considering are the
rate HMRC pays on tax repayments and the rate used in court settlements.

A4.14.12 When a public sector organisation recognises that it needs a scheme for a set of similar or
connected claims after maladministration or service failure, it should ensure that the arrangements
chosen deal with all potential claimants equitably. It is important that such schemes take into account
the PHSO's Principles of good administration2. They must be well designed since costs can escalate if a
problem turns out to be more extensive than initially expected.
A4.14.13 If those seeking compensation have suffered injustice or hardship in a way which is likely to
persist, it may not be appropriate to pay compensation as a lump sum. Instead it may make sense to
award a structured settlement with periodic (eg monthly or annual) payments. Public sector
organisations considering such settlements should seek both legal and actuarial advice in drawing them
up. A4.14.14 Essentially, designing a compensation scheme is no different from designing other services.
Good management, efficiency, effectiveness and value for money are key goals (see Chapter 4). Some
specific issues which may require special care for compensation schemes are outlined in box A4.14B.

Box A4.14B: Issues to consider in designing compensation schemes

Clarify the coverage of the scheme.

Set clear scheme rules, with supporting guidance, to implement the policy intention. Make the remedies
fair and proportionate, avoiding bias, discrimination or prejudice. Ensure the scheme's systems work, eg
through pilot testing.

Design in sufficient flexibility to cope with the characteristics of the claimant population. Check that the
administration cost is not excessive – or simplify the scheme.

If the scheme sets a precedent, make sure that it is acceptable generally.

Inform parliament appropriately, eg through a written statement and/or in the estimates / annual
accounts.

Plan to evaluate the scheme at suitable point(s).

Provide for closure of the scheme, unless there is good reason not to.

2 http://www.ombudsman.org.uk/improving-public-service/ombudsmansprinciples/principles-of-good-
administration

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Consulting the Treasury

A4.14.15 When considering making individual remedy payments, departments need to consult the
Treasury (and sponsored bodies need to consult their sponsor departments) about cases which:
•

fall outside their delegated authorities; or

raise novel or contentious issues; or

could set a potentially expensive precedent or cause repercussions for other public sector organisations.

A4.14.16 Public sector organisations developing schemes to pay remedies should consult the Treasury
before finalising them. Proposed schemes drawn up in response to a PHSO recommendation also
require Cabinet Office approval. Once a scheme is agreed, it is only necessary to consult the Treasury
further about cases outside the agreed boundaries for the scheme, or the delegated authority applying
to it.

Reporting ex gratia payments

A4.14.17 Departments should ensure that ex gratia payments have Estimate cover, and that the ambit
of the vote concerned is wide enough for the purpose. Ex gratia payments score as special payments in
departments' accounts. Departments and agencies should include summary information on
compensation payments arising from maladministration in their annual reports.

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Annex 4.15

Asset management

Each public sector organisation is expected to develop and operate an asset management strategy
underpinned by a reliable and up to date asset register. The board should review the strategy annually
as part of the corporate or business plan.

A4.15.1 A4.15.1 Accounting officers of public sector organisations are responsible

for managing their assets. This aspect of financial management covers the acquisition, use,
maintenance, and disposal of assets for the benefit of the organisations and indeed for the Exchequer as
whole.

A4.15.2 Each organisation needs to have a clear grasp of:

the content of its current assets base;

•
the assets it needs to deliver efficient, cost effective public services;

what this means for asset acquisition, use, maintenance, renewal, upgrade and disposal;

whether any gains could be achieved by working with other public sector organisations;

how use of assets fits within the corporate plan.

A4.15.3 A4.15.3 Normally, these responsibilities will be dispersed in an organisation through a system of
delegations with appropriate reporting arrangements. Similarly, departments should ensure that each of
their sponsored organisations has equivalent arrangements.

Asset registers

A4.15.4 A4.15.4 It is good practice for each organisation to draw up, and keep up to date, a register of all
the assets it owns and uses. This will usually be needed for preparation of its financial accounts. It is also
essential to undertake regular stock taking of the organisation's current assets base and thus for
planning change. A4.15.5 The assets on an organisation's register should include both tangible and
intangible assets, covering both owned assets and assets under its legal control such as leased or private
finance assets. Box A.4.15A lists the main groups of assets but is not exhaustive. Each organisation
should decide on a meaningful valuation threshold in line with best practice.

A4.15.6 In drawing up the asset register, particular care should be taken with two sorts of asset:

attractive items, such as works of art and items similarly susceptible to theft. These may be included
even if they are below the valuation threshold, in line with guidance provided by the Government Art
Collection; and

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investments in the form of debentures and shares in commercial companies. These should be checked
at least annually.

Box A4.15A: main categories of public sector assets

tangible assets

•
•

intangible assets

wholly owned land and buildings

copyrights, including Crown copyright

leased fixed assets (including those

trademarks

acquired through private finance)

raw materials

stocks and stores

plant, machinery, equipment, tools

furniture and fittings

assets under construction

donated physical assets

heritage assets

antiques and works of art

economic infrastructure assets (including

highways, railways, airports, utilities

communication networks and power

generation and transmission)

franchises

patents and other intellectual property rights, including in house software goodwill

data and information

·
knowledge and know-how

• software licences

public dividend capital

loans and deposits

investments including shares and debentures in companies

Asset management strategies

A4.15.7 The asset management strategy of a public sector organisation should be integrated into its
corporate and annual business plans. It should thus be possible to help plan change in asset use or
deployment when necessary. Box A.4.15B suggests some key steps. The organisation's board should
take stock of progress in delivering its asset management strategy from time to time, and at least
annually.

Box A4.15B: steps for developing asset management plans

Review the asset register to assess its adequacy for the organisation's objectives and functions. Plan
how retained assets will be used efficiently for the organisation's core functions. Plan asset acquisitions,
e.g. to extend, modify or replace the existing asset base.

