Managing Public Money

May 2023
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Managing Public Money

May 2023
© Crown copyright 2023

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ISBN 978-1-915596-90-1
PU 3309

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Contents
Foreword 8
Chapter 1 Responsibilities 9
Chapter 2 Use of Public Funds 13
Chapter 3 Accounting Officers 19
Chapter 4 Governance and Management 29
Chapter 5 Funding 41
Chapter 6 Fees, charges and levies 49
Chapter 7 Working with others 55
Annex 1.1 Communications with Parliament 67
Annex 1.2 The Comptroller and Auditor General 74
Annex 2.1 Treasury approval of legislation 76
Annex 2.2 Delegated authorities 80
Annex 2.3 The PAC Concordat of 1932 85
Annex 2.4 New services 87
Annex 3.1 The Governance Statement 91
Annex 4.1 Finance Directors 95
Annex 4.2 Use of models 99
Annex 4.3 Risk 101
Annex 4.4 Insurance 106
Annex 4.5 Senior Responsible Owner Accountability 112
Annex 4.6 Procurement 114
Annex 4.7 Subsidies 120
Annex 4.8 Expenditure and payments 121
Annex 4.9 Fraud 123
Annex 4.10 Losses and write offs 126
Annex 4.11 Overpayments 132
Annex 4.12 Gifts 137
Annex 4.13 Special payments 140
Annex 4.14 Remedy 145
Annex 4.15 Asset management 149
Annex 5.1 Grants 155
Annex 5.2 Protecting the Exchequer interest (clawback) 159
Annex 5.3 Treatment of income and receipts 164
Annex 5.4 Contingent liabilities 168
Annex 5.5 Lending 177

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Annex 5.6 Banking and managing cash 183
Annex 6.1 How to calculate charges 191
Annex 6.2 Charging for information 195
Annex 6.3 Competition law 198
Annex 7.1 Forming and reforming ALBs 200
Annex 7.2 Framework documents 205
Annex 7.3 Government Companies, Public Corporations, and Trading Funds
208
Annex 7.4 Using private finance 214

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Foreword
This document sets out the main principles for dealing with resources in public sector
organisations in the UK. 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 remain unchanged from previous version of this document and its
predecessors. 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.

These principles are invariant.

However, the law, business practices, and public expectations all change. 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 demanding standards set
out in this document.

The Treasury stands ready to help anyone who needs help in thinking through the
issues.

The Treasury will revise this document from time to time as the need arises. Where
necessary, the Treasury will also issue “Dear Accounting Officer” letters, to provide
specific advice on issues of accountability, regularity and propriety, value for money
and annual accounting exercises. The content of those letters carries the same force as
the material contained in this document.

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

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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

The standards expected of all public services are honesty, impartiality, openness,
accountability, accuracy, fairness, integrity, transparency, objectivity and reliability. All
should be carried out in the spirit of, as well as to the letter of the law, in the public
interest, to high ethical standards and achieving value for money.

1.1.2 The principles in this handbook complement the guidance on good governance
in the Corporate Governance Code1 applying 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
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
and conventions. This mix may of course change from time to time.

1 The Corporate Governance Code – see https://www.gov.uk/government/publications/corporate-governance-code-for-central-

government-departments

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1.2.2 As the Corporate Governance Code1 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:

• determine the policies of the departmental group

• chair the departmental board
• allocate responsibilities among the ministers in the department
• choose which areas of business to delegate to officials, and on what
conditions
• look 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
• also have 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 3.6 below 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).

1.2.6 Similarly, taxes may be collected, and public funds may be drawn, only with
parliamentary authority; and only as Parliament has authorised.

1.2.7 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.

1.3 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 3.7) 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.

1.3.3 To enable the effective scrutiny of the use of public funds, Parliament requires
departments and public bodies to notify it of certain events or the publication of

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

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

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material. Those notification requirements are set out in the relevant chapters of this
document, but also brought together in Annex 1.1.

1.4 The Treasury

1.4.1 Parliament looks to the Treasury to make sure that:

• that departments use their powers only as it has intended

• 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

• 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 system 4 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
• may also work through the Cabinet Office to set certain standards
applicable across central government, for example functional
standards5.

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 shall be adequate delegations, controls and
reporting arrangements to provide assurance to the board, the accounting officer6 and
ultimately ministers about what is being achieved, to what standards and with what

4 See the Consolidated Budgeting Guidance for more - https://www.gov.uk/government/collections/consolidated-budgeting-guidance

5 See Functional Standards - https://www.gov.uk/government/collections/functional-standards

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.

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effect. These arrangements shall 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 Code7).

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 website8 and in annex 1.2.

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

• financial audit of the accounts of departments and arms length bodies

(ALBs), covering:
i. assurance that accounts have been properly prepared and are free
of material misstatements9
ii. 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 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 records 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
information. 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 3.7) may hold hearings to examine evidence on any of these reports
and on other related matters.

7 https://www.gov.uk/government/publications/civil-service-code/the-civil-service-code

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

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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.

2.1 Introduction
2.1.1 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.

2.1.2 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 exceptions10, parliamentary authorization 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 (see section 2.4)

• sufficient legal powers – though see section 2.5 for some limited exceptions

2.1.3 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). Further, Parliament expects the statutory powers granted to
be exercised in line with the wider spending framework set by the Treasury: for
example, spending powers must be exercised in line with the delegations set by
Treasury or a sponsor department, and powers to set remuneration must be exercised
in line with central pay controls unless alternative delegations have been agreed.

10 See section 5.3.

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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:

• 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
• use of resources is within the ambit of the vote and consistent with
the Estimate(s)
• they answer to Parliament for stewardship of these responsibilities.

2.3 Treasury Consents

2.3.1 Departments must have Treasury consent before undertaking expenditure or
making commitments which could lead to expenditure, or have other fiscal
implications (this includes legislation with spending implications - see annex 2.1).
Usually the Treasury agrees some general approvals delegating consent for each
department subject to clear 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

• A delegated limit, below which consent is delegated to the department, and

above which spending proposals still require specific Treasury consent

• objective criteria for exceptions requiring specific Treasury scrutiny or approval

• a sampling mechanism to allow specimen cases to be examined

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 business11 (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 must always be obtained before
proceeding, even if the amounts in question lie within the delegated limits.

2.3.5 It is improper for a public sector organisation to spend or make commitments

outside the agreed delegations and if occurs will likely result in a finding that that
spend is irregular. 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, e.g. for large or critical
projects. There are also Whitehall wide controls on key progress points for the very

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

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largest projects12. In such cases it is unlawful to proceed without Treasury consent -
and Treasury consent cannot be given retrospectively.

Box 2.3: examples of transactions requiring explicit Treasury consent

• extra statutory payments similar to but outside statutory schemes

• ephemeral ex gratia payment schemes, e.g. payments to compensate for official

errors

• extra statutory payments similar to but outside statutory schemes

• special severance payments, e.g. compromise agreements in excess of

contractual commitments

• non-standard payments in kind

• unusual financial transactions, e.g. imposing lasting commitments or using tax

avoidance

• unusual schemes or policies using novel techniques

2.3.7 Where proposals have public expenditure implications, the Treasury should be
consulted before they are submitted for approval by collective agreement at cabinet
level, either in person, by write-round or via a cabinet sub-committee. Where the
department proposing the policy and the Treasury cannot agree in advance, any
proposal for collective ministerial consideration should record the Treasury’s position
in terms which are acceptable to them. Policy proposals with public expenditure
implications will not be agreed unless Treasury ministers are content.

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 principles13 -
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.

12 Through the Major Projects Authority, http://www.cabinetoffice.gov.uk/content/major-projects-authority] using powers delegated by

the Treasury.
13 http://www.public-standards.gov.uk/

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

• the importance of operating with regularity and propriety

• the need for efficiency, economy, effectiveness and prudence in the
administration of public resources, to secure value for public money 14.
2.4.3 Should a minister seek a course of action which the accounting officer cannot
reconcile with any individual 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 expected opportunity for control and
accountability. Departments shall 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)
• 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.

14 5 A more detailed description of value for money is at annex 4.4

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

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

• lease agreements, e.g. for photocopiers, lifts

• contractual obligations to purchase goods or services (e.g. where single year

contracts might be bad value)

• expenditure using prerogative powers such as defence of the realm and

international treaty obligations

2.5.4 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, e.g. 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.

2.6.2 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, i.e. with
wider benefits to outweigh the convention of awaiting parliamentary authority
(political imperative is not enough)

17
• 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

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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 Introduction
3.1.1 Each organisation in central government – department, agency, trading fund,
NHS body, non-departmental public 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 shall 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
• of other ALBs (including all NDPBs), as accounting officers for these
bodies
• 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 Officer of Accounts team via
[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

19
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

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.

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 shall 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

20
 • 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

3.3.2 The accounting officer of a corporate arm’s length body shall 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 shall 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
• 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 (e.g. using the Green Book15 to evaluate
alternatives)
• Control: the accounting officer shall personally approve and confirm
their agreement to all Cabinet Committee papers and major project or
policy initiatives before they proceed

15 https://www.gov.uk/government/collections/the-green-book-and-accompanying-guidance-and-documents

21
 • 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 (e.g. 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 shall 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.

3.4.3 An accounting officer assessment shall 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 significant 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

22
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 shall also be prepared and published.

3.4.8 Accounting officers may also choose to publish similar information from
assessments made in other circumstances at their discretion.

3.4.9 When an accounting officer assessment for a GMPP project is completed, the
summary assessment should be published promptly on the department’s pages of
gov.uk. The Treasury maintains a collection page titled ‘Accounting Officer
Assessments’16 that links to these publications. Departments should ensure that their
page is added to this collection page once they publish it.

3.4.10 Copies should be deposited in the Library of the House of Commons, and sent
to the Chair of the PAC, the Comptroller and Auditor General and the Treasury Officer
of Accounts. It should also be copied to the Principal Accounting Officer if prepared by
another accounting officer in the department or one of its arm’s length bodies.

3.4.11 Where an accounting officer decides the public interest is best served by
delaying publication of a summary assessment, they should nevertheless share the
summary on a confidential basis with the chairs of the PAC and the relevant
departmental select committee, as well as the Comptroller & Auditor General and the
Treasury Officer of Accounts17.

3.4.12 Further guidance on producing and publishing accounting officer assessments

can be found in Accounting Officer Assessments: guidance18.

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. Further details are set out in Chapter 7.

16 https://www.gov.uk/government/collections/accounting-officer-assessments-collection

17https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1090958/DAO_0422_Accounting_of

ficer_assesments_and_framework_documents.pdf
18 www.gov.uk/government/publications/accounting-officer-assessments

23
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 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 shall 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 shall ask their senior minister for a formal written direction to
proceed. An oral direction shall 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. Treasury consent does not remove the need
for a direction if the requirements of box 3.2 are not met.

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
shall 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 shall:

• follow the minster’s direction without further ado

• promptly copy the direction request, the direction and other papers
the accounting officer considers relevant to Public Accounts
Committee, 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

24
 • if asked, explain the minister’s course of action - this respects
ministers’ rights to frank advice, while protecting the quality of
internal debate.
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.

3.6.8 Where a direction has been issued, this does not represent a continuing
mandate to dispense with the accounting officer standards. The AO has a
responsibility to ensure the standards set out in box 3.2 are met on an ongoing basis.
The AO should seek to bring the policy in line with standards at the earliest
opportunity if possible, and if circumstances change should consider whether the
existing direction provides sufficient cover to justify the policy. It may be appropriate to
revisit with the Minister if the direction is still supported at appropriate stages of policy
implementation.

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 Witnesses to PAC hearings sometimes find that there is supplementary material
which would be helpful to the committee, in addition to the NAO report. When this
happens it is good practice to submit it to the Committee with adequate time to
consider it, clearing it first with the NAO. If time does not permit this, witnesses or their
representatives should discuss the best approach with the Clerk to the Committee.

3.7.3 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.

3.7.4 In answering questions, the accounting officer shall 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.

3.7.5 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.

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

25
3.7.7 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.

3.7.8 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.

3.7.9 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.

3.7.10 The PAC expects the government to respond promptly and transparently
through both the initial Treasury Minute and subsequent Progress Reports.
Accounting officers shall ensure the internal clearance processes within their
organisation, including any ministerial clearances the accounting officer decides are
needed, are arranged to fit with deadlines for responses.

3.7.11 In addition, if a department determines it is necessary to revise the target date

for implementing an agreed recommendation, the accounting officer shall write
immediately to the PAC, copied to the Treasury Officer of Accounts, and provide a
detailed explanation for the deferral. Departments shall not leave notification of the
delay in implementation until the publication of the next Treasury Minutes Progress
Report.

3.8 When an 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 shall 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:

26
 • 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 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
details.

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, e.g. 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 shall 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 shall have meaningful oversight of the subsidiary sufficient to exercise their
AO responsibilities. It is not acceptable to establish ALBs, or subsidiaries to ALBs, in
order to avoid or weaken parliamentary scrutiny. If an ALB does not possess this level
of control, it will most likely be necessary for the sponsor department’s PAO to appoint
the chief executive of the subsidiary as an AO in their own right. In this case, the
subsidiary’s AO is directly responsible to the PAO, although the sponsor department
may delegate some sponsorship functions to the original ALB. All AOs must be
appointed by and responsible to the sponsor department’s PAO.

3.10.4 Exceptionally, the accounting officer of a sponsor department may need to

intervene if an ALB drifts significantly off track, e.g. 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, e.g. 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 shall 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
shall 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.

27
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.

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

3.11.4 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 shall identify and assess risks, and design and operate the most effective risk
treatment activities (including controls) possible in the time available.

3.11.5 The Treasury stands ready to help accounting officers think such issues through.

28
Chapter 4
Governance and Management
Public sector organisations shall 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 Introduction
4.1.1 Each public sector organisation shall establish governance arrangements
appropriate to its business, scale and culture. The structure shall combine efficient
decision making with accountability and transparency.

4.1.2 In doing so, central government departments shall be guided by the Corporate
Governance Code19 . 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

19 https://www.gov.uk/government/publications/corporate-governance-code-for-central-government-departments for both the code

and the good practice guidance.

29
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, e.g. 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 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, e.g. 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 of the organisation that they lead. The administrative
standards expected are set out in the Civil Service Code 20 and the Ombudsman’s
Principles of Public Administration21. They allow considerable flexibility to fit with each
organisation’s obligations and culture. It is against these standards that failure to
deliver is assessed. Accounting officers shall also ensure they comply with the

20 https://www.gov.uk/government/publications/civil-service-code/the-civil-service-code

21 https://www.ombudsman.org.uk/about-us/our-principles

30
functional standards22, which set expectations for the management of functional work
and the functional model across government.

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 shall 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 shall provide the Treasury with accurate and timely

information about in-year developments – their expenditure,
performance against objectives and evolution of risk (e.g. serious
unforeseen events or discovery of fraud)
• ALBs shall provide their sponsor departments with similar information
• the established mechanisms for controlling and reporting public
expenditure, including Treasury support or approval where necessary,
shall be respected.
4.2.4 In particular, departments shall 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, e.g. 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

22 https://www.gov.uk/government/collections/functional-standards

31
 • 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 shall 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.

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

4.3.3 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.
4.3.4 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.

4.3.5 In turn the board shall support the accounting officer in drawing up the
governance statement, which forms part of each organisation’s annual accounts. See

32
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 obligations23, and occasions
where commercial insurance would provide value for money24. 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 shall run efficient systems for managing
payments (see box 4.4). It shall 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 shall be led by a senior responsible
owner (SRO). It is good practice to aim for continuity in such appointments25.

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

23 E.g. ALBs should insure vehicles where the Road Traffic Act requires it.

24 E.g. where private sector contractors take out single-site insurance policies because they are cheaper than each individual party

insuring themselves separately.

25 See annex 4.5.

33
 • 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

4.6 Receipts
4.6.1 Public sector organisations shall 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 shall 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

34
4.7.1 From time to time public sector organisations may find it makes sense to carry
out transactions outside the usual planned range, e.g.:

• 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

• extra-statutory payments to claimants (where a similar statutory
scheme exists)
• ex gratia payments to customers (where no established scheme exists)
• 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.

35
 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.

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.

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.