Identify disposals, and plan to use the proceeds. Once decided upon, disposals should be as swift as the
market will allow with reasonable value for money). Treasury approval is required for spending or
retaining receipts.

Plan any loans of assets, with charges and conditions for their return, liability, damage.

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Consider whether any retained assets have potential to generate revenue through commercial services.

A4.15.8 Knowledge assets (also known as intangible assets, some examples of which are listed above in
Box A4.15A) should be considered as part of a public sector organisation's asset management strategy.
Proper management of such assets is essential for the efficient and effective use of resources within
public sector organisations, and it is therefore important that organisations are able to identify, protect,
and maximise the value of these assets. To assist with this, government has published guidance to
support organisations and clarify best practice for public sector knowledge asset management[1], and
recommends that organisations:
develop a strategy for managing their knowledge assets, as part of their wider asset management
strategy

appoint a Senior Responsible Owner for knowledge assets who has clear responsibility for the
organisation's knowledge asset management strategy

Efficiency improvements

A4.15.9 Efficiency in the use of workspace may make it possible for a public sector organisation to
occupy less space. It is good practice to dispose of surplus property, or to share accommodation on the
civil estate with other public sector organisations where this is practicable. It may be necessary to
consider a budget transfer between organisations, with Treasury consent, to help meet the initial
relocation costs.

A4.15.10 Prior to marketing any land or building asset, public sector organisations should also make use
of the following:

"Disposal of Surplus Public Sector Land and Buildings - Protocols for Land holding Departments"1 which
describes the procedures to be followed to dispose of land with development potential;

The Cabinet Office's National Property Controls which detail the rules on lease extensions, lease
renewals, acquisitions, disposals as well as required space standards associated with major
refurbishments of buildings;

The Register of Surplus Land, part of ePIMS (electronic Property Management Information Mapping
Service), a mandatory central database recording information on the civil estate. The data base does not
cover leasehold property with less than 99 years outstanding;

the Civil Estate Occupancy Agreement governing relationships among Crown bodies sharing
accommodation and the Civil Estate Coordination Protocol which is designed to improve the planning,
acquisition, management, rationalisation and disposal of property and other workspace on the civil
estate;

latest guidance and advice available from the Government Property Unit.

https://www.gov.uk/government/publications/knowledge-asset-management-in-government

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Asset Sales

A4.15.11 When undertaking an asset sale, departments should follow the Asset Sales Disclosure
Guidance. The guidance requires government departments to disclose the impacts of an asset sale on
Public Sector Net Borrowing (PSNB), Public Sector Net Debt (PSND), Public Sector Net Financial Liabilities
(PSNFL) and Public Sector Net Liabilities (PSNL), as well as disclosing the proceeds and whether the sale
was above, within or below the retention value range. Departments should also include a rationale for
the sale, as well as justification for its format and timing, and include these alongside the impacts in a
Written Ministerial Statement laid in Parliament after the sale.

Transfer of property

A4.15.12 Public sector organisations may transfer property among themselves without placing the asset
on the open market, provided they do so at market prices and in appropriate circumstances. They
should follow the guidelines in box A4.15C.

Box A4.15C: protocol for transfers of assets

Consult ePIMS to see if properties on the civil estate can be used.

Value assets at market prices using Royal Institute Chartered Surveyors' Red Book (www.rics.org). The
original and prospective owners should work collaboratively to agree a price. It is good practice to
commission a single independent valuation to settle the price to be paid.

The organisations should take legal advice, especially where sponsored organisations are involved as
these may have specific legal requirements.

There is no need for full investigation of legal title since full transfer is rarely necessary because of the
indivisibility of the Crown.

Consult the Government Property Unit of the Cabinet Office, who may be able to help with
coordination.

The terms of transfer should not normally involve neither clawback (rights to share disposal proceeds)
or overage (rights to share future profits on disposal) though see A4.15.13 below.

A4.15.13 Sometimes transfers of assets result from machinery of government changes. The relevant
legislation (eg a transfer of functions order) should prescribe the terms of any such transfers.

A4.15.14 In certain limited circumstances overage provisions can be considered. The circumstances
where overage is acceptable are:

where the property is sold to a private developer for housing development;

there is a realistic prospect that selling will improve the outcome for housing policy, e.g. by creating an
aggregated composite site;

the accounting officers of the relevant public sector organisations are convinced that, in this transaction,
overage offers value for money for the Exchequer as a whole; and

the Treasury agrees (these transaction are always novel and contentious).
131

A4.15.15 In addition, the overage provisions may be agreed by a central government purchaser of
property where it is a condition of the sale of that property by a local government or devolved
administration body. In all cases the purchase must represent value for money for the Exchequer as a
whole and Treasury consent should be sought.

Disposals of property and land assets

A4.15.16 Public sector organisations should take professional advice when disposing of land and
property assets. Some key guidelines are in box A4.15D.

Box A4.15D: protocol for disposal of land, property and other assets

Value assets at market prices using Royal Institute of Chartered Surveyors' Red Book

(www.rics.org).

Dispose of surplus land property within three years.

Dispose of surplus residential property within six months.

Sell plant, machinery, office equipment, furniture and consumable stores by public auction as seen; or
by open tender. Obtain payment before releasing the goods.

If an asset is sold or leased at a loss, the proceeds forgone (compared to market value) should be
treated as a gift, and the routine in annex 4.12 should be followed.

A4.15.17 Sometimes private finance projects involve disposals. Each such case should be evaluated as
part of the private finance project, with due attention to the need to secure good value for money.
Further guidance is an annex 7.4.

A4.15.18 Public sector organisations which make grants to third parties for the acquisition of assets
should normally include a clawback condition under which they can recoup the proceeds if the recipient
of the grant later sells the asset. There is some scope for flexibility in this discipline: see annex 5.2.