4.10 Assets

36
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

(e.g. response times), targets (e.g. 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 (e.g. 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 Parliamentary and Health Service

37
Ombudsman (PHSO)26, whose Principles of Good Complaints Handling27 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 shall operate as openly as is compatible shall the
requirements of their business. In line with the statutory public rights 28, they should
make available timely information about their services, standards and performance.
This material shall strike a careful balance between protecting confidentiality and
open disclosure in the public interest.

4.13.2 All public sector organisations shall adopt a publication scheme routinely
offering information about the organisation’s activities. They shall 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 shall consolidate information about the relevant ALBs. It
shall include a governance statement (see annex 3.1).

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.

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

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

28 E.g. Freedom of information act 2000, Data protection act 1998, Environment information regulations 2004 and the Re-use of public

sector information regulations 2005

38
Box 4.8: factors to consider when planning policies or projects design

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?

39
 • 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?

40
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 Introduction
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 shall respect in
managing their budgets. Departments are expected to live within their allocations for
each financial year, with some limited exceptions, e.g. 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 (non-
specific 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 (i.e.
all spending in budgets and any voted spend outside of budgets) for the year ahead.
The provision sought shall be taut and realistic, without padding. The Supply Estimates
Guidance Manual has more detail.

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

41
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 shall 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

• irregular expenditure outside the ambit, e.g. on an unauthorised
service.

42
5.4.4 Parliament usually regards the latter as particularly unsatisfactory because it
means that the department concerned has flouted Parliament’s intentions29 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 bound30 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 shall 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, e.g. 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.

Box 5.1: contingent liabilities: notifying Parliament

• Parliament shall be notified of uncertain liabilities in a meaningful way without

spurious accuracy. This shall be done by Ministerial Statement and departmental
Minutes to the House of Commons, drawn directly to the attention of the chairs
of the PAC and relevant departmental committee.

• If a contingent liability affects several departments but cannot confidently be

allocated among them, the relevant ministers shall inform Parliament in a
pragmatic way. A single statement may well suffice.

• If, exceptionally, a new liability needs to remain confidential, the minister shall
inform the chairs of the relevant select committee and the PAC; then inform
Parliament openly when the need for confidentiality lifts.

• Ministers shall inform Parliament if an ALB assumes a contingent liability which it

could not absorb within its own resources, since the risk ultimately lies with the
sponsor department’s budget.

5.5.3 Public sector organisations shall give Parliament prompt and timely notice of
any significant new commitments, whether using existing statutory powers or to be

29 I.e. has breached the Concordat – see annex 2.3

30 Under the Concordat.

43
honoured through future legislation. Non statutory contingent liabilities (above a
specified threshold) shall always be notified in this way. The process is set out in annex
5.4.

5.5.4 The general rule is to err on the side of caution in keeping Parliament informed
of emerging contingent liabilities. It is impossible to generalise about every possible
set of circumstances but some guidance is in box 5.1.

5.6 Tax
5.6.1 Public sector organisations shall not engage in, or connive at, tax evasion, tax
avoidance or tax planning. If a public sector organisation were to obtain financial
advantage by moderating the tax paid by a contractor, supplier or other counterparty,
it would usually mean that the Exchequer as a whole would be worse off – thus
conflicting with the accounting officer’s duties (section 3.3). Thus artificial tax
avoidance schemes shall normally be rejected. It shall be standard practice to consult
HMRC31 about transactions involving non-standard approaches to tax before going
ahead.

5.6.2 There is of course no problem with using tax advisers to help meet normal
legitimate requirements of carrying on public business. These include administration
of VAT, PAYE and NICs, where expert help can be useful and efficient.

5.6.3 Proposals to create new taxes in order to assign their proceeds to new spending
proposals are rarely acceptable. Decisions on tax are for Treasury ministers, who are
reluctant to compromise their future fiscal freedom to make decisions.

5.7 Public Dividend Capital

5.7.1 Certain public sector businesses, notably trading funds and certain Health
Trusts, are set up with public dividend capital (PDC) in lieu of equity. Like equity, PDC
should be serviced, though not necessarily at a constant rate.

5.7.2 PDC is not a soft option. In view of the risk it carries, it should deliver a rate of
return comparable to commercial equity investments carrying a similar level of risk.
There is scope for the return to vary to reflect market conditions and investment
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 guidance32.

5.8 Borrowing by public sector organisations

5.8.1 Some public sector organisations, e.g. certain trading funds, are partly financed
through loans provided through the sponsor department’s Estimate; or from the

31 HMRC customer relationship manager or customer co-ordinator.

32https://www.gov.uk/government/collections/consolidated-budgeting-guidance

44
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 shall 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 shall 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, e.g. 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.

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 (e.g. 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 shall normally
arrange to guarantee the loan to secure a fine rate. This is not always possible, e.g.
when a guarantee would rank as a state aid (see annex 4.7). A department which
guarantees a loan normally33needs 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 shall be scrutinised as thoroughly as if indeed a loan
were made. Since guarantees always entail entering into contingent liabilities,

33 The Concordat applies here in just the same way as to spending – see annex 2.3.

45
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 shall 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,
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 shall establish a policy for its use of
banking services. See annex 5.6 for guidance. Sponsor departments shall also make
sure that their ALBs are aware of the importance of managing this aspect of their
business efficiently and effectively.34

34 Further details on ALB’s cash management arrangements can be found within the Framework Document Guidance and
Framework Document Templates available on gov.uk - https://www.gov.uk/government/publications/managing-public-money-
framework-documents

46
5.12 Other financing techniques, including hedging
instruments and forward contracts
5.12.1 Depending on its circumstances, purposes and risk profile, a public sector
organisation may, with appropriate Treasury consents, consider using financial
instruments provided by the financial markets. Accounting officers must ensure there
is a clear rationale evidencing the overall benefit before using these instruments.

5.12.2 Simpler examples of this type of activity are the use of credit and debit cards in
order to secure faster settlements, or fixed price energy contracts for supply in public
sector buildings. These simpler forms can be considered as being in the normal course
of business.

5.12.3 The use of more complex types of financial instruments is only permitted with
the explicit consent of the Treasury. The most common examples of this being the use
of forward contracts for foreign currency transactions or commodities. Other examples
include swap contracts and derivatives.

5.12.4 Accounting officers should be aware that the use of these more complex
financing instruments to hedge might not be the cheapest option for the Exchequer
as a whole, compared to departments and ALBs absorbing volatility risk within their
budgets, which remains the default approach.

5.12.5 However, such transactions can support the accounting officer in ensuring the
regularity of spending, by ensuring they do not need to absorb significant volatility
(e.g. from foreign exchange value fluctuations) within their control totals.

5.12.6 For example: if a department or arm’s length body were committed to pay an
amount of foreign currency in the future that represented a significant proportion of
the department or ALB’s budget, which would be subject to high levels of foreign
exchange volatility, it might enter a simple forward via the Bank of England – as agent
for the Treasury under arrangements entered into through Government Banking to
give certainty that the final cost (in sterling) would be known and within its control
totals.

5.12.7 All use of such instruments should be carefully evaluated and will require
Treasury consent, save those examples in the normal course of business such as those
mentioned in 5.12.2. Treasury will always refuse proposals to speculate. Offers which
appear too good to be true usually are.

5.12.8 Any organisation using these instruments shall 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 and their ALBs shall
consult the Treasury before using derivatives for the first time. Annex 5.6 contains
further detail.

5.12.9 Departments should only enter into such financing instruments via centralised
expertise and frameworks. For example, through the Bank of England – as agent for
the Treasury, who can provide departments with vanilla instruments such as forward
contracts and swaps for foreign exchange transactions, and Crown Commercial
Services for energy and commodities purchases.

5.12.10 Commercial providers also offer forwards, options and non-foreign currency
derivatives (e.g. commodities, interest rates, inflation), these are always novel,
contentious and repercussive and will always require explicit Treasury consent.

47
Treasury will normally be sceptical, as financial hedging generally incurs costs, private
providers can have a higher cost of finance than the Government and intend to profit
from their business, making them poor value for money.

5.12.11 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.

5.12.12 Departments should ensure that financing instruments are appropriately

scored in line with Consolidated Budgeting Guidance, and that the Treasury is
consulted regarding losses in line with Annex 4.10, and the department’s delegated
authority letter.

48
Chapter 6
Fees, charges and levies
Charges for services provided by public sector organisations normally pass on the full
cost of providing them. There is scope for charging more or less than this provided
that ministers choose to do so, Parliament consents and there is full disclosure. Public
sector organisations may also supply commercial services on commercial terms
designed to work in fair competition with private sector providers. Parliament expects
proper controls over how, when and at what level charges may be levied

6.1 Introduction
6.1.1 Certain public goods and services are financed by charges rather than from
general taxation. This can be a rational way to allocate resources because it signals to
consumers that public services have real economic costs. Charging can thus help
prevent waste through badly targeted consumption. It can also make comparisons
with private sector services easier, promote competition, develop markets and
generally promote financially sound behaviour in the public sector.

6.1.2 There are unavoidable reasons why policy on charging is important:

• charges substitute for taxation (or, in the short term, borrowing) as a

means of government finance. Decisions on charging policy shall
therefore be made with the same care, and to similar standards, as
those on taxation
• for this reason, Parliament expects to consider legislation on whether
charges shall be levied; how they should be structured; and on charge
levels
• international standards35 determine how income from charges is
classified in the national accounts. Certain charges are treated as
taxes.
6.1.3 As in other areas of managing public funds, Parliament expects the Treasury to
make sure that its interests are respected, including pursuit of efficiency and
avoidance of waste or extravagance. Because Estimates and budgets are shown net of
income, special effort is required to give Parliament information about both gross and
net costs, and about the sources and amounts of income.

6.2 Basic principle

6.2.1 The standard approach is to set charges to recover full costs. Cost shall be
calculated on an accruals basis, including overheads, depreciation (e.g. for start up or
improvement costs) and the cost of capital. Annex 6.1 sets out how to do this.

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

35 The Treasury and public accounts follow classification decisions taken by the Office for National Statistics, an independent

organisation which is guided by the international standards set out in the European System of Accounts.

49
 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 s56 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.

50
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 shall 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, e.g. in person, by post or online

• priorities, e.g. where a quicker service costs more

• quality, e.g. charging more for a premium service with more features

• recognising structural differences, where it costs more to supply some

consumers

However, different groups of customers should not be charged different amounts for a
service costing the same, e.g. charging firms more than individuals. Similarly, cross
subsidies are not standard practice, e.g. charging large businesses more than small
ones where the cost of supply is the same.

6.3.6 Charges within and among central government organisations shall 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.

6.3.7 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, e.g. 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

51
 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.

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.

6.4.2 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.

6.5 Charging below cost

6.5.1 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.

6.6 Charging above cost

6.6.1 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.

6.6.2 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).

6.7 Cross subsidies

6.7.1 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.

6.8 Information services

6.8.1 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.

52
6.9 Levies
6.9.1 Compulsory levies, e.g. 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.

6.9.2 As with other fees and charges, levies shall be designed to recover full costs. If
the legislation permits, the charge can cover the costs of the statutory body, e.g. a
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).

6.10 Commercial services

6.10.1 Some public sector services are discretionary, i.e. 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.

6.10.2 Charges for these services shall be set at a commercial rate. The rate shall
deliver a commercial return on the use of the public resources deployed in supplying
the service. So the financial target shall 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 shall be:

• for sales into commercial markets, in line with competitors’

assessment of their business risk, rising to higher rates for more risky
activities
• 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)
6.10.3 If a publicly provided commercial service does not deliver its target rate of
return, outstanding deficits shall be recovered, e.g. by adjusting charges. Any objective
short of achieving the target rate of return calls for ministerial agreement, and shall be
cleared with the Treasury. But discretionary services should never undermine the
supplier organisation’s public duties, including its financial objective(s).

6.10.4 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.

6.11 Disclosure
6.11.1 It is important that Parliament is fully informed about use of charges. Each year
the annual report of the charging organisation shall give:

• the amounts charged

• full costs and unit costs
• total income received
• the nature and extent of any subsidies and/or overcharging

53
 • the financial objectives and how far they have been met.
6.11.2 To keep Parliament properly informed, Estimates should display details of
expected income from charges. The Estimates Manual explains how the controls work.

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

6.12 Taking stock

6.12.1 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, e.g. 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 (e.g. licensing, contracting out, privatising) be

better?

54
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 shall 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 or policy independence is compatible with
financial oversight by the ALB’s parent department and with accountability for the use
of public resources.

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, e.g. by establishing early warning processes or safeguards.

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

• 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).

55
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
shall 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 shall consult
the Treasury and the Cabinet Office about making the choice.

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 Parliament36.

7.2.4 Nor is it acceptable to use a royal charter to establish a public sector body since
such arrangements deny Parliament control and accountability.

7.2.5 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).

7.2.6 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.

7.2.7 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.

7.2.8 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.

36 The sponsor department also has less control as each NMD has its own budget, Estimate and annual accounts. So if a ministeria l

department transfers work to an NMD, there is a greater risk of excess votes in each.

56
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) shall then be kept up to date as the partnership develops.

7.3.2 Framework document templates are available on gov.uk alongside the

Framework documents guidance37 and further information is provided in Annex 7.2

7.3.3 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.

7.3.4 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.

7.4 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 set out in
the framework documents guidance. 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 Shared services and departments pooling resources

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. 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 7.2. The list is not exhaustive.

7.5.3 Shared services often need funding to set up infrastructure, e.g. 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 shall 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).

37 https://www.gov.uk/government/publications/managing-public-money-framework-documents

57
Box 7.2: 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 (e.g. 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, e.g. 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

7.5.4 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 Joint working and delivering cross-cutting

programmes
7.6.1 Sometimes an accounting officer decision involves several public sector
organisations. There are a number of different potential models for joint working, as
set out below.

7.6.2 It is good practice for participating bodies to document their respective

responsibilities via a memorandum of understanding38.

Box 7.4: models for joint working

Model 1: Collaboration

• departments may collaborate in the development of policy in which they

respectively have an interest

• accounting officer responsibilities rest personally with the accounting officer

whose department’s resources are being used

Model 2: One department leads, whilst formally accessing the expertise of other
government departments or ALBs

• the accounting officer responsibilities rest personally with the accounting officer
whose department’s resources are being used

• however, the accounting officer may require expertise, analysis or insights from
another department or public body, in order to support their decision making

38 https://www.gov.uk/government/publications/accounting-officer-assessments

58
 • the accounting officer may require the supporting organisation to provide
written assurances of the robustness of any analysis provided and underlying
methodologies

• the ultimate judgement and accountability lies with the accounting officer
incurring expenditure against their resources

Model 3: Departments individually fund elements of a joint project or plan

• departments individually contribute funding from their own Estimate and

ambits to their own individual projects which make up the overarching plan

• accounting officer responsibilities rest personally with the accounting officer of

the department whose resources are being used for each element of the cross-
cutting project or programme

• joint governance processes may be established (e.g. joint governance boards) to

oversee co-ordination and delivery of the overarching plan

• as in model two, accounting officers may rely upon expertise provided by other
departments

• ministerial responsibility for the overarching plan is shared, with each minister
having responsibility for their respective policy area

Model 4: One department leads at programme level, with accountability and

responsibility for individual projects sitting with different departments and ALBs

• an overall Senior Responsible Owner (SRO)39 at the programme level is

responsible for the delivery of the programme as a whole

• individual project SROs are accountable to both the accounting officer of their
department and the programme level SRO

• accounting officer responsibilities rest personally with the accounting officer of

the department whose resources are being used for each element of the cross-
cutting project or programme (as with Model 3)

• timely and high-quality information flows between the SROs and accounting
officers are required to ensure the accounting officer can consider value for
money of their projects in the context of the programme and Exchequer as a
whole

Model 5: Support via budget cover transfers

• one department with an aim in common with another may transfer budget
cover to the other department, in order to undertake activities that align with
their respective objectives

• the accounting officer transferring the budget cover cannot abdicate all their
accounting officer responsibilities. The transferring AO must be confident that
the budget cover will be used in line with Parliament’s expectations and the
intent of the joint policy, and in compliance with the rules set out in MPM. This

39 See Annex 4.5

59
 can be achieved through the use of memoranda of understanding or other
governance documents between AOs.

• More elaborate governance structures may be appropriate if these transfers

occur as part of a joint programme (as per Model 4 above).

• accounting officer responsibilities ultimately rest personally with the accounting

officer of the department receiving the budget cover who incurs the spending,

• the recipient department must have appropriate ambit and vires to undertake
the work
Model 6: Machinery of government change

• policy responsibility and funding transfer from one department to another by

order of the prime minister in exercise of the royal prerogative

• accounting officer responsibilities rest with the accounting officer of the

department receiving the policy responsibility, who will use their resources

• in order to meet the requirements of regularity and propriety it may be

necessary for the receiving department to:
o amend their ambit to ensure they have parliamentary authority to incur
spending on the new activity40
o bring forward primary legislation to ensure compliance with the new
services rule41

7.7 Non-departmental public bodies

7.7.1 Non-departmental public bodies (NDPBs) may take a number of legal forms,
including companies and charities. Most executive NDPBs have a bespoke structure
set out in legislation or its equivalent (e.g. a Royal Charter 42). 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.

7.7.2 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.

7.7.3 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 shall be documented in the
framework document (see annex 7.2).

7.7.4 NDPBs’ sources of finance vary according to their constitution and function.

40 See 2.2.

41 See 2.6.

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

60
7.7.5 Box 7.4 shows the main options available.

Box 7.5: sources of finance for NDPBs

• 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)

• 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, e.g. lottery funding

• public dividend capital

7.7.6 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.

7.8 Public corporations

7.8.1 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. UK Government Investments (UKGI), which
specialises in strategic management of corporates, may be a good way of managing
departments’ responsibilities as shareholders.

7.8.2 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.

7.8.3 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).

61
Box 7.6: 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:

o governance of the business

o procedure for appointments (and disappointments)

o financial and performance monitoring

o any necessary approvals processes

o the circumstances of, and rights upon, intervention

• details of any other relationships with any other parts of government

7.9 Trading funds

7.9.1 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.

7.9.2 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.

7.9.3 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.

7.9.4 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, e.g. on
borrowing.

7.9.5 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.

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Box 7.7: 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

7.10 Non-ministerial departments

7.10.1 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.

7.10.2 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 shall define such a relationship.

7.10.3 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.

7.11 Local government

7.11.1 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.

7.11.2 Nevertheless Parliament expects assurances that such decentralised funds are
used appropriately, i.e. 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.

7.11.3 For these relationships a framework document is not usually the most fruitful
approach. Instead. Central government departments shall 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).

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

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7.12 Innovative structures
7.12.1 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.

7.12.2 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: e.g. the NDPB format has considerable elasticity in practice.
Box 4.8 and the framework document guidance may help with this analysis.

7.13 Outsourcing
7.13.1 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.

7.13.2 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.

7.13.3 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.

7.13.4 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.

7.14 Private finance

7.14.1 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.

7.14.2 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 as possible, of the risk
of difficult future financial environments. It is not good practice to embark on a private

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 finance arrangement if it is dependent on other separate financial transactions taking
place during the project’s lifetime.

7.14.3 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.

7.15 Commercial activity

7.15.1 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.

7.15.2 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.

7.15.3 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 7.8.

Box 7.8: 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

7.15.4 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.

7.15.5 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.

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7.16 Working with civil society bodies
7.16.1 Central government organisations may find they can deliver their objectives
effectively through relationships with civil society bodies: i.e. 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.

7.16.2 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 Compact43.

7.16.3 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.

7.16.4 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, i.e. to
agree terms in which public sector donors reclaim the proceeds if former publicly
owned assets are sold.

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Annex 1.1
Communications with
Parliament
A key element of propriety is meeting Parliamentary expectations, especially
transparency. In line with this, Managing Public Money details requirements to notify
Parliament of certain events or the publication of material. Those notification
requirements are set out as part of each area. This Annex supports departments and
Arm’s length bodies in respect of those notifications by setting out a standardised
process for how such communications should occur. This includes circumstances
where notification should occur in circumstances where Parliament is not sitting or
where it is in the public interest such reporting should remain confidential.

Matters to be notified to Parliament

A1.1.1 MPM requires certain spending or commitments to spending to be notified to
Parliament whether by written Ministerial Statement or by correspondence with the
Committee of Public Accounts (PAC) and relevant departmental committee. It also
requires transparency with regard to governance arrangements.

A1.1.2 This annex sets out some of the common requirements for notification that may
occur. This list is non-exhaustive - accounting officers and finance teams should be
aware that Parliamentary procedures and conventions, as well as specific
requirements as set out in legislation, may give rise to additional requirements for
communications with Parliament and Committees. If uncertain whether notification is
necessary, it is good practice to seek the advice of both departmental Parliamentary
Clerks and HMT spending teams.

A1.1.3 Failure to notify Parliament as directed is a breach of propriety and accounting

officers must consider if such a course of action gives rise to a conflict with their
accounting officer duties as set out in Chapter 3 of Managing Public Money.

A1.1.4 Accounting officers are directly responsible to Parliament for the use of public
funds in their organisation and as such it is imperative that Parliament is made aware
of unusual spending. Accounting officers should err on the side of transparency with
Parliament wherever possible.

Mechanisms for notification

A1.1.5 Parliament may be notified in number of ways as outlined below:

• Annual Report and Accounts (ARA). Details of the requirements to be

included In the Annual Reports and Accounts are set out in the
Government Financial Reporting Manual. 44

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67
 • Written Ministerial Statements (WMS). Government ministers can
make written statements to Parliament as well as oral ones. Written
ministerial statements are normally used to put the day-to-day
business of government on the official record and in the public
domain. It is good practice where the statement relates to matters of
spending to also notify the relevant departmental select committee
and the Public Accounts Committee of the laying of the WMS.
• Correspondence with Parliamentary Select Committees. Such
correspondence should be frank and provide sufficient level of detail
to allow effective scrutiny. Correspondence may be sent on a
confidential basis to the committees but the requirement for
confidentiality should be articulated and justified within the
correspondence.
• Depositing papers in the Libraries of both Houses of Parliament. The
House Library will accept deposits following a commitment to place
these papers in the Libraries is usually made in a written statement, in
response to a parliamentary question or in the course of a debate. It is
also possible to deposit material by authority of a letter from a
Minister.45

A1.1.6 It will also be sometime be appropriate to make material available to the

general public via publication on gov.uk. When this occurs, it may also be appropriate
to notify Parliament this has occurred by one or other of the means above.

Content and timing of communications

A1.1.7 In general, the content of the communications should be as open as possible
with Parliament balanced against the public interest in maintaining a safe space for
policy development, commercial sensitivity and respecting national security concerns.
Departments should be clear as to the dates of the communications and the dates
and details concerning the matter to which those communications relate. In relation
to spending, departments should be clear as to costs, but avoid spurious levels of
accuracy, and instead use ranges of costs where matters are uncertain.
Communications should always be approved by and attributed to the appropriate
minister or senior official so that Parliament knows to whom they should direct any
queries.

A1.1.8 The tables below set out time limits for when communications should occur.
These should be treated as limits, not targets. It is always better to give Parliament
time to consider any communications. If the time limits below cannot be met, the
communication should explain why that is. Presentational convenience is not an
acceptable reason to delay notification, and Parliament is unlikely to look kindly on
delays due to administrative error or slow clearance processes.

Notification of significant income, spending or

commitments to spend
A1.1.9 Managing Public Money details specific circumstances where it is necessary to
inform Parliament of government spending. These include:

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68
 • Losses (including losses due to fraud or overpayments) (A4.10.6)
• Gifts (A4.12.5)
• Special payments (A4.13.18)
• Asset sales (A4.15.11)
• Contingent liabilities (Annex 5.4)

A1.1.10 In addition, there are certain matters related to spending that require
Parliament to be informed either directly or via the C&AG. These include:

• Contingencies Fund advances (Chapter 5 Estimate manual)

• details of irregular spend (A2.2.17)
• where the accounting officer is the of the view their duties are not met
and a Ministerial direction is required. (3.6.5)

The below table summarises notification requirements as set out elsewhere in this
document

Spending Commitments

Notified to C&AG and

Treasury Officer of
Annual report and

Select Committee

Letter to PAC and

Departmental
Published on

Accounts
Accounts
gov.uk

WMS

Timing

Losses in excess
✓
of £300,000
Serious46 losses Parliament should be alerted
once the scale of the loss is
established or where the
✓ ✓ quantum of loss is uncertain
where the AO considers it is
proper for Parliament to be
informed.

Gifts made in WMS should be laid in the

excess of ✓ ✓ house 14 sitting days before
£300,000 the gift is made.

Special
Payments
cumulatively ✓
greater than
£300,000
Individual Special
Payments ✓
greater than

46 Serious is not defined in Managing Public Money and the Accounting Officer should consider both in terms of quantum or if there
are particular factors that require the loss to be brought to Parliaments attention in advance of the publication of the ARA..

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 £300,000 (note
separately)
Contingent WMS & DM should be laid in
Liability47 ✓ ✓ ✓ the house 14 sitting days
before the indemnity incurred

Contingent Correspondence should be

Liability (Recess) sent to the relevant
committees 14 working days
✓ ✓ before the indemnity is
incurred. A WMS should be
laid upon Parliament being
reconvened.

Contingent Correspondence explaining

Liability the need for confidentially
(Confidential) should be sent to the relevant
committees 14 working days
✓ ✓ before the indemnity is
incurred. A WMS should be
laid upon circumstances
requiring confidentiality
expiring.

Contingent Parliament should be altered

Liability (Short as soon as possible and
Notice) preferably in advance of the
✓ ✓ ✓ liability being incurred WMS
and correspondence should
explain the reason for short
notice.

Gifts received Gift received need only be

noted in accounts where HMT
or the department consider
✓
there is a special need for
them to be brought to
Parliament’s attention

Asset Sales Disclosures should be laid in

above Parliament as soon as
Departmental practicable after the sale has
✓ ✓
delegations or taken place in the manner
that are NCR described in Asset sales
disclosure guidance48

Irregular If the Treasury does not give

✓
spending retrospective approval or

47 As per Annex 5.4 Contingent Liabilities require notification where they are outside the normal course of business for the
department, over £300,000 exposure but not arising under statutory powers or under statutory powers but are either NCR or of such a
size relevant to the department’s budget that Parliament should be notified.
48 Asset sale disclosures: guidance for government (publishing.service.gov.uk)

70
 authorise write-off of irregular
expenditure, the department
must inform the NAO.

Contingencies Whether or not recourse is

Fund advance49 made to the Contingencies
Fund for cash, departments
must notify Parliament, by
✓ way of a Ministerial Statement
agreed with the Treasury,
where a commitment will be,
or has been, entered into in
advance of Supply.

Ministerial Upon making the

Direction commitment to spend the
department should promptly
copy the direction request,
the direction and other
papers the accounting officer
considers relevant to the
Chair of the PAC, the
Comptroller and Auditor
✓ ✓ ✓ ✓ General and the Treasury
Officer of Accounts

The direction should 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

Ministerial Where confidentiality is

Direction required, in addition to
(confidential) copying to the Comptroller
and Auditor General and the
Treasury Officer of Accounts
as usual, the direction
request and the direction
✓ ✓ must be shared 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

49 Supply Estimates guidance manual - GOV.UK (www.gov.uk) paragraph 5.12

71
Notification of governance and accountability
arrangements
A1.1.11 In order to provide proper scrutiny of spending, Parliament must also be in
position to understand the manner which the decisions to spend have been come to
and to whom they should direct any enquiries regarding that spending. It is also
important that they understand the way responsibilities are assigned across
government and between departments and arm’s length bodies.

A1.1.12 Common governance documents and references to where to find detail on their
preparation within this document are detailed below:

• Notification of accounting officer appointments (3.2)

• Accounting officer assessments (3.4)
• Framework documents (Annex 7.2)
• Accounting officer system statements (A3.1.13)

Governance Arrangements
Officer of Accounts
Select Committee
Publish on gov.uk

Letter to PAC and

Notified to C&AG

Deposited in the
Departmental

House Library
and Treasury

Timing

Accounting AO appointment letters should be

Officer provided to the AO on the date they
appointment ✓ ✓ take executive control of the
organisation for which they become
AO.

Accounting Publication of the summary should

Officer come at the point of approval of the
Assessment Outline Business Case.
(GMPP) However, accounting officers have
✓ ✓ ✓ discretion to determine the timing of
publication, balancing Parliament’s
expectations and the public interest
test subject to informing Parliament
as below.

Accounting Where an accounting officer does

Officer decide to delay publication, they
Assessment should share the summary
(GMPP) assessment on a confidential basis
confidential 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 can take place.

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 Framework Framework documents should be
Document published on gov.uk on departmental
✓ ✓ collection pages as soon as they are
agreed. They should be updated at
least every three years.

AO System AO systems statements should be

Statement50 published alongside the department’s
Annual report and Accounts and
refreshed where there have been
✓ ✓ significant changes in departmental
governance structures such as
machinery of government changes or
the creation or dissolution of arm’s
length bodies.

Statutory requirements to notify and report

A1.1.13 Many statutes have requirements to report on how the powers granted by
Parliament have been used. For example, section 11 of the Industrial Development Act
1982 or section 3 of the Infrastructure (Financial Assistance) Act 2012. The above
reporting requirements should not be considered to relieve departments of their
obligations to fulfil their statutory requirements.

Confidential Reporting
A1.1.14 Sometime is it will be necessary to inform Parliament of spending or
commitment to spend in confidential manner. This should be the exception rather
than the rule and the public interest will generally weigh heavily in favour of
transparency. If confidentiality is required, the department should make clear the
reasons for such confidentially and also indicate the circumstances under which
confidentially will no longer be necessary.

A1.1.15 Acceptable reasons for confidentially might include where there would
prejudice to criminal investigations, revealing sensitive commercial information,
national security concerns or the need to protect a safe space for ongoing policy
development. A good rule of thumb will be to consider similar factors as may inform a
decision to release material under freedom of information request.

A1.1.16 If material is to be kept confidential it will generally be appropriate inform the

Public Accounts Committee and relevant departmental select committee through
correspondence. In the most sensitive cases it may be necessary to provide an oral
briefing to Committee members. All such measures should only continue for as long
as the public interest is in favour of confidentially being maintained.

50 Accounting Officer System Statements: guidance (publishing.service.gov.uk) -

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r_guidance_2017.pdf

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Annex 1.2
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.

A1.2.1 The C&AG is an officer of the House of Commons appointed by The King. 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.

A1.2.2 The C&AG is appointed for a single non-renewable term of ten years; and can
only be removed from office by The King 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.

A1.2.3 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
A1.2.4 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.

A1.2.5 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).

A1.2.6 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

74
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.

A1.2.7 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.

A1.2.8 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

A1.2.9 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.

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Annex 2.1
Treasury approval of
legislation

This annex sets out how departments should clear proposed legislation with the
Treasury where there are financial implications, either for expenditure or raising
revenue. More detailed guidance on the preparation of legislation and the legislative
process should be sought from departmental parliamentary clerks

A2.1.1 When preparing legislation, departments must consult the Treasury:

• the before any proposals for legislation with financial implications are
submitted to ministers collectively for policy approval
• about any provisions included in legislation with financial and public
service manpower implications
• on the terms of Money Resolutions and Explanatory Notes
• subsequently about any changes that are proposed to the agreed
financial provisions, e.g. during the legislation’s passage through
Parliament
A2.1.2 Departments shall make sure that they achieve Treasury agreement early in the
process and in any event before drafting instructions to Parliamentary Counsel are
prepared.

Treasury consent
A2.1.3 All legislation with a financial dimension should provide for specific Treasury
consents to any key changes in the implementation of the powers it contains.
Examples of such triggers, all requiring ministerial decisions, are in box A2.1A. Treasury
consent is required to protect the authority of the Chancellor of the Exchequer in
matters of finance or establishment.

A2.1.4 In principle, the Chancellor's authority is protected by:

• the doctrine of the collective responsibility of ministers

• the need for Treasury approval of Estimates before they are presented
to Parliament and before resources consumed or expenditure
incurred can be charged on the Consolidated Fund
A2.1.5 But providing for statutory consent avoids any danger that the Chancellor
might be committed to legislation he or she would not have agreed.

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Money resolutions
A2.1.6 A money resolution is required51 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.