A4.15.19 Disposals to charities require particular care. Their trust deeds sometimes place restrictions on
how they may use their assets. It is good practice to consider the possible disposal of assets by such
recipients before making gifts to them.

Economic infrastructure assets

A4.15.20 Managing economic infrastructure affects the quality of delivery of services. It is also central to
achievement of the national infrastructure goals detailed in the National Infrastructure Plan. These
factors need to be incorporated into the business plans and objectives of public sector organisations
which hold, use and manage such assets.

A4.15.21 Good asset management of economic infrastructure thus calls for the responsible
organisations to coordinate their own and their stakeholders' objectives. Sometimes securing value for
money for the taxpayer means compromise between cost, risks, opportunities and performance. Finding
the right solution can affect organisations' long-term plans, their prioritisation of resources and work to
achieve realism in stakeholder expectations, as set out in the National Infrastructure Plan.

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Central asset registers

A4.15.22 From time to time government gathers information in order to publish a national assets
register. Central government organisations and NHS bodies should supply the information on their
assets when requested.

A4.15.23 Under Crown copyright policy, certain public sector organisations are required to supply details
for the official bibliographic database. See annex 6.2 for further details.

Digest of guidance

Office of Government Property (Cabinet Office) -

https://www.gov.uk/government/policy-teams/government-property-unit-ogp

Government's Estate Strategy: delivering a modern estate –

https://www.gov.uk/government/publications/government-estate-strategy-2018

Common Minimum Standards for Construction

https://www.gov.uk/government/publications/common-minimum-standards-for-

construction

recording property details on the government's ePIMS (electronic Property Information System)

https://www.epims.ogc.gov.uk/ProgrammeHub/public/DAO%20Letter%20Mandati

ng%20e-PIMS.pdf?id=258687de-b5ce-4d28-9430-1e259c56897b

Property disposal - https://www.gov.uk/government/publications/guide-for-the- disposal-of-surplus-

government-land
Crichel Down rules - offering land and property acquired by the public sector back for former owners -
https://www.gov.uk/government/publications/compulsory-

purchase-process-and-the-crichel-down-rules-guidance#historyC

Disposal of Heritage Assets https://historicengland.org.uk/images-

books/publications/disposal-heritage-assets/guidance-disposals-final-jun-10/

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Annex 5.1

Grants

This annex sets out how government departments should arrange and control grants, including to arm's
length bodies such as NDPBs.

A5.1.1 Central government departments normally offer two kinds of financial support to third parties,
using statutory powers:

grants: made for specific purposes, under statute, and satisfying specific conditions eg about project
terms, or with other detailed control;

grants in aid: providing more general support, usually for an NDPB, with fewer specific, but more general
controls on the body, and less oversight by the funder.

A5.1.2 Grants should not be confused with contracts. A public sector organisation funds by grant as a
matter of policy, not in return for services provided under

contract.

Payment

A5.1.3 Grants should be paid on evidence of need or qualification, depending on the terms of the grant
scheme. For example:

·
·

the recipient may need to demonstrate financial viability and delivery capability;

the recipient may need to submit a claim with evidence of eligibility;

the recipient may need to show that it meets the conditions of the

scheme, eg a farmer may need to disclose details of his or her business; there may be a timing condition;

small third sector organisations may need to demonstrate a clear operational requirement for project
funding to be made before grant is paid.

A5.1.4 Grants in aid should also match the recipient's need. Significant sums should be phased through
the year in instalments designed to echo the recipient's expenditure pattern. In this way the recipient
organisation need not carry significant cash balances, which would be an inefficient use of public money.

Control

A5.1.5 Payment of both grants and grants in aid normally requires specific

empowering legislation as well as cover in Estimates. There is scope for temporary ex

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gratia grant schemes to be financed on the authority of the Appropriation Act alone provided that the
scheme meets the standard conditions (see section 2.5).

A5.1.6 The accounting officer of the funding organisation is responsible for ensuring that grant recipients
are eligible and use the grant in the way envisaged in the founding legislation, with terms and conditions
set out in a grant funding agreement. For grants in aid, it is usual to arrange this by setting out terms and
conditions in a framework document sent to recipients to explain their responsibilities. Such framework
documents should strike an appropriate balance among:

ensuring prudent management of grant in aid funds;

achieving value for money;

• assuring funders that grants are used as envisaged; while

· allowing recipients reasonable freedom to take their own decisions.

However, care needs to be taken as general and wide ranging conditions attached to grant in aid can
transfer control of a body to a funder for public sector classification purposes.
A5.1.7 Accounting Officers should ensure that all grants issued comply with the Government Functional
Standard for grants. 1

A5.1.8 Departments should understand enough about the other sources of a grant recipient's income to
be satisfied that the same need is not funded twice, this should include an internal and cross-
government check of grant funding awards. It is usually essential to segregate inflows from different
recipients since they are usually intended for different purposes.

A5.1.9 Departments which provide grants of either kind to an arm's length body should document how
the recipient is expected to handle the funds. See annex 7.2 for more.

A5.1.10 Departments should ensure that they have adequate assurance arrangements in place, which
take account of an assessment of fraud risk, and that the Comptroller and Auditor General has adequate
access rights to grant recipients.

A5.1.11 A department asked by another part of government to pay a grant to an external organisation,
such as a charity, from its own resources should ensure that its own accounting officer gives due
consideration to the proposal before funding is committed.

Protecting the Exchequer

A5.1.12 If public sector organisations provide grants to private sector organisations to acquire or
develop assets, suitable and proportionate steps should be taken to safeguard both their financial
interests and those of the Exchequer. Donors should consider setting grant conditions designed to
ensure that the Exchequer's interest is not overlooked if the asset is not used as expected (see annex
5.2).

1 https://www.gov.uk/govemment/publications/grants-standards

135

Endowments

A5.1.13 Grants and grants in aid are normally paid to meet the needs of the recipients. Exceptionally,
there may be a case for funding by way of endowment or dowry, ie a modest one-off grant to enable the
recipient to set up a fund from which to draw down over several years. The recipient should then be
able to make a clean break with the need for support.

A5.1.14 A5.1.14 Departments contemplating such funding arrangements should consult the relevant
Treasury spending team (and in turn arm's length bodies should consult their sponsor departments) as
this form of funding is always novel and contentious. The Treasury will need to consider the value for
money case for this form of funding, including:
• the opportunity cost of locking public funds into a particular endowment, using investment appraisal
techniques;

the value of the particular programme or project against others. The Treasury will need to be satisfied
that such funding would not protect any low-value projects or programmes from proper expenditure
scrutiny;

the sustainability of the funded body and whether such funding will remove future reliance on public
funding;

whether there are clear objectives, outputs and outcomes of the funding; and

the risk of further call on public funds.

A5.1.15 Any such endowment should:

reflect genuine need for capital funding that could not be raised through other methods;

be made only to recipients with the competence to manage the endowment over time; and

avoid skewing public funding away from other projects that have genuine cash needs.

A5.1.16 The terms of an endowment should:

be clear that the funded body should not subsequently approach the donor for annual funding;

• maintain clear boundaries between the funder and recipient.

A5.1.17 Endowments should never be used as a way of bringing expenditure forward to avoid an
underspend. Nor is it acceptable to make a string of endowment payments to a single recipient instead
of taking specific provision in legislation to pay grants.

A5.1.18 Endowments are intended for situations where a clear financial break will be advantageous to
both recipient and donor. Normally the recipient will be a civil society body or equivalent status.

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Annex 5.2
Protecting the Exchequer interest (clawback)

This annex discusses how public sector organisations which provide grants to the private sector and
others should protect their investments where grants are used to buy or improve assets.

Clawback

A5.2.1 Public sector organisations providing funds to others to acquire or develop assets should take
steps to make sure that public sector funds are used for the intended purposes for which the grant is
made. It is usual to consider setting conditions on such grants, taking into account the value of the grant,
the use of the asset to be funded and its future value.A standard grant condition is clawback. This is
achieved by setting a condition on the grant that gives the funding body a charge over the asset so that,
if the recipient proposes to sell or change the use of the asset acquired with the grant, it must:

consult the funder;

return the grant to the funder; or

yield the proceeds of sale (or a specified proportion) to the funder.

A5.2.3 However, a charge over the asset is not always essential. Some ground rules are suggested in box
A5.2A.

Box A5.2A: when to consider clawback

clawback desirable

tangible or tangible or intangible assets, including intellectual property rights, crown copyright, patents,
designs and database rights, financed directly, whether wholly or partly by grants or grants in aid;

tangible or intangible assets developed by the funded body itself, financed indirectly by a grant for a
related purpose or by grant in aid

clawback not always necessary

137

procurement of goods and services, where any liability is adequately discharged once the goods and
services have been provided

where a grant has been provided for research and not specifically for the creation of physical asset, the
successful conclusion of the research might be adequate return
A5.2.4 Because funders, recipients and circumstances can vary so much, there is no single model for
clawback. Bespoke terms are often desirable. They should allow as much flexibility as seems sensible.
The aim should be to help recipients develop and provide services over the longer term while securing
value for public funds. Drawing on the ideas in box 7.2, funders should always settle the terms of each
grant with its recipient at the start of the relationship, consistent with its objectives.

Designing clawback conditions

A5.2.5 The design of clawback conditions for a grant should take account of its circumstances, the
underlying policy objective(s) and the funder's approach to risk. A checklist of some common factors to
consider is in box A5.2B. Using this tailored approach can mean different organisations take very
different approaches to the same risks.

Box A5.2B: factors to consider in designing clawback terms

the nature and purpose of the grant

how the asset will help secure the policy objectives behind the grant

the expected life of the asset

the extent to which the recipient is financed out of public funds

how the asset will be used by the recipient, eg scope for appreciation or generating profit

how long the funder should retain an interest in the asset

whether the asset may be sold, with any restrictions on disposal, eg as to price or purchaser

whether there is sense in reassessing after a certain period or on a given trigger

whether the terms of clawback should vary according to a factor such as the asset value (in which case
the terms may need to provide for periodic valuations)

when the policy objectives should be delivered

the funder's legal powers and the recipient's legal position (eg as a company or charity) any other
relevant legal factors

A5.2.6 In setting terms and conditions for grants, funders should consider what

could happen if things do not proceed as intended, notably what should happen if:

the recipient does not behave as expected; or

external conditions are very different to plans; or

·

the recipient goes into liquidation (eg should the funder take priority over unsecured creditors).

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Duration of charge

A5.2.7 It can make sense to relate the funder's right to clawback to the policy objectives of making the
grant rather than allowing it to persist indefinitely unchanged. Some policy options are outlined in box
A5.2C. If the clawback is linked to the value of an asset which is likely to appreciate, there is a risk that
the recipient may face a disincentive to participate, so care and sensitivity may be needed.

A5.2.8 However, it can also make sense to moderate grants conditions by using terms such as:

a break clause allowing the funder and recipient to consider whether the objectives of the funding have
been achieved, triggering the end or reduction of the funder's interest in the asset;

a review clause allowing scope to retain the charge and review the clawback period if the project has
not met the agreed objectives;

releasing the funder's interest in the asset (and so permitting its disposal or use as collateral) at the end
of the agreed charge or clawback period.