A2.1.7 The responsible department shall 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

• direct charge (a Consolidated Fund standing service)

• indirectly, i.e. “out of monies to be provided by Parliament” (through Estimates):

• expenditure proposals affecting public expenditure as defined in the current

public expenditure planning total, e.g. 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 (e.g. 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

A2.1.8 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

51 By virtue of Standing Order 49 of the House of Commons

77
 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.

A2.1.9 Departments shall clear ways and means resolutions with the Treasury.
Further advice should be sought from parliamentary clerks.

Explanatory Notes
A2.1.10 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
website52.

Box A2.1B: legislation authorizing expenditure: explanatory notes

Financial effects of the legislation:

• Estimates of expenditure expected to fall on

o the Consolidated Fund (CF), distinguishing between Consolidated Fund

standing services

o 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

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

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

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79
 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 inferred 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 shall 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 (e.g.
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 shall 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 government53.

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 ALBs54.
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)
• 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.

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

54 https://www.gov.uk/government/publications/managing-public-money

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Box A2.2B: standard terms for delegated authorities

• a clear description of each item delegated

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

• any relevant authorities, e.g. 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 shall agree delegated authorities with their arm’s
length bodies, making use of the template delegated authority letter 42.
Delegations to ALBs should generally be no greater than departments’ own
delegated authorities, but can be greater in exceptional circumstances with the
consent of the Treasury. 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 (e.g. 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.

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

A2.2.16.Requests for retrospective approval shall follow the same format as

requests submitted on time.

A2.2.17.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.

A2.2.18.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.

A2.2.19.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.

A2.2.20.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, e.g.
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.

A2.2.21.Departments shall 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.

83
84
Annex 2.3
The PAC Concordat of 1932

This annex sets out the evolution of Parliament’s concerns regarding the
propriety of public spending.

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:

85
 “… 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”.

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

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 Annex 2.4
New services
This annex sets out the propriety considerations to be made when delivering new
services.

A2.4.1. Chapter 2 (box 2.1) sets out the essential conditions for authorisation of public
spending. New services are exceptions, i.e. 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 in box 2.1, in some circumstances it is not
necessary to have specific enabling legislation in place. Parliament accepts that
agreement to the Estimate55 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, e.g. 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

• initiatives lasting no more than two years, e.g. a pilot study or one-off intervention

• 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
shall consult the Treasury before relying upon them.

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

87
 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.

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 shall make sure that the
ambit 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 be incurred before royal assent

• significant work associated with preparing for or implementing the new task
enabled by a bill, e.g. 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, e.g. employing consultants to design a significant IT or

88
 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.

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 agreed 56. 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, i.e. where postponing expenditure until
after royal assent would:

o cause additional wasteful expenditure

o lose (not just defer) efficiency savings

o 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.

Providing for a new service

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

56 See section 5.8 of the Estimates Manual.

89
released. If possible, an oral explanation at second reading, or a separate oral
statement, is desirable. In addition there shall be:
• notes in the explanatory memorandum and impact assessment to the
relevant bill
• 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 3.6). 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
• 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

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 • 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:
i. bottom-up information and assessments to generate a full
appreciation of performance and risks as they are perceived from
within the organisation
ii. end-to-end assessments of processes, since it is possible to neglect
interdependent and compounded risks if only the components are
considered
iii. a high-level overview of the organisation’s business so that systemic
risks can be considered in the round
iv. any evidence from internal control failures or poor risk
management
v. potentially, information from whistle-blowers
vi. 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)
risks57, emerging technology and other cutting-edge developments. It should also
mention any protective security concerns in suitably careful terms 58, with details
reported to the external auditor.

Content of the 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.

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.

57 Including the external risks identified in the National Risk Assessment.

58 As set out in the Security Policy Framework.

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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:

o any newly identified risk

o a record of any ministerial directions given

o a summary of any significant lapses of protective security (e.g. 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 (box 3.1) 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?

• could the issue have a material impact on the accounts?

• might national security or data integrity be put at risk?

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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, e.g. 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, e.g. 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. 59 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
• any failure to meet the requirement to comply with or explain
departures from the Corporate Governance Code or any other
authoritative guidance.

59 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 qualified60
• 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

• 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

60 1 The term professional finance director in this context means both being a qualified member of one of the five bodies compri sing the
Consultative Committee of Accounting Bodies (CCAB) in the UK and Ireland, i.e. 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 in 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.

95
 • 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. The finance function should maintain a firm grasp of the organisation’s financial
position and performance. Supporting the accounting officer, the finance director shall
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 shall 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.

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Box A4.1B: financial management leadership

• providing professional advice and meaningful financial analysis enabling decision

makers to take timely and informed business decisions

• 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 shall 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 shall ensure
that there are similar disciplines in the organisation’s ALBs. These shall 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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98
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.

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.

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

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

• The board defines the organisation’s risk tolerance.

• 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 e.g. on tolerance or on response.

• 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, e.g. 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, e.g. in facilitated groups.

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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 prioritise its
total risk exposure so that the board can take an informed strategic approach to risk
for the organisation as a 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, e.g. 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, e.g.
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 (e.g. because they
would be disproportionate); and for unavoidable risks, e.g. 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, e.g.

improving training or risk awareness; or stopping transfer of digital information using
data sticks. Beware of imposing unnecessary costs or damaging innovation.

Corrective controls: measures to deal with damaging aspects of realised risks, e.g.
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, e.g. hygiene requirements.

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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, e.g. 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.

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, e.g. 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

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existing response to risk to achieve equally successful results by less expensive or less
invasive techniques, e.g. 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 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 (e.g. 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

105
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 shall 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 the organisation’s assets or reduce
exposure to liabilities crystallising. Such decisions shall 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 may 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: e.g., 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 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.

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Where commercial insurance is required: e.g. vehicles where the Road Traffic Acts
require it.

Appraising the options

A4.4.3. Decisions on whether to buy insurance shall be based on objective cost-
benefit analysis, using guidance in the Green Book61. 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 – comprising the expected cost,
expenses, cost of capital, profit and others
• the administrative cost of managing claims with the insurance company
• the cost of brokerage to secure the insurance, potentially included in the
premium

Benefits:
• transfer of risk, valued at the expected compensation for the insured losses, i.e.
reflecting all possible scenarios and their probability of arising – note this will
depend significantly on how the insurance is structured and its features
• services bundled with the insurance as outlined in other considerations below

Other considerations:
• Additional services that could either be provided as part of insurance cover or
sourced separately:
o Claims handling and administration – Managing claims as they arise
through to settlement, including assessment of damages and legal
defence. This could also include post event advice, with pre-arranged
contracts and plans for accelerated recovery
o Recoveries – Pursuing liable parties for damages
o Risk mitigation – Actions, advice and investment to pro-actively reduce
the risk of loss and manage losses effectively when they arise
• Project or stakeholder requirements – For example insurance may be required
as part of taking out a lease, in these cases it is also worth considering whether
the insurance requirement changes the value for money analysis of this option,
suggesting an alternative may be preferred
• Data and systems ownership – Where government has risks that are spread
across a number of central government bodies, there is value in collating and
analysing the risk exposure and experience data. This may be possible with or
without insurance, but when retaining the risk this can synergise with necessary
administrative activity

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

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 • Alternative options – Insurance is not the only option when looking to manage
risk. In line with the Orange Book, once identified and assessed, risk
management should look at mitigation in combination with accepting, avoiding
or transferring the risk. All options should be considered to secure the best value
for money

Setting fees and charges

A4.4.4. If a central government organisation insures risks arising in supplying a
service for which a fee or charge is levied, the actual premium payments shall 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 shall be taken into account. See Chapter 6 for further details.

Reporting
A4.4.5. Departments shall seek Treasury consent for any decision to use the services
of commercial insurance companies outside of the circumstances described in this
annex.

A4.4.6. Departments should also consult Treasury regarding any reviews of

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

Dealing with uninsured losses (except traffic

accidents)
A4.4.7. 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

A4.4.8. 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.
Similarly, ALBs should not normally expect their sponsor departments to meet
claims for reimbursement of loss.

Insured losses
A4.4.9. Public sector organisations should make insurance claims in accordance
with the terms of the policy.

A4.4.10. 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
A4.4.11. 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.

A4.4.12. 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 Settlement of claims

All insured Insurers settle claims

All uninsured Organisation(s) at fault negotiate about

whether to reimburse the other(s)

Organisation at fault uninsured, other Insured organisation claims on its

organisation(s) insured insurance policy. Uninsured
organisation(s) feal with claims from
the insurers on the basis of strict legal
liability

Organisation at fault insured, other Uninsured organisation(s) seek

organisation(s) uninsured financial satisfaction through the
insurers of the organisation(s) at fault

Vehicles
A4.4.13. Most ALBs insure third-party vehicle claims to comply with the Road Traffic
Acts. Public sector organisations that are not insured or otherwise protected for
traffic accidents should refer any third-party claims, either for or against, to the
Treasury Solicitor who acts on behalf of the government.

A4.4.14. 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.

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A4.4.15. Vehicles travelling in other countries must comply with local requirements.
These may 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, e.g. indemnities.

Loans
A4.4.16. 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
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.

A4.4.17. Public sector organisations are usually expected to meet the cost of
insuring any government assets (e.g. equipment or stores) held by a contractor in
the normal course of business, if the contractor is not comfortable relying of a
government indemnity. 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.

A4.4.18. 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 approved and reported
if they fall within the contingent liabilities process (see annex 5.4).

A4.4.19. 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
A4.4.20. 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).

A4.4.21. 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.

A4.4.22. The scope of the certificate should be strictly confined to the risks with
which the Employers' Liability (Compulsory Insurance) Act 1969 is concerned, and

110
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 A4.4E: 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 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
This annex sets out how Senior Responsible Owner accountabilities interact with
accounting officers and Parliament.

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

112
responsible owner. https://www.gov.uk/government/publications/the-role-of-the-
senior-responsible-owner

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).

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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 Crown Commercial Service 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:

• 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

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Skills:

• use procurement professionals throughout;

• 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.

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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
guidance62.

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 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 growth 63.

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

62 Cabinet Office guidance: https://www.gov.uk/government/organisations/crown-commercial-service

63 Procurement Pledge (http://www.cabinetoffice.gov.uk/resource-library/our-procurement-pledge)

116
 • 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 approach64 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
• 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;
• 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.

64 https://www.gov.uk/government/publications/lean-sourcing-guidance-for-public-sector-buyers

117
Central purchasing bodies and agencies
A4.6.14. Central government organisations are required to use the services and
collaborative procurement deals managed by the Crown Commercial Service on
behalf of government65.

A4.6.15. If public sector purchasers employ private sector agents to undertake

procurement on their behalf they should:
• require compliance with the law (see box A4.6C)
• ensure clear allocation of responsibilities
• 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.

Taxation
A4.6.16. Central government bodies shall:
• 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 guidance66)
• 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 shall
consult the Treasury and HMRC at an early stage to identify the likely tax
implications and assess the proposal for propriety generally.

65 Cabinet Office guidance: https://www.gov.uk/government/organisations/crown-commercial-service

66 Cabinet Office guidance: Procurement Policy Note – Tax arrangements of Public Appointees

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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/publications/the-green-book-
appraisal-and-evaluation-in-central-governent)

Department for Business and Trade 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/)

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) 67. 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

HMG 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

67 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
• settle quickly when a contested invoice gets a satisfactory
response.

A4.8.3. Public sector organisations are also bound by legislation68 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 available69.

Payments outside the normal pattern

A4.8.5. Payments in advance of need shall be exceptional and shall 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

68 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).
69 The Prompt Payment Code https://www.smallbusinesscommissioner.gov.uk/ppc/about-us/

121
approval. Advance payment shall 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 (i.e.
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
• 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 shall 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
• 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.

A4.9.4. For guidance on all these areas, see Tackling Internal Fraud70 and Tackling
External Fraud71.

Assessing vulnerability to fraud

A4.9.5. Each organisation shall identify and assess at different levels how it might
be vulnerable to fraud with reference to the government standards for Fraud Risk
Assessment. Fraud should be always considered as a risk for the departments’ risk
register.

Evaluating the scale of fraud risk

A4.9.6. 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 shall
identify the potential for fraud and the different impacts that fraud could have for

70 http://webarchive.nationalarchives.gov.uk/20130129110402/http://www.hm-treasury.gov.uk/psr_managing_risk_of_fraud.htm

71 http://www.nao.org.uk/report/good-practice-in-tackling-external-fraud-2/

123
this spend area. Once spending is approved this shall result in the development
and continued maintenance of a detailed fraud risk assessment.

Responding to fraud risk

A4.9.7. 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 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.

A4.9.8. 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
A4.9.9. Public sector organisations shall 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.

124
These shall be reported to the centre of the government’s Counter Fraud
Function via the Consolidated Data Return.

A4.9.10. Public sector organisations shall 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 shall also consider reporting frauds and suspected fraud to
the NAO.

A4.9.11. Where fraud leads to serious loss it may be appropriate to report to

Parliament as set out in Annex 4.10. If criminal investigations are ongoing it may
be necessary to report in a confidential manner so as not to prejudice any
investigation or trial.

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Annex 4.10
Losses and write offs
This annex sets out what is expected when departments and their arm’s 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 (e.g. 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

126
 • losses arising from failure to make adequate charges: e.g. for the use of public
property

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 shall 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 shall consult their sponsor departments about similar
cases. In turn departments may need to consult the Treasury.

Box A4.10B: 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

• whether the investigation has shown any defects in the existing systems of
control and if so, what action will be taken

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Notification to Parliament
A4.10.6. Losses shall 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 should also consider the case for a written statement to
Parliament. Departments shall 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 shall maintain an up to date record of losses.
The record shall 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
• 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 shall 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 shall 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 shall 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 pension72 which would otherwise be due, or under statutory or other
specific powers73, 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

72 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.

73 For example, King’s Regulations.

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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 (e.g. 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.

Store 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 shall 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 shall be noted in

departmental records, in accordance with normal practice. Such losses shall 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.4.10.245 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, shall 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
agreed74.

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 shall be treated as losses, and brought to the attention of Parliament
in the same way as stores losses.

74 Stores held by the Ministry of Defence may be valued according to their estimated supply price.

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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

• extra costs arising from failure to allow for foreseeable changes in circumstances

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
• a claim for a refund of an overpayment which fails or is waived.
This should be regarded as a cash loss.

A4.10.26. Waivers shall be noted in annual accounts in accordance with the

FReM. In addition:
• a claim not presented should normally be noted at its original
figure

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 • where more than one department is involved, each should note
its records to the extent of its interest, without attempting
spurious accuracy.

A4.10.27. There is no need to note annual accounts if claims between

departments are waived or abandoned. These are domestic matters.

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

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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 shall be followed.

Box A4.11A: possible reasons for overpayment

Contractors and suppliers:

• Overpayments in business transactions shall 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 shall 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 the below groups 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. These groups are:

o civil servants
o members of the armed forces
o employees of NDPBs
o retired teachers and NHS employees
o and the dependents of any of these

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A4.11.2. 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.

A4.11.3. 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 without parliamentary authority

A4.11.4. 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
A4.11.5. 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, e.g.
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.

A4.11.6. 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, e.g. those
involving recipients’ carelessness, may require judgement. And some cases may
involve such obvious error, e.g. where an amount stated is very different from
that paid, that no recipient could reasonably claim to have acted in good faith.
A4.11.7. In forming a judgement about whether payments have been received in
good faith, due allowance should be made for:
• the complexity of some entitlements, e.g. to pay or benefits
• 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.

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Fraud
A4.11.8. 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
A4.11.9. 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

A4.11.10. Defences which may be claimed against recovery include:
• the length of time since the overpayment was made
• change of position
• estoppel
• good consideration
• hardship.

A4.11.11. Lapse of time: 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.

A4.11.12. 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.

A4.11.13. 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
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.

A4.11.14. Change of position: 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

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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.

A4.11.15. Estoppel: 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.

A4.11.16. 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.

A4.11.17. It is essential for public sector organisations to seek legal advice where
change of position or estoppel is offered as defence against recovery.

A4.11.18. Good consideration: 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.

A4.11.19. Hardship: 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 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
A4.11.20. 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.

A4.11.21. 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.

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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.

A4.11.22. 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 shall 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)

• donations by departments

137
 • 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
A4.12.2. 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 shall consult their sponsor departments about gifts.

A4.12.3. The written ministerial statement (WMS) and departmental 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 shall be explained.