Box A5.2C: options for clawback duration or assets as collateral

keying it to the objectives of the grant

relating it to the period over which the intended benefits are to be delivered

settling clawback rights on a declining scale, eg falling to zero by the end of an agreed period, or the

asset's useful life, or by when the policy objectives are deemed delivered

allowing the recipient to use as collateral the difference between the market value of the asset and the
original grant

A5.2.9 It is common to prohibit recipients from using the assets they acquire or improve using grants as
collateral in borrowing transactions. This is because the public sector funder might be forced to take up
the recipient's legal liability to service debt should it fail. However, if a funder agrees that a recipient
may use assets acquired or developed with grants as collateral, it should consider carefully what
conditions it should apply. Some freedom of this kind may help the recipient make the transition to
viability or independence. For example, a funder might allow a recipient to retain income generated by
using spare capacity in the funded asset. A5.2.10 But normally it is important for the funder to retain
some control over any use of the funded asset outside the grant conditions. Typically the funder will
require the recipient to obtain the funder's consent before raising funds on any part of a funded asset so
long as the clawback period continues. Any further conditions should be proportionate, striking a proper
balance between encouraging the recipient to be self-supporting and allowing the recipient to use
public funds for its own purpose.

Enforcing a claim on a funded asset

A5.2.11 Where appropriate, funders should secure a formal legal charge on funded assets. This may be
particularly important for high risk projects or to prevent the

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funder becoming exposed to assuming the recipient's debts. It is usual to take a registered charge on
land under the Land Registration Act 2002 and its Rules. If the recipient is a Companies Act company, it
may make sense to secure a registered charge on the company's book debts.

A5.2.12 The form and intended duration of any charge should be recorded in the founding documents
charting the relationship between the funder and recipient. Both parties will need legal advice, eg
covering the statutory background) and on how the charge would be enforceable. Both parties should
also keep track of their outstanding charges. It is good practice to register a land charge, so that it will
automatically be taken into account during any sale process.

A5.2.13 Sometimes a funder may decide not to enforce clawback when a funded asset is sold, even
though the agreed clawback period is still in force. Funders should take any such decision consciously on
its merits, not letting it go by default. Reasons why a funder might take this approach include:

the objectives of the grant may have been achieved;

the recipient may propose to use the funded asset in an acceptable way different from the original
purpose;

the recipient may intend to finance an alternative asset or project

within the objectives of the grant scheme out of the proceeds of the sale;

the funder might agree to abate future grants to the recipient instead of taking the proceeds of sale.

A5.2.14 If a department decides to waive a clawback condition, it should consider whether it needs to
report that waiver as a gift. If so, it should follow the gift reporting requirements in annex 4.12.

A5.2.15 If it is proposed to sell a grant recipient with a live charge, the funder should take legal advice on
whether it can enforce the charge on the proceeds of the sale. The funder should consider the legal
position of the proposed purchaser of the grant recipient, and in particular whether its objectives (eg
charitable or as a social enterprise) are in line with the original grant conditions. If the funder becomes
aware that such a sale is possible at the time the grant is awarded, it would usually be appropriate to
require the recipient to obtain its consent before proceeding. And any request for endorsement of a sale
should be evaluated objectively.

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Annex 5.3

Treatment of income and receipts

The rules on use of income and receipts are designed to control the circumstances in which they can
finance use of public resources.

A5.3.1 Parliament controls departments' use of income and receipts, just as it controls the raising of tax,
since both may finance use of public resources. Departments should ensure that all income and
associated cash is recorded in full and collected promptly.

A5.3.2 Unless otherwise authorised, cash receipts must be paid into the Consolidated Fund. Sometimes
specific legislation requires this for certain income streams; for many others the Civil List Act 1952
classifies them as hereditary revenues to be paid into the Consolidated Fund.

A5.3.3 Hereditary revenue is:

virtually all non-statutory receipts;

cash receipts received by virtue of specific statutory authority; and

receipts where statute does not say otherwise.

Unless it can be established that a particular type of receipt or surplus cash is not hereditary revenue,
the default position is that it is, and that the Civil List Act 1952 requires it to be paid into the
Consolidated Fund.

A5.3.4 The main categories of income and associated receipts are shown in Box A.5.3A.

Box A5.3A: the different kinds of central government income

the proceeds of taxation: paid into the Consolidated Fund

repayment of principal and interest on NLF loans: paid direct to the NLF

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sums due under bespoke legislation: paid as specified, eg the proceeds of national insurance
contributions paid into the National Insurance Fund

receipts of trading funds: treated as specified in the founding legislation

sums due to departments financed through Estimates:

either paid into the Consolidated Fund as CFERS

or applied to support spending in the Estimate if the Treasury agrees.

A5.3.5 Specific legislation, with Treasury approval, is normally required to authorise use of income
directly to meet resource consumption ie to offset current or capital expenditure. In effect this process
means that the department seeks less finance through Estimates because part of the cost of the service
is met from income. Parliament has an interest because otherwise resource consumption would require
specific approval through the Estimates process.

A5.3.6 Following the Clear Line of Sight reforms, there is no longer a specific control over the amount of
income that can be retained by departments and used to offset spending. However controls over
income remain.

A5.3.7 In order for a department to retain income to offset against spending within the Estimate it must
be within the budget boundary (i.e. classed by the Treasury as negative DEL or departmental AME) and
be properly described in the Estimate. There must also be a direct relationship between the income and
the spending and departments may not use additional income on one part of the Estimate to offset
shortfalls of income (or overspends) in another part of the Estimates without Treasury approval. Such
approval will only be given where the additional income has an appropriate relationship to the
expenditure it is being used to cover.

Authority to retain and use income

A5.3.8 The Treasury has powers to direct that income included in a departmental Estimate and
approved by Parliament may be retained and used by the department. This Treasury direction is
included within the introductory text to the Main Supply Estimates publication1. The direction provides
that the income in the relevant Estimate may be applied against resources (current or capital) within
that Estimate. Without such authority the cash must be surrendered to the Consolidated Fund as extra
receipts (CFERs).