A4.12.4. 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.

A4.12.5. The WMS and minute shall 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
A4.12.6. 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

138
concerned. This may be particularly appropriate if it is proposed to make the gift
urgently or promptly on expiry of the waiting period.

A4.12.7. Where an objection is raised, the gift shall 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 shall be notified of the outcome of any representations made by
MPs.

Noting annual accounts

A4.12.8. Annual accounts shall include a note on gifts made by departments if
their total value exceeds £300,000. Gifts with a value of more than £300,000 shall
be noted individually, with a reference to the appropriate WMS and
departmental minute. Exceptionally, where gifts are made between government
departments, the receiving department shall note in its accounts, not the donor.

Gifts received
A4.12.9. Departments shall 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.

A4.12.10. Donations, sponsorship or contributions, e.g. from developers shall also

be treated as gifts.

A4.12.11. 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 broadly.

A4.12.12. 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.

A4.12.13. 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 Treasury
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, e.g. 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 must 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, for any special payment for which it has
no delegated authority, or which exceeds its authority.

A4.13.5. For the avoidance of doubt, Treasury approval shall be sought before the offer
of the special payment is made. If appropriate departments may seek a negotiation
mandate in advance based on their assessment of a likely outcome.

A4.13.6. ALBs shall consult their sponsor departments in comparable circumstances.

In turn, the department may need to consult the Treasury.

A4.13.7. 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.

A4.13.8. 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 might create a
precedent for other departments;
• may be deemed novel, contentious, or repercussive
• arise because of obscure or ambiguous instructions issued centrally.

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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, e.g. 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:

o payments made to meet hardship caused by official failure or delay

o out of court settlements to avoid legal action on grounds of official

inadequacy

• payments to contractors outside a binding contract, e.g. on grounds of hardship.

A4.13.9. 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.

A4.13.10. Departments shall 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 an assessment of the value for
money of the case
• any non-financial aspects
• whether the case in question could have wider impact.

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Severance payments
A4.13.11. 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 shall always
consult the Treasury in advance when considering a special severance payment.

A4.13.12. 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.

A4.13.13. 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.

A4.13.14. Departments shall not treat special severance as a soft option, e.g. 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.

A4.13.15. 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
available75.

A4.13.16. 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 available76.

Box A4.13B: factors to consider in special severance cases

Any case for special severance put to the Treasury shall 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

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 • the management procedures followed

• the value for money offered by the possible settlement

• any non-financial considerations, e.g. where it is desirable to end someone’s

employment without dismissal, perhaps because of restructuring

• whether the case could have wider impact, e.g. for a group of potential tribunal
cases

A4.13.17. 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 controls 77
• 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

A4.13.18. 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
A4.13.19. 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.

A4.13.20. Organisations considering proposals for retention payments should subject

them to strict value for money analysis. Sponsor departments shall submit a business
case to the Treasury, supported by market evidence, together with an evaluation of
the risks and costs of alternative options. The Treasury will always be sceptical of
whether they are necessary.

Reporting
A4.13.21. As Parliament does not provide for special payments when voting Estimates
or passing specific legislation, special payments shall be brought to Parliament’s

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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.

A4.13.22. Notification is separate from accounting treatment, which will depend on

the nature of the special payment. Special payments shall be noted in the accounts
even if they may be reduced by subsequent recoveries.

A4.13.23. Special payments shall be noted in annual accounts where the total value
exceeds £300,000. Individual payments of more than £300,000 shall be noted
separately.

Reporting to Cabinet Office

A4.13.24. 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 available78.

A4.13.25. Civil Service-wide data on special severance payments will be published

annually by the Cabinet Office.

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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, e.g. 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 handling79
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.

A4.14.2. 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
A4.14.3. 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.

The remedies available

A4.14.4. Remedies can take a variety of forms, including (alone or in combination):

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 • an apology
• an explanation
• correction of the error or other remedial action
• an undertaking to improve procedures or systems; or
• financial payments, e.g. one-off or as part of a structured settlement.

A4.14.5. 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
A4.14.6. 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.

A4.14.7. 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.

A4.14.8. 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.

A4.14.9. 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, e.g. 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, e.g. because of delay

• Whether the process of making the complaint has imposed costs on the person
complaining, e.g. lost earnings or costs of pursuing the complaint

• The circumstances of the person complaining, e.g. whether the action or

inaction of the public sector organisation has caused knock on effects or
hardship

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 • 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

A4.14.10. 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.

A4.14.11. 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
administration80. They must be well designed since costs can escalate if a problem
turns out to be more extensive than initially expected.

A4.14.12. 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 (e.g.
monthly or annual) payments. Public sector organisations considering such
settlements should seek both legal and actuarial advice in drawing them up.

A4.14.13. 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, e.g. 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

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 • Inform Parliament appropriately, e.g. 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

Consulting the Treasury

A4.14.14. When considering making individual remedy payments, departments need
to consult the Treasury (and sponsored bodies need to consult their sponsor
departments) about cases which:
• falls outside their delegated authorities;
• raises novel or contentious issues
• could set a potentially expensive precedent or cause repercussions
for other public sector organisations.

A4.14.15. 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

A4.14.16. 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. 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. 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. 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

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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 Franchises

Stocks and stores Patents and other intellectual

property rights, including in house
software

Plant, machinery, equipment, tools Goodwill

Furniture and fittings Data and information

Assets under construction Knowledge and know-how

Donated physical assets Software licenses

Heritage assets Public dividend capital

Antiques and works of art Loans and deposits

Economic infrastructure (including Investments including shares and

highways, railways, airports, utilities, debentures in companies
communication networks, power
generation and transmission

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

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 • 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.

• 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 , 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:
• 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

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 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.
Asset sales
A4.15.11. When undertaking an asset sale, departments shall 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 shall 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

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A4.15.13. Sometimes transfers of assets result from machinery of government
changes. The relevant legislation (e.g. 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
• the Treasury agrees (these transaction are always novel and
contentious)

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 shall be sought.

Disposal 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. Where such a sale achieves the policy objectives of another
department or public body it may be appropriate for the loss of value to be
made good by that department instead and potentially scored as a grant to the
recipient.

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

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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.

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

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

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 e.g. 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 shall 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, e.g. 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 shall 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 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).

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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
• allowing recipients reasonable freedom to take their own
decisions.

A5.1.7. 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.

A5.1.8. Accounting officers shall ensure that all grants issued comply with the
Government Functional Standard for grants81.

A5.1.9. 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.

A5.1.10. 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.

A5.1.11. 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.

A5.1.12. 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

A5.1.13. 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).

Endowments

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A5.1.14. 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, i.e. 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.

A5.1.15. Departments contemplating such funding arrangements shall consult

the relevant Treasury spending team (and in turn arm’s length bodies shall
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
• the risk of further call on public funds.

A5.1.16. Any such endowment shall:

• 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
• avoid skewing public funding away from other projects that
have genuine cash needs.

A5.1.17. The terms of an endowment shall:

• be clear that the funded body should not subsequently
approach the donor for annual funding
• maintain clear boundaries between the funder and recipient.

A5.1.18. Endowments shall 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.

A5.1.19. 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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158
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.

A5.2.1. 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.

Clawback
A5.2.2. 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
• 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:

• procurement of goods and services, where any liability is adequately discharged

once the goods and services have been provided

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 • 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, e.g. 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, e.g. 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 (e.g. as a company or
charity)

• any other relevant legal factors

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 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
• external conditions are very different to plans

the recipient goes into liquidation (e.g. should the funder take
priority over unsecured creditors)

Duration of change
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, e.g. 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

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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
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, e.g. 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 (e.g. 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
• receipts where statute does not say otherwise.

A5.3.4. 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.

A5.3.5. 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
allowing the recipient to use as collateral the difference between the market
value of the asset and the original grant

• sums due under bespoke legislation: paid as specified, e.g. 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:

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 o either paid into the Consolidated Fund as CFERs

o or applied to support spending in the Estimate if the Treasury agrees

A5.3.6. Specific legislation, with Treasury approval, is normally required to

authorise use of income directly to meet resource consumption i.e. 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.

A5.3.7. 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.

A5.3.8. 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

A5.3.9. 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 publication82. 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).

A5.3.10. Sometimes departments have excess income, i.e. 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

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Spending Review settlement83. Any income in excess of this will normally be
treated as non-budget and will need to be surrendered as a CFER.

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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) shall require
the ALB to gain the sponsor department’s agreement to any commitment,
including borrowing, into which it proposes to enter. Departments shall 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 shall
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

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budgets and Estimates shall 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 shall report these to Parliament at the earliest opportunity. There is
a standard procedure for doing this: see paragraphs A5.4.26 to A5.4.40 of this
annex.

A5.4.7. If a liability taken on in this way seems likely to persist, the department
concerned shall 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, e.g. 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 (e.g. a cap on the contractor’s liabilities), the
public sector organisation should consider renegotiating. The acid test is

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whether two private sector bodies would use the same terms. In cases of doubt,
the Treasury shall be consulted.

A5.4.10. Private Finance Initiative (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 Book84, 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, e.g. 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.

A5.4.14. 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.

A5.4.15. The Contingent Liability Approval Framework85 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

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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 shall be sought in the usual way for novel contentious
and repercussive spend. For the avoidance of doubt limitations of liability that
are prohibited or 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 shall include the liabilities of any sponsored bodies.

A5.4.19. 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 Treasury before entering
into a contingent liability with a maximum exposure of £3m or more. This
process is also required for remote contingent liabilities.

Types of liabilities
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 shall 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

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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 Code 86. 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.”

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 the bullets bellow)
• 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 shall be
notified of any liability, even if it meets one or more of the criteria given in
paragraph A5.4.26, 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

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 • is novel, contentious or potentially repercussive.

A5.4.28. It is important to note that undertakings in the normal course of

business shall 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 shall 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,
e.g. if the liability arises immediately.

A5.4.30. Written Ministerial Statements and departmental Minutes shall be laid in

the House of Commons, on the same day, and shall 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 shall:

• 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
• 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 shall 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, i.e. 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, e.g.
proactively arranging a meeting with them. The Treasury should be kept in
touch with representations made by MPs and of the outcome.

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Box A5.4C: standard text for departmental Minutes on liabilities

The 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 shall 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.

A5.4.34. If, exceptionally, the guarantee or indemnity would give rise to an actual
liability, the department shall 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).

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 shall write to the chairs of both
the PAC and departmental committee to provide the same details as those
outlined in paragraph A5.4.31, with the same notice period. The letters shall
explain the need for confidentiality. Any objection by either chair shall be
approached in the same way as MPs’ objections (paragraph A5.4.33). If
departments continue to have concerns about writing to Parliament, in
particularly sensitive or confidential cases, they shall 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
shall follow the procedure in paragraph A5.4.29 and explain the need for urgency,
agreeing revised wording to the final standard paragraph with the Treasury.

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A5.4.38. If the proposal is more urgent than this rule would allow, the department
shall write to the chairs of the PAC and the departmental committee, giving the
information in paragraph A5.4.31 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 A5.4.38 shall be used to report

liabilities during a parliamentary recess. In such cases the notice period should
be 14 working days notice, i.e. 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 shall 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 shall 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 A5.4.36) can be
reported transparently, the standard Minute (paragraph A.5.4.31) shall be laid.

A5.4.42. Departments shall 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 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 Manual87 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

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

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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).

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Annex 5.5
Lending
Government departments may borrow from the Estimate or NLF and then on-
lend to third parties. There are some key disciplines required to protect the
Exchequer from loss. It is also important to keep Parliament informed, especially
about risk exposures.

A5.5.1. The government provides loan finance to public sector organisations

through departmental Estimates and the National Loans Fund (NLF). The broad
principles of this annex also apply to Public Dividend Capital (PDC) and
government loan guarantees.

Statutory authority
A5.5.2. The NLF needs specific statutory authority to lend to each of its borrowers,
normally found in the enabling legislation of the borrower. Similarly,
departments must normally have specific statutory authority to make voted
loans. Box A5.5A identifies the provisions which shall be specified in the enabling
legislation. Departments setting up new powers should consult their Treasury
spending team early in the drafting process. If NLF lending is intended, they shall
also consult the Exchequer Funds and Accounts team (EFA) in the Treasury.

Loans from the NLF

A5.5.3. The Treasury is accountable for the management of the NLF. In turn
departments responsible for on-lending are accountable for the specific
advances they make. So they should ensure that the conditions for their loans
are satisfied and that repayments of interest and principal are received on time.

A5.5.4. The NLF cannot lend at a loss88. Interest on NLF loans must therefore be
sufficient to cover the cost of government borrowing, on the same terms and for
the same period. This makes sure that lending is unsubsidised and that no final
charge rests on the NLF.

A5.5.5. Because the government’s credit rating is better than commercial

borrowers’ the NLF can both borrow and lend at fine rates. NLF lending is not
available to commercial entities in the private sector.

A5.5.6. Similarly, NLF loans can only be made where there is a reasonable
expectation that they will be serviced and repaid on the due dates. Lending
departments should consider whether to take security in order to fully protect
the NLF’s position. And if a lending department becomes concerned about the
security of any of its loans to third parties, it should discuss them with the
Treasury at an early stage. Departments automatically stand behind all NLF loans

88 S5, NLF Act 1968.

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to arm’s length bodies (ALBs) and should agree this with them, formally in
writing.is intended, they should also consult EFA.

Box A5.5A: powers in legislation enabling lending

NLF loans Voted loans

The Secretary of State or Minister may The circumstances in which loans

lend to relevant bodies may be made

The Treasury may issue funds from Repayment of principal and interest
the NLF to the Secretary of State should be made to the Consolidated
Fund

The purpose for which loans may be Conditionality associated with the
made loans

A limit on total lending outstanding

(Sometimes) a power to raise this limit A borrowing limit, sometimes

by order within a further absolute including a power to raise this limit
ceiling; by order within a further absolute
ceiling specified in the primary
legislation

A requirement for interest and The terms and conditions to be

principal repayments collected by attached to loans and how interest
departments to be surrendered to the rates are to be determined
NLF

A requirement to present an annual

account to Parliament, prepared by
the sponsor department, of loans
made and repaid.

Interest on NLF loans

A5.5.7. Interest on temporary NLF loans of up to 6 months is fixed and repayable
with the principal on maturity.

A5.5.8. Long-term NLF loans may be issued at fixed or variable rates. Fixed rate
loans may be repaid by:
• equal instalments of principal (EIP) throughout the life of the
loan, normally twice a year; or
• equal repayments (ER) comprising varying proportions of
interest and principal over the life of the loan, normally twice a
year; or
• exceptionally, interest over the life of the loan with repayment of
principal in full at maturity.

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A5.5.9. The length and type of loan should be matched to the type of asset being
acquired and the expected payback period. Variable rate loans can be rolled over
at one, three-, or six-monthly intervals. Penalty interest may be charged if a
payment of interest or principal is not received on time. EFA can advise on the
details of the terms and conditions.

A5.5.10. The Treasury sets all NLF interest rates (including on appropriate rollover
dates for variable rate loans) for the different maturities available in the light of
prevailing interest rates. Interest rates for long-term loans are set out on the
website of the Public Works Loan Board89 (PWLB).

Early repayment of NLF loans

A5.5.11. As the government lends at very competitive rates, it is not usually
possible for borrowers to repay loans early in order to refinance on more
advantageous terms. If this were possible, any savings the borrower might make
would be at the expense of the NLF, leaving the Exchequer as a whole worse off.
However, there may be a case for early repayment (other than for temporary
loans) where there are genuinely surplus funds (e.g. from the sale of assets or
trading activities). Similarly, it may also be possible to refinance existing loans
where material, demonstrable and sustained changes (e.g. in asset life or
technology) make a different maturity period more appropriate.

A5.5.12. Any proposals for early repayment must be agreed with the Treasury
beforehand. If agreed, the borrower pays:
• interest up to the day before the loan is prematurely repaid
• a sum, calculated by the Treasury, equal to the present value of
all future repayments of principal and interest on the original
schedule. This sum is designed to leave the Exchequer no worse
off. It may be higher or lower than the total of the sums due on
the loan for the outstanding period under the original schedule.
The difference (i.e. the discount or premium) then scores as an
adjustment to interest in the accounts.

Write off or repayment of NLF loans by grant

A5.5.13. Departments shall consult the Treasury about any proposals for a capital
reconstruction involving repayment or write off of NLF loans. It requires primary
legislation to write off NLF loans. Interest remains payable on debts up to the day
before repayment or write off.

A5.5.14. Capital reconstruction of the debts of an organisation which will remain

in the public sector also requires specific statutory powers. Typically the
legislation achieves capital reconstruction of its assets and liabilities by issuing it
with voted grants to repay its NLF debt.

A5.5.15. Change of status and capital reconstruction ahead of privatisation is

different. When the borrower’s status changes from public to private sector, it is
no longer appropriate for it to enjoy the fine rates the NLF achieves. So all NLF
loans must be repaid. Departments shall agree the approach with the Treasury.

89 The PWLB lends NLF funds to local authorities and others: https://www.dmo.gov.uk/responsibilities/local-authority-

lending/about-pwlb-lending/

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Accounting for NLF loans
A5.5.16. Legislation authorising an ALB to borrow from the NLF normally specifies
that its sponsor department should prepare its annual accounts. Sponsor
departments should also account for NLF transactions in their accounts in
accordance with the FReM.

Voted loans
A5.5.17. Like NLF loans, voted loans should only be made where there is a
reasonable expectation of their being properly serviced and repaid. Departments
making voted loans should ensure that the conditions in the enabling legislation
are met and that the Estimate provides for advances of principal. If the
legislation leaves the lending department with discretion over terms and
conditions, interest rates should be set to reflect the cost to the government of
borrowing. Otherwise the same disciplines apply to voted loans as to NLF loans
(paragraphs A5.5.3-A5.5.10).

A5.5.18. Voted loans are technically assets of the Consolidated Fund. So payments
of interest and principal should normally be surrendered to the Consolidated
Fund. However if there is related expenditure within the same budget boundary
as the receipt, such payments may be retained if the Treasury agrees.

Repaying early and writing off voted loans

A5.5.19. The Treasury shall be consulted about any proposals for the early
repayment of voted loans. The rules applying to early repayment of NLF loans
(A5.5.11) normally apply.

A5.5.20. Treasury approval is required to write off loans of more than £20m. The
department concerned shall notify Parliament in a Treasury Minute using the
standard opening and closing paragraphs in box A5.5B. If it is not possible for the
Minute to be laid allowing fourteen days of parliamentary time, the Minute
should explain why.

A5.5.21. Should a Member of Parliament object to the write-off, the minister

responsible should give the MP the opportunity to make a personal
representation about his or her objections. Only when this dialogue has been
concluded will the Treasury be able to give consent to the write-off.

A5.5.22. Treasury agreement is also required for smaller write offs unless specific
delegations have been agreed. Departments writing off loans should follow the
procedure in annex 4.10 to notify Parliament.

Box A5.5B: Treasury Minute on loan write-offs: standard paragraphs

Opening paragraph:

When a government department proposes to write off the repayment of an

Exchequer loan whose principal outstanding exceeds £20 million, it is the normal
practice for the Treasury to present to the House of Commons a Minute
explaining the circumstances and giving particulars of the write-off. Except in
cases of special urgency, Treasury consent is withheld until fourteen
parliamentary sitting days after the issue of the Minute.

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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 (for
example by giving notice of a Parliamentary Question or of a Motion relating to
the Minute), final Treasury approval of the remission will be withheld pending an
examination of the objection.

Lending to competitive organisations

A5.5.23. The requirements described above always apply to NLF and voted loans.
Some additional disciplines apply to loans to public sector organisations which
operate in commercial markets. These disciplines are justified by the need to:
• avoid distorting competition in the markets in which these
organisations operate
• deliver vfm for the Exchequer as a whole by maximising the
efficiency of the pooled borrowing approach and minimising
subsequent cost of funds.

A5.5.24. The competitive organisations and transactions in the public sector to

which these disciplines apply are:
• those organisations that compete with the private sector for
more than 75% of their business
• many organisations that compete for between 20% and 75% of
their business, considered case by case
• usually organisations using loan finance for a particular discrete
activity that would compete with the private sector.
A5.5.25. The disciplines required are all intended to ensure that the public sector
organisations concerned do not exploit any competitive advantage they might
otherwise enjoy through access to cheaper finance. They are set out in box A5.5C.

Box A5.5C: disciplines for commercial lending

• All borrowing must be agreed with the Treasury spending team

• The borrower, or its sponsor department, should obtain a credit rating, using
independent financial advice and excluding any implicit or explicit government
guarantees

• Any guarantee of an organisation’s borrowing should rest on explicit statutory

powers. There may be terms and conditions, e.g. a cap on the amount

• The borrower organisation should satisfy the Treasury that the proposed
transactions are justified within its corporate plan; or for large singleton
transaction that it delivers value for money

• Short term finance i.e. less than seven days, should be obtained from
commercial providers, e.g. through overdrafts

• Longer term borrowing, whether from the NLF or through voted loans, should
be at interest rates comparable to what similar competitor firms in the private

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 sector would pay, and must as a minimum cover the government’s cost of
borrowing . The Treasury will determine the interest rate to be applied

External borrowing and government guarantees

A5.5.26. Public sector organisations sometimes undertake limited, short-term
borrowing from the private sector, for example through a bank overdraft, in
order to meet very short-term requirements not available through public sector
lenders. Such borrowing should be explicitly guaranteed by the government to
secure the finest terms unless there are good policy reasons otherwise.

A5.5.27. Guarantees should normally only be given with an explicit statutory

power, which should specify:
• the circumstances in which guarantees may be given and the
terms and conditions to be attached
• a limit on the total sum which may be covered by guarantees at
any one time, which may include power to raise the limit by
order within a further absolute ceiling specified in the primary
legislation
• a requirement for Parliament to be notified once the guarantee
has been given; and
• authority for any costs resulting from the guarantee to be met
from Estimates

A5.5.28. Even if the enabling legislation does not require the sponsor department
to notify Parliament of new guarantees, the department should follow the
standard procedure for notifying Parliament of contingent liabilities (annex 5.4).

A5.5.29. In principle government guarantees may also be given for longer term
borrowing, including in foreign currencies. Such guarantees will only be
considered where the guaranteed borrowing is on terms at least as fine as the
government could obtain in its own name. This is a stringent test. Private sector
borrowers cannot often meet it. Departments should therefore ensure that all
their sponsored bodies consult them in advance about the terms of any
proposed private sector or overseas borrowing. In no circumstances should any
central government organisation borrow on terms more costly than those
available to the government without Treasury approval.

A5.5.30. As foreign borrowing may also have implications for the credit standing
on the international money markets of the UK public sector, proposals for such
borrowing must be cleared with the Treasury in advance. This applies to all ALBs.

A5.5.31. It is good practice to keep Parliament informed when guarantees are first
used, or varied significantly.

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Annex 5.6
Banking and managing
cash
Public sector organisations should run their cash management processes to
provide good value for the Exchequer as a whole. This means using the
Government Banking Service, limiting use of commercial banking (with Treasury
consent in each instance), and providing the Treasury with accurate forecasts of
cashflows. Any use of non-standard techniques should be kept within defined
bounds and controlled carefully.

A5.6.1. Together public sector organisations process large volumes of cash each
day in order to carry out their functions. It is important that the cashflows
involved achieve good value for the Exchequer as a whole by minimising the
government’s borrowing at the end of each working day. So as much as possible
of the government’s cashflow should be contained within the Exchequer
pyramid.

A5.6.2. Public sector organisations must maximise the use of publicly procured
banking services (accounts with commercial banks managed centrally by
Government Banking), unless there is a clear business case to do otherwise. This
ensures effective aggregate control and provides the opportunity for central
consolidation of cash resources to minimise government’s financing
arrangements. Other arrangements lead to increased government borrowing
increasing costs and credit risk to the Exchequer.

A5.6.3. When assessing the government’s cash position, the Debt Management
Office (DMO) relies in part on the Treasury’s cash flow forecasts, which in turn rely
on department’s own forecasts. For this reason, it is important for departments
and their ALBs to provide accurate cash flow forecasts to the Treasury.

A5.6.4. Accounting officers are responsible for managing the risks inherent in this
process actively, including any credit exposures of funds held in commercial
banks outside the Exchequer pyramid. Each public sector organisation should
establish a banking policy in order to carry out this task.

Cash management
A5.6.5. Good cash management means having the right amount of cash available
when needed, without inefficient unused surpluses. Each public sector
organisation should plan its own cash management efficiently, following the
guidelines in box A5.6A. It is usually convenient for sponsor departments to
include their ALBs’ flows with their own for this purpose. With this information
EFA can enable departments to draw cash as they need it within their voted
provisions in Estimates.

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A5.6.6. EFA need to understand the dynamics of public sector organisations’
demands for cash and similarly the income they may generate. With this
information they can identify peaks and troughs in the public sector’s overall
need for cash so that the DMO can plan its debt management activity. For this
purpose EFA need to know the annual, monthly and daily sequences of cash
flow, including any major one-off items.

A5.6.7. As a matter of good financial management, public sector organisations

should never go overdrawn. Exchequer costs rise if unplanned large payments
are not forecast in advance. The Treasury will normally charge penalty interest at
current base rate plus 2% on overdrawn positions on Government Banking
accounts. Particular care should be given to ensure the nominated supply
estimate account and the account group as a whole remain in credit.

A5.6.8. The Treasury may waive or vary such a penalty interest charge, normally if
the circumstances which led to the overdraft are outside the department’s
control, or if the overdraft does not incur additional costs to the Exchequer.

Box A5.6A: planning and cash management

• Forecast cash flows and provide EFA with detail within agreed timescales

• Tell EFA of the major cash flows even if a definite transaction date has not been
agreed.

• Keep EFA advised if payment or receipt dates are moved even if this is outside
normal deadlines.

• Negotiate payment dates, put them in contracts with counterparties and stick
to them.

• Transact substantive payments (above £5m) by 12pm (noon) each weekday.

• Negotiate the main inflows to take place on specific dates, and specify receipt in
the morning as late receipts (after 3pm) may not be swept into the Exchequer
pyramid that day.

• Departments should keep commercial accounts at minimum levels and ensure

they are not funded in advance of need. Departments should notify EFA each
quarter of any balances held in a commercial account.

Banking
A5.6.9. Each public sector organisation should establish a banking policy for
control of its working balances and its transmission of funds. Its centrepiece
should be use of Government Banking accounts, which sit within the Exchequer
pyramid. Departments should only hold funds outside of the Exchequer where a
good business case can be made for doing so, e.g. if Government Banking
cannot provide a necessary service or legislation requires it.

A5.6.10. Specific Treasury agreement to each commercial account is required

before it is established. Once this approval has been received, departments (and
their ALBs) should gain the Crown Commercial Representative for Banking’s (CR)
approval before setting up, or altering, any commercial accounts The CR has

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responsibility for the strategic management of banking services and their
suppliers across the whole of the Exchequer.

A5.6.11. A banking policy should cover at least the features outlined in box A5.6B.
Once settled, the policy should be reviewed regularly to make sure that it
remains appropriate and up to date.

Box A5.6B: essential features of an organisation’s banking policy

• The Government Banking bank accounts to be operated, with reference to their

purposes (e.g. to contain income from different sources)

• Any commercial accounts, how they should operate, and why they are justified

• How and where working overnight balances required for day to day operation
are to be held

• How the risks of fraud and overpayments are to be prevented, countered

systemically and managed when discovered

• How any non-Exchequer funds should be managed and kept separate from
public money

• The organisation’s cut off times for processing payments (in line with the
Exchequer’s core banking hours; authorising payments on their banking
platforms by 12pm for high value payments and no later than 3pm for others)

• When and how payment by cheque, credit card or direct debit is acceptable
(see guidelines in Box A5.6D)

• Any use of non- standard financial instruments, e.g. agreeing foreign exchange
hedging contracts with commercial banks (see paragraph A5.6.22)

• Record keeping, including frequent bank statement reconciliations

A5.6.12. Where a public sector organisation plans to use commercial bank

account(s), it should follow the guidelines in box A5.6C. Only commercial banks
which are members of the relevant UK clearing bodies should be considered for
this purpose90.

Box A5.6C: guidelines for using commercial banks accounts

• Only hold funds outside of the Exchequer where there is a clear basis to do so
(legal, value for money for the Exchequer as a whole) and with the agreement of
the Treasury

• Consult the CR to agree the approach to negotiations with potential suppliers

and to ensure leverage of government’s relationship with key banking suppliers

• Ensure that cleared funds will reach accounts as early as possible in the relevant
clearing cycle

90 http://www.accesstopaymentsystems.co.uk/introduction-payment-systems/what-payment-scheme

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 • Obtain specific charges for money transmission and other services so that costs
are transparent and comparable

• Obtain gross interest on cleared credit balances, at rates as close as possible to

the Bank of England’s interbank rate or better (subject to credit risk and other
liquidity considerations)

• Refuse arrangements that involve maintaining minimum balances as this

increases Exchequer debt and raises Exchequer costs, even if the offer appears
superficially attractive because of reduced charges

• Negotiate with care any indemnities that commercial banks may seek to
replace their normal arrangements (e.g. to protect the bank from incorrect
BACS debits), after taking legal advice and obtaining clearance from the
Treasury

• Surrender interest receipts as Consolidated Fund Extra Receipts

• Minimise balances in commercial accounts without going overdrawn, holding

only enough for immediate needs

Money transmission
A5.6.13. Public sector organisations should generally use the cheapest, safest and
quickest means of moving public funds, depending on the context. Generally
this means adopting the hierarchy in box A.5.6D. Sometimes it is necessary to
strike a balance among these desirable features to achieve the best outcome.

A5.6.14. For payments to counterparties outside the Exchequer, it is good

practice for public sector organisations to use BACS91 Grade 3 (Government
Grade) where possible. This is a safe and cost-effective payment method,
allowing for settlement directly at the Bank of England which reduces exposure
to commercial banks. Use of a government grade Bacs SUN means public sector
organisations are not limited to the standards BACS payment limit. For inward
payments, it may be appropriate to apply credit controls or other safeguards.

A5.6.15. Public sector organisations should ensure their finance operations

provide timely payment of all intra-day outflows. Payments made late during the
working day increase intraday volatility, causing disruption to payee’s and the
wider Exchequer’s cash management activities which may lead to increased
cost.

Box A5.6D: money transmission services ranked in order of preference

• Internal transfers. Use to move funds between accounts held within the same
bank as they are free. You can move funds between your organisation’s
accounts as well as to accounts held by other public sector organisations who
use Government Banking’s contract with the same bank.

91 BACS (formerly the Bankers’ Automated Clearing Service) is the commonly used three-day electronic payments and receipts

system.

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 • Government BACS grade 3. This can be used for payments external to the
Exchequer boundary, for example to suppliers and for salaries, and when
moving funds to public sector organisations who use different commercial
banking service providers.

• Faster payments and CHAPS. These should only be used for transactions with
entities external to the Exchequer. Where used for:

o making payments, this should be in a controlled manner with appropriate

safeguards to prevent damage to the Exchequer; or,

o receipts, arrangements should be made for the payer to make payments

as early as possible in the day.

• Credit and other payment cards. When accepting credit and other payment
cards to receive payments the fees and additional risks involved need to be
understood. Paying and receiving funds in this way needs to represent value for
money for the Exchequer.

• Payable orders and cheques, should be used by exception and only when other
methods are not available.

• Cash, uncrossed cheques, order books or any methods carrying similar security
risks should not usually be used.

Borrowing
A5.6.16. Public sector organisations should not normally rely on obtaining finance
by borrowing from commercial banks as it is almost always more expensive than
relying on the government’s credit rating. Any expenditure financed by such
borrowing without explicit Treasury consent would be considered irregular.

A5.6.17. Certain arm’s length bodies, such as public corporations, trading funds
and NHS Foundation Trusts may, however, borrow from commercial banks for
short term needs. This is only possible if it has been agreed in the founding
documentation for the body (see chapter 7).

Managing risk using other financing instruments,

including hedging
A5.6.18. Sometimes public sector organisations face financial risks that they
might struggle to manage or absorb if they crystallised. In these circumstances
they may consider using commercial financial instruments such as forward
contracts, to limit their exposure to such risks..

A5.6.19. The use of such instruments to limit risk may be appropriate in certain
circumstances, but speculation is never acceptable.