A5.3.9 Sometimes departments have excess income, ie income is anticipated to be higher than the
expenditure stream it matches, or more income than was anticipated in the Estimate. When income is
anticipated to be higher than the expenditure stream it matches departments may present an Estimate
with a negative budgetary limit at the start of the financial year, although this is relatively rare. When
more income is received than was anticipated in the Estimate, departments are allowed to treat the
income as negative DEL as long as it is no more than 10% above the level envisaged for that year as part
of the Spending Review settlement2. Any income in excess of this will normally be treated as non-
budget and will need to be surrendered as a CFER.

1 (see Estimates Manual https://www.gov.uk/government/publications/supply-estimates-guidance-

manual

2 https://www.gov.uk/government/collections/consolidated-budgeting-guidance

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Annex 5.4

Contingent liabilities

Parliament expects advance notice of any commitments to future use of public funds for which there is
no active request for resources through Estimates. This annex discusses how a number of different kinds
of liability should be dealt with.

A5.4.1 As with expenditure, ministers may enter into liabilities - in effect, commitments to future
expenditure - without explicit parliamentary authority. But parliament expects to be notified of the
existence of these commitments when they are undertaken. Should they eventually give rise to the need
for public expenditure, they will require the authority of an Appropriation Act and frequently also
specific enabling legislation.

A5.4.2 Because the Crown is indivisible, ministers (and their departments) cannot give guarantees to
each other. They can, however, enter into commitments to conditional support with the same effect -
though this is rare.

A5.4.3 Some liabilities are uncertain. These contingent liabilities recognise that future expenditure may
arise if certain conditions are met or certain events happen. That is, the risk of a call on Exchequer funds
in the future will depend on whether or not certain events occur. In taking on such liabilities
departments must be sure to consult the Treasury.

A5.4.4 Arm's length bodies (ALBs) sponsored by departments do not generally have powers to take on
liabilities, because these would in effect bind their sponsoring departments. So the documentation
governing the relationship between a department and an ALB (see chapter 7 and annex 7.4) should
require the ALB to gain the sponsor department's agreement to any commitment, including borrowing,
into which it proposes to enter. Departments should ensure that ALBs have systems to appraise and
manage liabilities to the standards in this annex, so that they can report to parliament any liabilities
assumed by ALBS in the same way as they would their own.

Need for statutory powers

A5.4.5 It is good practice to enter into liabilities on the strength of specific statutory powers - as with
items of expenditure. This is essential if a regular scheme of loan guarantees or other support is
intended. Departments should consult the Treasury about proposals for such legislation, which should
include arrangements for reporting new liabilities to parliament. It is usual to put a statement to both
Houses when statutory liabilities are undertaken. Provision in budgets and Estimates should

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be scored as the department's best assessment of the need to pay out in support of the liabilities.

A5.4.6 In the nature of giving liabilities, many will arise with little notice. Departments should report
these to parliament at the earliest opportunity. There is a standard procedure for doing this: see
paragraphs A.5.5.22 to A.5.5.36 of this

annex.

A5.4.7 If a liability taken on in this way seems likely to persist, the department concerned should
consider backing it with statutory cover. This is because any expenditure which arises because of it is
subject to the same parliamentary expectations about statutory powers as any other expenditure (see
section 2.1). If a contingent liability could give rise to a loan, the organisation should ensure that there is
reasonable likelihood of the loan being serviced and repaid (see section 5.6). A5.4.8 There is an
exception to the need for statutory powers for accepting liabilities. Commitments taken on in the
normal course of business do not need specific cover, just as routine administrative expenditure does
not (see para 2.3.2). The standard conditions for treating liabilities as undertaken in the normal course
of business are set out in box A.5.4A, with some common examples. What may be the normal course of
business for one department may not be the normal course of business for another.

Box A5.4A: Liabilities arising in the normal course of business

In order to treat a liability as arising in the normal course of business, the organisation concerned should
be able to show that:

the activity is an unavoidable part of its business and/or

parliament could reasonably be assumed to have accepted that such liabilities can rest on the sole
authority of the Supply and Appropriation Act, based on the activities it has previously authorised.

Examples of common liabilities arising in the normal course of business include:

•
•

liabilities arising in the course of the purchase or supply of goods and services in the discharge of the
department's business

contractual commitments to make payments in future years arising under long-term contracts, eg major
building works

commitments to pay grants in future years under a statutory grant scheme

contingent liabilities resulting from non-insurance (see annex 4.4).

A5.4.9 If procurement in the normal course of business gives rise to proposals for liabilities outside the
normal range (eg a cap on the contractor's liabilities), the public sector organisation should consider
renegotiating. The acid test is whether two private sector bodies would use the same terms. In cases of
doubt, the Treasury should be consulted.

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A5.4.10 PFI contracts are a special case of procurement and so can cause

departments to take on liabilities. There is no need to notify use of standard PFI terms to parliament,
but any use of non-standard terms should be reported like any other.

A5.4.11 There are additional conditions for taking on non-standard conditions, namely:

the need must be urgent and unlikely to be repeated; and

it would be in the national interest to act even though there is no statutory authority.

Taking on liabilities

A5.4.12 Before accepting any liability, the organisation should appraise the proposal using the Green
Book1, to secure value for money, just like a proposal to undertake any other project. The liability
should be designed to restrict exposure to the minimum, eg by imposing conditions about duration.

A5.4.13 Many liabilities transfer risk from the private sector to the public sector. The starting basis in
these cases should be that a risk-based fee is charged to the private sector (analogous to a guarantee
fee or insurance premium). Charging fees in this way ensures the private sector has an incentive to
mitigate risk and reduces taxpayers' exposure to liabilities crystallising.

A.5.4.14 It will not always be possible or desirable to charge the private sector a fee. For example, if the
department does not have the legal power to do so, or because the policy intervention is counter-
cyclical. In these cases, the Treasury will need to be satisfied why not charging a fee is appropriate.