A5.6.20. In principle risks of this kind are no different to the other risks with which
public sector organisations grapple. They should be managed in a similar way,
balancing the scale and likelihood of the risk against the cost, and opportunity
cost of taking mitigating action.

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A5.6.21. When considering use of financial instruments, it is important to
remember that:
• their use may entail taking on new risks, which themselves must
be managed. It is therefore necessary for any organisation using
them to ensure that it has sufficient expertise in depth for this
task
• financial instruments of this type might not always be the
cheapest option. So departments should be confident that the
risk being avoided is worth the additional cost they might incur
• provisions for their use should be contained in the organisation’s
banking policy (box A5.6B)

A5.6.22. Any decision to use financial instruments is automatically novel and

contentious and Treasury consent shall be sought accordingly.

A5.6.23. As set out in 5.12.9, departments should only enter into such financing
instruments via centralised expertise and frameworks. For example, through the
Bank of England for foreign exchange transactions and Crown Commercial
Service for energy and commodities purchases.

A5.6.24. If an organisation considers using financial instruments to hedge, its

accounting officer will need to be satisfied that the cost and management effort
of operating the hedging policy offers value for money for the Exchequer as a
whole. The organisation should clear its strategy with the Treasury and draw up a
bespoke section of its banking policy for the purpose. An outline is shown at box
A5.6E.

Box A5.6E: outline management policy for using financial instruments

• Define the risks to be controlled, their volume, frequency and the rationale for
control

• Governance of and accountability for the various elements of the organisation’s

hedging policy, both at working level and on the board

• List of acceptable counterparties (after assessing their credit risks and

competence), with exposure limits (which may differ for different financial
instruments)

• Arrangements for defining acceptable risk, differentiated as necessary among

the different methods of dealing with them

• Arrangements for monitoring and reporting exposures and forecasts

Foreign exchange
A5.6.25. A powerful case for hedging arises when a public sector organisation
must make regular and predictable transactions in foreign currencies whose
scale is material to the organisation’s business. The Guidance on Foreign
Exchange Exposure Management and approval framework provides detailed
advice on how to manage foreign exchange risk, and the contact details for the
relevant expertise available within government.

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A5.6.26. The standard principles for foreign exchange management are set out in
box A5.6F. When drawing up the strategy It is important to remember that the
detailed advice set out in section 5.12 and this annex applies, alongside the
guidance.

Box A5.6F: Mandatory FX management requirements

1. Departments should always consider spot transactions and do not need

Treasury consent if they are carried out within Government Banking.

2. Consent for FX transactions other than spots must be obtained from Treasury in
accordance with paragraph 2.5 of the FX guidance.

3. Where Treasury consent is required, an opinion must also be obtained from the
FAB in accordance with the FX guidance. Consultancy expenses for FX advice
should not be incurred until advice has been sought from the Board.

4. Departmental bodies exposed to material FX risk must have a Foreign-

Exchange policy document setting out their FX risk management strategy. It
must be reviewed annually by the department and at least once by the FAB. The
FX Policy Document must have Treasury approval before coming into force.

5. For all forward contracts of any value and all spot payments in G10 currencies
with a value greater than £2 million equivalent, the Bank of England must be
used. If using forward contracts, they should be arranged as soon as possible to
optimise their benefits.

6. For FX transactions under £2 million equivalent, and non-G10 currencies over £2

million, Government Banking contracts and suppliers must be used for banking
services.

7. Incoming foreign currency over £2 million equivalent should be received

through the Bank of England.

8. Bank balances (sterling or non-sterling) should always be held in Government

Banking, unless prior Treasury approval has been given. Non-Government
Banking commercial holdings and transactions require approval from Treasury
and their values must be reported regularly.

9. Foreign currency balances should be minimised

10. Before agreeing foreign currency liabilities, purchases and other contracts in
sterling, check if there is an FX risk premium that will be passed on at a greater
rate than achievable by the Bank of England.

11. Government bodies are not permitted to speculate. They should not attempt to
anticipate FX movements and try to “beat the market”. It is not the intention of
Parliament that voted Exchequer funds are used to make profits or savings by
trading currencies.

12. Government bodies are required to consider budgetary controls and value for
money for the Exchequer as a whole. Accordingly, avoid buying or selling FX
options, other than in exceptional circumstances, as options are usually

189
 expensive, carrying a risk based premium and often involve a degree of
speculation.

13. While the Bank of England can help with G10 currencies, where possible, avoid
using currencies other than sterling, US dollars or Euros as markets in other
currencies are less liquid.

190
Annex 6.1
How to calculate charges
This annex discusses how to calculate the cost of public services for which a fee is
charged.

Introducing a new or updated charge bearing

service
A6.1.1. Public sector organisations planning to set up or update a service for
which a fee may be charged shall ensure early engagement with Treasury.
Advice should be sought at the earliest opportunity if there are any variations on
the standard model. Proposed variations may be agreed in certain instances,
considering each on its merits. Each will need to be justified in the public interest
and on value for money grounds.

A6.1.2. Practical issues which organisations will need to consider when setting up
or refreshing a charge bearing service include: the definition of the service and
its rationale; the proposed financial objective (for instance, full cost recovery; 70%
of full cost plus a 30% public subsidy); how the service is to be delivered and
which organisation is to deliver it; whether the provider should retain any income
from charges; the proposed charging structure (for instance, a single service or
several sub-services). Organisations will also need to refer to the checklist in box
4.9 of factors to consider when planning policies and projects.

Measuring the full cost of a service

A6.1.3. With agreed exceptions, fees for services should generally be charged at
cost, sometimes with an explicit additional element to match the returns of
commercial competitors. So to set fees for public services it is essential to
calculate the cost of providing them accurately.

A6.1.4. The main features to be taken into account in measuring the annual cost
of a service are set out in box A6.1A. Not everything in the list will apply to every
service and the list may not be exhaustive. It is important that the calculation is
comprehensive, including all relevant overheads and non-cash items.

A6.1.5. So far as possible the calculation should use actual costs, where they are
known. For services just starting, there may be no alternative to using best
estimates, geared to estimated consumption patterns.

A6.1.6. Start-up costs which are capitalised in the accounts and the cost of fixed
capital items are scored in the accounts in full. These costs should be attributed
to the cost of the service as the depreciated value each year.

A6.1.7. Start-up costs which cannot be capitalised in the accounts are scored as
they are incurred. Such costs may be recovered through fees and charges by
spreading them over the first few years of service provision. It is also good

191
 practice to set fees to recover costs which cannot be capitalised in the accounts
and which have been incurred to improve efficiency and effectiveness so that
charges are lower or offer better value. This needs explicit Treasury agreement
and may require statutory backing.

A6.1.8. For services which are charged at different rates, the same procedure
should be used to set the different rates. That is, the cost of any premium service
should be objectively justifiable by its additional cost (e.g. where faster shipping
is offered); or conversely any discount should be justifiable by saving to the
supplier (e.g. using the internet rather than over the counter). Note, however,
that sometimes the legislation permits differential pricing unrelated to the
relative underlying costs – though even then there should be good policy reason
for the difference.

Box A6.1A: elements to cost in measuring fees

• Accommodation, including capital charges for freehold properties

• Fixtures and fittings

• Maintenance, including cleaning

• Utilities

• Office equipment, including IT systems

• Postage, printing, telecommunications

• Total employment costs of those providing the service, including training

• Overheads, e.g. (shares of) payroll, audit, top management costs, legal services,
etc

• Raw materials and stocks

• Research and development

• Depreciation of start upstart-up and one-off capital items

• Taxes: vat, council tax, stamp duty, etc

• Capital charges

• Notional or actual insurance premiums

• Fees to sub-contractors

• Distribution costs, including transport

• Advertising

• Bad debts

• Compliance and monitoring costs

• Provisions

192
But not:

• Externalities imposed on society (e.g. costs from pollution and crime)

• Costs of policy work (other than policy on the executive delivery of the service)

• Enforcement costs92

• Replacement costs of items notionally insured

• Start-up costs (those which are capitalised in the accounts) and one-off capital
items

Financial objectives
A6.1.9. The standard approach to setting charges for public services (including
services supplied by one public sector organisation to another) is full cost
recovery. It normally means recovering the standard cost of capital, currently
3.5% in real terms. Some exceptions are noted in section 6.4.

A6.1.10. One other exception is commercial services, i.e. those services which
compete or may compete with private sector suppliers of similar services. These
should aim to recover full costs including a real rate of return in line with the
rates achieved by comparable businesses facing a similar level of risk. The normal
range of rates is 5-10% but rates as high as 15% may be appropriate for the very
highest risk businesses.

A6.1.11. Great care should be taken in pricing commercial services where public
sector suppliers have a natural dominant position. The market prices of
competitors will often be a good guide to the appropriate rate of return if there is
genuine competition in the market. Where there are limited numbers of buyers
and sellers in a market, it may be better to take other factors into account as well.
These might include past performance, the degree of risk in the underlying
activity and issues bearing on future performance.

Accidental surpluses and deficits

A6.1.12. Despite every effort to measure and forecast costs, surpluses and deficits
are bound to arise from time to time. Causes may include variations in demand,
in year cost changes, and so on. It is good practice to consider mid-year
adjustment to fee levels if this is feasible.

A6.1.13. It is also good practice to set fees to recover accumulated past deficits.
This may require statutory backing through a s102 order (see paragraph 6.3.3).

A6.1.14. Where significant surpluses have arisen, these should usually be refunded
to the payees at the earliest opportunity.

92 See HMT guidance on receipts

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/226421/PU1548_final.pdf

193
194
Annex 6.2
Charging for information
This annex discusses how public sector organisations should charge for the use
and re-use of information, including data, text, images or sound recordings. Much
information about public services is available for free. However, when charging for
information, it is generally at full cost although there are exceptions.

A6.2.1. The policy is that much information about public services should be made
available either free or at low cost, in the public interest. Most public
organisations freely post information about their activities and services on the
internet. There should be no additional charge for material made available to
meet the needs of particular groups of people e.g. Braille or other language
versions. More extensive paper or digital versions of information may carry a
charge to cover the costs of production.

A6.2.2. Information products have an unusual combination of properties:

typically, high cost of production combined with low cost or reproduction. They
are frequently licensed for the use of many customers simultaneously rather
than being sold or otherwise transferred. This can make for complex charging
arrangements to recover costs accurately.

A6.2.3. It is good practice to make available sufficient recent legislation, public

policy announcements, consultation documents and supporting material to
understand the business of each public sector organisation.

A6.2.4. Anything originating in Crown bodies, including many public sector

organisations, has the protection of Crown copyright. Most Crown copyright
information is made available at no charge under Open Government Licence
terms.

A6.2.5. Public sector organisations should maintain information asset registers as

part of their asset management strategy93 feasible.

Rights to access
A6.2.6. The terms on which information is made available should be made clear
at the point of sale or licensing. There is a clear public interest in maximising
access to much public sector material, and this should be borne in mind when
deciding what charges should be levied. For this reason many publications can
be re-used by others free of charge. However, public sector organisations should
take account of copyright issues, using legal advice as necessary.

A6.2.7. Most public sector organisations choose, as a matter of policy, to make

available on the internet information disclosed in response to requests under the
Freedom of Information Act 2000 and Environment Information Regulations

93 For further information see http://www.nationalarchives.gov.uk/information-management/manage-information/policy-

process/digital-continuity/step-by-step-guidance/step-2/

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2004. Public sector bodies should also note the provisions of the amendments
(introduced by the Protection of Freedoms Act 2012) to sections 11-11B and 19 of
the Freedom of Information Act 200094 in respect of relevant datasets, where
there are statutory duties relating to the format and supply of requested
datasets and to their listing in publication schemes, and to charges under a
specified licence.

Information carrying charges

A6.2.8. Whilst the majority of information is free to access, a number of public
sector organisations supply information for which charges are made to cover the
associated costs. These include:
• services commissioned in response to particular requests
• services where there are statutory powers to charge
• information sold or licensed by trading funds (although they
must comply with the rules set out by the re-use regulations –
see below)
• publications processing publicly gathered data for the
convenience of the public, through editing, reclassification or
other analysis
• retrieval software, e.g. published as a key to using compiled data

A6.2.9. Public sector organisations can also charge for supplying some
information which recipients intend to process, e.g. for publication in another
format. Licences supplied in this way may take a number of forms, including
royalties on each additional copy sold in the case of the most commercial
applications. The norm is:
• Raw data: license and charge at marginal cost
• Value added data and information supplied by trading funds:
charge at full cost including an appropriate rate of return where
this is permitted under the re-use regulations (see paragraph
A6.2.10)

The Re-use of Public Sector Information Regulations

2015
A6.2.10. The Re-use of Public Sector Information Regulations 201595 set out the
circumstances where public sector bodies may charge above marginal cost for
licensing the re-use of information. Where it is intended to charge for the re-use
of information within the scope of the regulations, it is important to comply with
those regulations, paying attention to the clauses that cover requirements to
generate revenue

A6.2.11. Trading funds, for example, may charge for information where the
customer intends to duplicate or process (re-use) such material for profit. In such
cases, Crown bodies need to apply for a delegation of authority from the Keeper
of Public Records96 to license the information.

94 Freedom of Information Act 2000 revised - https://www.legislation.gov.uk/ukpga/2000/36/contents

95 SI 2015/1415 - http://www.legislation.gov.uk/uksi/2015/1415/contents/made

96http://www.nationalarchives.gov.uk/information-management/re-using-public-sector-information/uk-government-licensing-

framework/crown-copyright/delegations-of-authority/

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A6.2.12. The regulations set out that “charges for re-use must, so far as is
reasonably practicable, be calculated in accordance with the accounting
principles applicable to the public sector body”. See Annex 6.3 for further detail
on marginal cost pricing.

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Annex 6.3
Competition law
Public sector organisations need to take care if they provide services which compete
with private sector suppliers of similar services, or may do so. It is important that they
respect the requirements of competition law.

A6.3.1. UK competition law is founded on the Competition Act 1998 which prohibits
business agreements that prevent, restrict or distort competition in trade in the UK.
They also disallow market abuse on the part of any business in a dominant 97 in a
market.

A6.3.2. In particular, the following kinds of unfair competition are not allowed:
• very high prices that may exploit market power
• very low prices that may exclude competitors
• differential prices (or other terms and conditions of service) for the
same product to different customers (except for objective reasons such
as differences in quality or quantity) that distort competition
• refusing to supply competitors without objective justification such as
poor customer credit worthiness.

Pricing in competitive markets

A6.3.3. Services should be costed in line with the normal rules for full cost recovery.
Charges should be set to achieve the appropriate financial objective, normally at least
recovering full costs.

A6.3.4. Some public sector organisations both supply data for use in providing public
services and sell services using their data in competition with commercial firms. Such
organisations need to take particular care not to abuse their competitive position in the
market, especially if it is dominant. This could happen if a dominant supplier
organisation allocated its costs in such a way that an efficient competitor could not
operate profitably.

A6.3.5. There can be circumstances which merit departing from the normal principle of
full cost recovery. The justification is normally to achieve greater efficiency and
sensitivity in responding to patterns of demand or cost, e.g.:
• if the service cannot be expanded, but customers are willing to pay
more, there may be a case for increasing the price
• if there is excess capacity and customers are not willing to pay the
current charge, there may be a case for reducing the charge or
reducing output
• incentive charging, i.e. charging below cost to encourage demand, or
above cost to discourage it.

97 A business is deemed to be in a dominant position if it can generally behave independently of competitive pressures in its field.

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A6.3.6. There A6.3.6 If a public sector organisation decides not to recover full costs for a
while, it should take care that:
• its prices are not reduced in such a way as to stifle competition (a rapid
cut in prices could be unfair to private sector competitors)
• its products and services are not charged at less than their average
variable costs or short run marginal costs (though this does not
preclude charging at less than break even for a short period, e.g. to
match competition)
• the charging strategy is compatible with full cost recovery over the
medium term. This may mean ceasing to offer a service which has
become unviable against the competition
• any cross subsidies between services should not drive prices below
average variable cost or short run marginal cost
• if, exceptionally, a supplier charges below full cost because it has
surplus capacity, there must be broader benefits and prices should not
fall below average variable or short run marginal cost.