A.5.4.15 The Contingent Liability Approval Framework111 provides detailed advice on charging for risk,
mitigations to consider during the design of new guarantees and indemnities, and the contact details of
expertise available in government to advise on such proposals.

A5.4.16 Providing indemnities to contractors or limiting their liability in the event of their own
negligence, or that of a sub-contractor, should only be undertaken following an assessment of the best
value for money option for the exchequer as a whole. Assessment of VFM should include consideration
of the fact that requiring excessive liability caps, beyond what would be reasonable given the size and
scope of the contract, is likely to result in potential contractors including pricing for excessive risk or
choosing not to bid, thus reducing competition. The extreme case of unlimited liability should be used
very sparingly and only after discussion with the Commercial Function.

A5.4.17 When considering the use of unlimited liability clauses departments should consider whether
the contractor could bear such losses without being rendered insolvent, resulting in the risk being
passed back to the department. The Outsourcing Playbook gives further advice on identifying when to
use liability caps and how to set the level of those caps and support should be sought from the
Commercial Function. Where the quantum or scope of the cap is a departure from normal commercial
practice, or will give rise to a contingent liability, Treasury consent should be sought in the usual way for
novel contentious and repercussive spend. For the avoidance of doubt limitations of liability that are
prohibited or

[1] Contingent Liability Approval Framework.

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unenforceable in UK law, for example death or personal injury caused by negligence, fraud, or
fraudulent misrepresentation or breach of any obligation as to title implied by section 12 of the Sale of
Goods Act 1979 or section 2 of the Supply of Goods and Services Act 1982, are not permitted.

A5.4.18 Subject to the statutory powers of the public sector organisation and its delegated authorities, it
is important for an organisation contemplating assuming a new liability to consult the Treasury (or the
sponsor department, as the case may be) before assuming it. Departments' delegated authorities or
incurring liabilities should include the liabilities of any sponsored bodies.

A5.4.19 HM Treasury approval must be sought for all contingent liabilities that are novel, contentious or
repercussive. In addition, a completed Contingent Liability approval framework checklist must be
submitted to HM Treasury before entering into a contingent liability with a maximum exposure of £3m
or more. This process is also required for remote contingent liabilities.

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Types of liability

A5.4.20 Public sector organisations may take on liabilities by:

issuing specific guarantees, usually of loans;

writing a letter or statement of comfort; or

providing indemnities.

A5.4.21 It is important to remember that any of these instruments issued by a minister may be legally
enforceable.

A5.4.22 Guarantees should normally arise using statutory powers. They typically involve guarantees
against non-payment of debts to third parties.

A5.4.23 Letters of comfort, however vague, give rise to moral and sometimes legal obligations. They
should therefore be treated in the same way as any other proposal for a liability. Great care should be
taken with proposals to offer general statements of awareness of a third party's position, or oral
statements with equivalent effect. Creditors could easily take these to mean more than intended and
threats of legal action could result. Treasury approval is essential.

A5.4.24 It is common to give certain kinds of indemnity to members of boards of central government
departments or of NDPBS; or to civil servants involved in legal proceedings or formal enquiries as a
consequence of their employment, perhaps by acting as a board member of a company. The standard
form is set out in box A.5.4B, in line with the Civil Service Management Code2. This cover is comparable
to what is obtainable on the commercial insurance market. So it excludes personal criminal liability,
reckless acts or business done in bad faith.

A5.4.25 Liabilities of this kind to individuals do not normally need to be reported to parliament unless
they go beyond the standard form or are particularly large or risky.

Box A5.4B: standard indemnity for board members

The government has indicated that an individual board member who has acted honestly and in good
faith will not have to meet out of his or her personal resources any personal civil liability, including costs,
which is incurred in the execution or the purported execution of his or her board functions, save where
the board member has acted recklessly.

2 https://www.gov.uk/government/publications/civil-servants-terms-and-conditions
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Notifying liabilities to parliament

A5.4.26 The rules for notifying parliament of liabilities are very similar to those for public expenditure.
Generally speaking there is no requirement to inform parliament about any liability which:

arises in the normal course of business;

arises under statutory powers (subject to third bullet point of paragraph A5.4.23); or,

would normally require notification (i.e. neither arising in the normal course of business nor under
statutory powers) but is under £300,000 in value.

A5.4.27 There are some exceptions to this general rule. Parliament should be notified of any liability,
even if it meets one or more of the criteria given in paragraph A5.4.22, which:

arises as a result of a specific guarantee, indemnity or letter of comfort where the guarantee is not of a
type routinely used in commercial business dealings;

is of such a size, relative to the department's total budget, that parliament should be given notice;

arises under specific statutory powers which require parliament to be notified; or,

is novel, contentious or potentially repercussive

A5.4.28 It is important to note that undertakings in the normal course of business should be judged
against the department's normal business pattern authorised by parliament. So what may be normal for
some departments may not be normal for others. In cases of doubt it is best to report.

A5.4.29 Non-statutory liabilities which need to be reported to parliament should be notified by Written
Ministerial Statement and accompanying departmental Minute (see box A5.4C). Treasury approval is
required before going ahead. It is sometimes necessary, with Treasury agreement, to adapt the form of
wording, eg if the liability arises immediately.

A5.4.30 Written Ministerial Statements and departmental Minutes should be laid in the House of
Commons, on the same day, and should briefly outline the nature of the contingent liability and confirm
that a departmental Minute providing full details has been laid in the House of Commons.

A5.4.31 Departmental Minutes should:

use the standard wording for the opening and closing passages, which
has been agreed with the PAC (box A.5.4C);

describe the amount and expected duration of the proposed liability,

giving an estimate if precision is impossible;

explain which bodies are expected to benefit, and why;

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if applicable, explain why the matter is urgent and cannot observe the normal deadlines (paragraph
A5.4.26_);

explain that authority for any expenditure required under the liability will be sought through the normal
Supply procedure;

be copied to the chairs of both the PAC and departmental committee.

A5.4.32 The contingent liability should not go live until 14 parliamentary sitting days, after the Minute
has been laid. Every effort should be made to ensure that the full waiting period falls while parliament is
in session. Where a contingent liability is reported less than 14 days before the end of the session, the
contingent liability should only go live after lying before parliament during 14 sitting days, ie some days
after the start of the next session.

A5.4.33 If an MP objects by letter, Parliamentary Question or Early Day Motion, the indemnity should
not normally go live until the objection has been answered. In the case of an Early Day Motion, the
Member(s) should be given an opportunity to make direct personal representations to the minister, eg
proactively arranging a meeting with them. The Treasury should be kept in touch with representations
made by MPs and of the outcome.

A5.4.34 If, exceptionally, the guarantee or indemnity would give rise to an actual liability, the
department should consult the Treasury about the wording of the Minute. The department should
discuss the implications for the actual liability on its budget, Estimate and accounts.

A5.4.35 There is not usually a requirement to notify parliament in instances where a contingent liability
arises due to events outside a department or ALB's control rather than through an active policy decision.
An example of something that would be outside a department or ALB's control would be legal
proceedings being brought against them. Events of this nature should still be disclosed in the entity's
Annual Report and Accounts in line with the requirements of the Government Financial Reporting
Manual (FReM).

Box A5.4C: standard text for departmental Minutes on liabilities

Opening passage

It is normal practice, when a government department proposes to undertake a contingent liability in

excess of £300,000 for which there is no specific statutory authority, for the Minister concerned to
present a departmental Minute to parliament a giving particulars of the liability created and explaining
the circumstances; and to refrain from incurring the liability until fourteen parliamentary sitting days
after the issue of the Minute, except in cases of special urgency.

The body of the Minute should include:

If the liability is called, provision for any payment will be sought through the normal Supply procedure.

Closing passage

The Treasury has approved the proposal in principle. If, during the period of fourteen parliamentary
sitting days beginning on the date on which this Minute was laid before parliament, a member signifies
an objection by giving notice of a Parliamentary Question or by otherwise raising the matter in
parliament, final approval to proceed with incurring the liability will be withheld pending an examination
of the objection.

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Non-standard notification

A5.4.36 Sometimes it is not possible to give details of a contingent liability with full transparency. In such
cases the department should write to the chairs of both the PAC and departmental committee to
provide the same details as those outlined in paragraph A5.4.24, with the same notice period. The
letters should explain the need for confidentiality. Any objection by either chair should be approached in
the same way as MPs' objections (paragraph A.5.4.27). If departments continue to have concerns about
writing to parliament, in particularly sensitive or confidential cases, they should seek advice from the
Treasury.

A5.4.37 Sometimes departments want to report an urgent contingent liability providing less than the
required 14 days notice. In such cases, the department should follow the procedure in paragraph
A.5.4.27 and explain the need for urgency, agreeing revised wording to the final standard paragraph
with the Treasury.

A5.4.38 If the proposal is more urgent than this rule would allow, the department should write to the
chairs of the PAC and the departmental committee, giving the information in paragraph A.5.4.28 and
explaining the need for urgency. Where possible, the Chairs should be given 14 working days from
receipt of the letter to raise an objection in writing, in which case the department would withhold final
approval to proceed with incurring the liability pending an examination of the objection. As a matter of
record, when parliament reconvenes, a Written Ministerial Statement and departmental Minute should
be laid explaining what has happened, including any liabilities undertaken.

A5.4.39 The same procedure as in paragraph A.5.4.29 should be used to report liabilities during a
parliamentary recess. In such cases the notice period should be 14 working days notice, ie excluding
weekends and bank holidays.

A5.4.40 Similarly, it is possible that a department might want to undertake a non- statutory contingent
liability when parliament is dissolved. Every effort should be made to avoid this, since members cease to
be MPs on dissolution, and committees will be reconstituted in the new parliament. If the department
nonetheless considers the proposed liability to be essential, it should consult the Treasury. When
parliament reconvenes a Written Ministerial Statement should be laid explaining what has happened,
including any liabilities undertaken.

Reporting liabilities publicly

A5.4.41 Any changes to existing liabilities should be reported in the same way as they were originally
notified to parliament, explaining the reasons for the changes. If an originally confidential liability (see
paragraph A5.4.29) can be reported transparently, the standard Minute (paragraph A.5.4.24) should be
laid.

A5.4.42 Departments should report all outstanding single liabilities, or schemes of liabilities, in their
accounts unless they are confidential. Any which would fall as a direct charge on the Consolidated Fund
should be reported in the Consolidated Fund accounts. The conventions in the FreM should be used.

A5.4.43 Estimates should similarly be noted with amounts of any contingent or actual liabilities. The
figures quoted should be the best assessments possible at the

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time of publication. Actual liabilities should appear as provisions. The rubric should refer back to
notification of parliament.

A5.4.44 When the conditional features of contingent liabilities are met, it is good practice to wait until
parliament has approved the relevant Estimate before providing the necessary resources. But if
providing support is more urgent, departments should apply for an advance from the Contingencies
Fund (see Annex 2.4 and the Estimates Manual3 under the usual conditions). If an advance is approved,
a statement to parliament should explain what is happening, and in particular how the crystallised
liability is to be met.

International agreements
A5.4.45 International treaties, agreements or commercial commitments which mean the UK incurring
specific contingent liabilities should follow the parliamentary reporting procedures as far as possible
whether or not the agreement is covered by legislation. Even if an international agreement does not
require legislation for ratification, it should nevertheless be laid before parliament, accompanied by an
explanatory memorandum, for 21 sitting days before it is ratified (the Ponsonby rule).

3 https://www.gov.uk/government/publications/supply-estimates-guidance-manual

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