Delivering financial objectives

A6.3.7. Public sector organisations should normally plan to achieve their financial
objectives. If necessary this may mean adjusting prices or managing the cost structure
of the supply to deliver adequate efficiency. In particular, if a public sector supplier
forecasts a deficit, it should take remedial action promptly.

A6.3.8. If a public sector supplier moves away from full cost charging, there may be a
case for reviewing its financial objective. Normally any such change needs the
agreement of both the responsible minister and the Treasury.

Taking things further

A6.3.9. More generally, it is good practice for bodies supplying goods or services into
competitive markets to seek legal advice on the application of competition law at an
early stage.

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Annex 7.1
Forming and reforming ALBs
This annex covers the processes of setting up new arm’s length bodies and reshaping
existing ones, either by merger, dissolution or other transformation. While the processes
are flexible, there are some common themes centring on accountability and
streamlining government processes.

Rationale for ALBs

A7.1.1. The government works through ALBs when there is a good reason to do so,
usually when it is helpful for a specialist body to carry out a function where
independence is important. Each ALB has its own bespoke reason for existing and
many are established under specific legislation determining their form, functions and
powers.

A7.1.2. The three main kinds of ALBs are agencies, non-departmental public bodies
(NDPBs) and non-ministerial departments (NMDs). Each has its strengths and is
appropriate for a range of functions. The three are compared in box A7.1A.

Setting up a new ALB

A7.1.3. It is good practice to decide early which kind of body is most appropriate when
setting up a new ALB (sources of guidance on setting up ALBs are in box A7.1B).
Parliament is concerned that hiving off functions into an ALB shall not diminish
accountability. For that reason NMDs are rarely the right solution.

A7.1.4. It is important to remember that effective functional independence does not

necessarily require a specific structure. Ministers can choose to stand back from the
decisions made or opinions published by any ALB while maintaining financial control
and oversight, e.g. ministers never interfere with HMRC’s decisions on individual
taxpayers’ affairs.

A7.1.5. The next step is to develop a framework document (or equivalent) setting out the
relationship between the new ALB and its parent department. Advice on this is in annex
7.2. These should be reviewed every 3 years to keep abreast of experience and the
changing context98.

A7.1.6. Decisions on the form of any particular ALB must ultimately be for ministers. They
will depend in part on perceptions of the function in question, and on the extent to
which ministers think it right to take a day to day interest in its affairs. Generally, the
closer the ALB’s functions are to the centre of government, the more likely it is to be an
agency; while NMD status is appropriate for organisations of some size carrying out
professional functions. The form and structure of the NDPB is very flexible, suiting
specific and technical functions.

98 https://www.gov.uk/government/publications/managing-public-money-framework-documents

200
A7.1.7. When an ALB is planned, it is essential to consult both the Treasury and the
Cabinet Office about its powers, status and funding99. Departments should also seek
advice from UK Government Investments (UKGI), the government's centre of excellence
in corporate finance and corporate governance, when establishing central government
companies, public corporations or ALB’s which have a significant commercial element,
significant private sector interface and/or whose governance is of material complexity.
In the case of such organisations, departments should also consider whether UKGI is
best placed to deliver the shareholder function itself on behalf of the department or, if
not, seek the advice and use the expertise of UKGI during the life of such arm’s length
bodies.

Box A7.1A: comparison of the three main kinds of ALB in central government

Feature Executive Agency Non-departmental Non-ministerial

public body department (NMD)
(NDPB)

Status Part of a Independent Department in its

department organisation. May own right
be a company
and/or charity

Crown body Yes Not usually Yes

Established by Administrative Usually bespoke Administrative

action (usually legislation (may action, often
quick and easy) take time) supplemented by
primary legislation
(if needed, may take
time)

Governance CEO supported by a Independent board Permanent

board led by non- secretary supported
executive Chair by a board

Ministerial A minister in the A minister in the Rarely needed, but

accountability parent department sponsor when necessary by
makes key department decides a minister in the
decisions on the key matters. E.g. parent department
agency’s affairs whether to adjust decides
functions, wind up
or replace

Parent department Has direct control Subject to formally Remote

agreed
memorandum. May
be light touch

Funding Estimates and/or Grant(s) from Estimates and/or

fee income department(s), fee income
and/or income from
fees or levies

Employees Civil servants Not usually civil Civil servants

servants

Accounts etc. Publishes plans and Publishes own Publishes own

accounts as part of plans and accounts. plans and accounts
parent Usually
department’s consolidated into

99 See for example: Executive Agencies: A guide for Departments and Public Bodies: A Guide for Departments -
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/80076/exec_agencies_guidance_oct06_0.pdf

201
 parent
department’s

Parliamentary CEO is agency CEO is normally the Permanent

accounting officer, accounting officer, secretary is
oversight by oversight by accounting officer.
departmental PAO departmental PAO Parent department
PAO can step in if
necessary

A7.1.8. It is worth remembering that the three kinds of ALB in box A7.1A are only the
most common. Others are possible. Cabinet Office guidance on the categories of Public
Bodies100 explains in more detail. They include public corporations and various kinds of
cooperative arrangements with the private or voluntary sector, some fairly loose. And
there is scope to establish one-off arrangements for special bodies where
circumstances demand something different. Special structures must of course be
evaluated carefully, on the strength of a comparative business case, to make sure that
they will deliver value for money to the public purse.

A7.1.9. Whatever the legal status of an ALB, its sponsor department should have a
mechanism for asserting an appropriate degree of control over it, especially in financial
matters and in relation to issues of ethics in the use of public funds. In general, the
greater the extent of public funding, the greater the degree of control called for101.

A7.1.10. If legislation is required to set up an ALB, it is important to observe the new

services rules (Section 2.6). Strictly this means that royal assent is required before
resources can be committed to getting the organisation on its feet. In some urgent
cases it may be possible to make a claim on the Reserve to make an earlier start, but
even so only after second reading in the Commons to an uncontroversial bill and with
safeguards to allow commitments to be unwound if the bill does not pass.

A7.1.11. Whatever the approach taken to setting up the new organisation, it is often
desirable to operate a period of shadow running before it starts in earnest. And do be
aware that the process of preparation can take time – e.g. often a couple of years or
more for an NDPB.

Box A7.1B: sources of guidance

Guide to the Establishment and Operation of Trading Funds:

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

Corporate Governance in Central Government Departments: Code of Good Practice

includes references to NDPBs and Agencies:

100 Categories of Public Bodies: A Guide for Departments and is available on the Cabinet Office website

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/80075/Categories_of_public_bodies_Dec12.pdf
101 For further guidance in relation to this please consult the Cabinet Office Public Bodies Governance Team and UKGI guidance.

https://www.ukgi.org.uk/wp-content/uploads/2020/03/UK-Government-Arms-Length-Bodies-A-View-from-Practitioners-January-
2020_WEB.pdf

202
https://www.gov.uk/government/publications/corporate-governance-code-for-central-
government-departments

Financial Reporting Manual – includes guidance for NDPBs and Agencies, including
form of Annual Reports: https://www.gov.uk/government/collections/government-
financial-reporting-manual-frem

Consolidated Budgeting Guidance – includes guidance in relation to NDPBs and public

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

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Reforming ALBs
A7.1.12. Valuable as they can be, proliferation of ALBs is not good practice. It adds to
administrative costs generally and can fragment accountability. So it can be
necessary or desirable to wind up or merge ALBs in the light of experience.

A7.1.13. The process of decision making is similar to that for setting up a new ALB if
there is to be a successor organisation. It is good practice to decide on a suitable
shape for the new organisation and then plan legislation, if necessary, to achieve it.

A7.1.14. The predecessor organisation(s) must be wound up in an orderly fashion, with

final accounts to close its affairs (including a comprehensive list of assets and
liabilities). If a closing organisation has no staff by the time the final accounts are
draw up, it is usual for the accounting officer of the successor organisation, if there is
one, to take responsibility for signing them off. If this is not possible, for example if
there is no successor, the PAO of the parent department should sign them off.

A7.1.15. When staff are to be migrated into a new organisation, it is important to

respect their statutory employment rights. Planning for this should form a key part of
the transition preparations. Mistakes can be costly.

204
Annex 7.2
Framework documents
Departments need arrangements to monitor and understand their arms-length
bodies’ strategy, performance and delivery. These should be set out in a framework
document. This annex sets out the process and clearances required, with links to
specimen documents tailored to the nature of various public sector organisations.
Whilst details will be tailored to individual circumstances, the expectation is that
framework documents should follow the appropriate template as closely as
practicable, and departures from the specimen templates should be clearly
signposted, explained and justified, and those departures cleared with HMT spending
teams and the Treasury Officer of Accounts.

A7.2.1. This annex provides guidance on the framework documents for:

• non-departmental public bodies (NDPBs)
• executive agencies
• statutory office holders
• central government companies (including those classified as NDPBs)
• central government charities (including those classified as NDPBs)
• non-Ministerial Departments
• public corporations.

A7.2.2. Terminology may differ and it may be these documents are referred to as a
memorandum of understanding, management agreements or partnership
agreements in some cases depending on historical or departmental practice. The
content of documents should, however, follow the specimen framework document
templates. The process set out below applies irrespective of the name of the
document.

A7.2.3. The framework document sets out the ALBs purpose, describes the
governance and accountability framework that applies between the roles of the
body and its sponsor department (and with any other departments or devolved
administrations with an interest in the ALB’s business), reflecting the specific
structures, roles and responsibilities in each case, and sets out how the day-to-day
relationship works in practice, including in relation to governance and financial
matters. They are public documents which:
• shall be published online and added to the Treasury’s collection
page for framework documents102
• deposited in the Libraries of both Houses of Parliament in line with
Parliamentary Guidance103.

A7.2.4. Standalone guidance on framework documents, and template framework

documents for each of the six broad types of ALB as set out above are published

102 https://www.gov.uk/government/collections/framework-documents-collection

103 https://www.parliament.uk/globalassets/documents/commons-library/deposited-papers-guidelines-for-departments.pdf

205
alongside Managing Public Money on gov.uk104 and will be updated from time to
time. These templates are broadly similar representing consistent standards of
accountability and governance, with relatively few differences where needed to
reflect the circumstances of a type of body (e.g. where an NDPB is also established
under the Companies Act).

A7.2.5. When considering the appropriate specimen template to use the

classification of the body should be considered. This should first be the formal
statistical classification by the Office of National Statistics followed by classification
by the Cabinet Office. Where the body has not been classified or there is uncertainty
as to classification, please consult the Treasury as to the appropriate template to use.
It is important that the framework documents are fit for the purpose of the individual
body. It may, therefore, be appropriate for teams to consider using a different
template to that prescribed by classification if the individual circumstances of the
body mean that another of the templates would be more appropriate, in whole or
part, from an operational or policy perspective (e.g. it may be appropriate for an
NDPB with a Board responsible for complex commercial operations to use the
Government Companies template.)

A7.2.6. Where departments are of the view that departures from the specimen
templates are necessary or there is a policy reason why an alternative template from
the bodies statistical classification should be used, these departures should be clearly
signposted, and policy arguments explained and justified. Such departures will also
require Treasury consent.

A7.2.7. New framework documents must be cleared first with the Sponsor
department Corporate Governance Team or Financial Governance Team or
equivalent, before clearance with relevant Treasury spending team and the Treasury
Officer of Accounts. It may also be appropriate to share the framework documents
for new public bodies or where there are complex governance arrangements with
the Cabinet Office Public Bodies Governance Team for their views.

A7.2.8. Departments should also seek advice from UK Government Investments

(UKGI), the government's centre of excellence in corporate finance and corporate
governance, when establishing central government companies, public corporations
or ALB’s which have a significant commercial element, significant private sector
interface and/or whose governance is of material complexity. In the case of such
organisations, departments should also consider whether UKGI is best placed to
deliver the shareholder function itself on behalf of the department or, if not, seek the
advice and use the expertise of UKGI during the life of such arm’s length bodies.

A7.2.9. Where a framework document is amended or departs from the cross-

government templates, the changes must be cleared by the Sponsor department’s
Corporate Governance Team or Financial Governance Team or equivalent, before
seeking Treasury consent. Framework documents shall be sent to the spending
team and to [email protected]. Treasury will aim to clear framework
documents within 28 days.

A7.2.10. Framework documents should be reviewed and updated at least every 3

years unless there are exceptional reasons that render this inappropriate that have
been agreed with Treasury and the Principal Accounting Officer of the sponsor
department. Upon review, where there are departures from the currently published

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templates or where the existing framework documents are no longer in compliance
with those templates frameworks documents should be re-cleared via TOA and the
spending team. It may be appropriate to update a framework document sooner if
there are significant changes to the ALB, e.g. reclassification, or the body taking on
additional functions or being subject to a machinery of government change.

A7.2.11. Framework documents constitute a core constitutional document of the

arm’s-length body and it is imperative that accounting officers, Board members and
senior officials are familiar with them, ensure they are kept up to date and use them
as guide to govern the collaborative relationship between the arm’s-length body, the
sponsor department and the rest of government.

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Annex 7.3
Government Companies,
Public Corporations, and
Trading Funds
Companies are used across government as a way of delivering on government
objectives which are better met by a more discrete legal entity with a clear
accountability and governance structure. Government companies’ objectives are
diverse and as such their characteristics are equally diverse. The risk of such diversity
is that it can lead to inconsistency in spending controls, governance arrangements
and accountability. This annex is intended to consolidate existing guidance in relation
to their responsibilities for public money and to provide some advice on common
issues that arise.

What is a government company?

A7.3.1. A Government Company (often informally referred to as a “GovCo”) is one in
which the government is the majority or only shareholder. It can include situations
both where the government has purposely set up the company up as a GovCo or
where the government has acquired majority shareholder status of an existing
company.

A7.3.2. Government may also have interests in companies where it does not hold
majority shareholder status. This may be where the government is the sole or
majority customer, where it holds preference shares, where the company is closely
governed by a regulatory regime or where the company is provided support by the
government such that government is deemed to hold significant control. Given this
diversity, it is helpful to consider companies through more clearly defined criteria
than the high-level label of “GovCo”.

What is a government company?

A7.3.3. The initial question for determining what kind of controls and governance
apply is whether the company is formally classified as public or private sector. Most
GovCos will be public sector but government also has interests in private sector
companies.

A7.3.4. Companies are classified to the public or private sector based on ONS criteria.
The ‘public sector’ is defined by the Office of National Statistics (‘ONS’) with reference
to the European System of Accounts 2010 in accordance with EU requirements for
Governments to produce accurate public sector finances and national accounts. The
National Accounts (or Sectoral) classification of entities as public or private depends
on the level of government control over the general corporate policy of the entity
being classified. This can be direct or indirect and may be evidenced by indicators
that include:

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 • the ability to appoint those in control, or those who determine the
policy of the entity
• a right to be consulted over such appointments, or to have a veto
over appointments
• the provision of funding accompanied by rights of control over how
that funding is spent
• a general right to control the day-to-day running of the body105.

A7.3.5. ONS decisions on classification are definitive and are informed by common
European standards. These classifications are published106. ONS may take some time
to consider the classification of a particular government entity, in the meantime
advice should be sought from the Treasury classifications team. Pending review by
the ONS, the Treasury view of classification should be regarded as definitive and
should inform the body’s governance, reporting and accountability structures.

Classification of Government companies – central, local

or public corporation?
A7.3.6. Once the ONS has classified a body as public sector it is classified to a sub-
sector based on its characteristics. These sub-sectors in respect of companies are:
• Central Government Company (CGC)
• Local Government Company (LGC)
• Public Corporation (PC).

Central and Local Government Companies

A7.3.7. Government companies which are classified by the Office of National Statistics
(ONS) for the purposes of National Accounts as ‘central government’ are usually then
administratively classified by Cabinet Office as NDPBs.

A7.3.8. CGC’s receive income wholly or in the majority from central government via
grants or contracts, or receive the majority of their income by virtue of levies or
taxation or funded by the recovery of their costs through the charging of fees.

A7.3.9. Central Government Companies should:

• be subject to Managing Public Money
• have an accounting officer appointed by the Principal Accounting
Officer of the sponsor department
• have clear delegated spending authorities from the department
agreed by Treasury and subject to Cabinet Office spending control
• follow government standards in governance, recruitment,
procurement and transparency for NDPBs
• appropriate board make-up and the balance of executive and non-
executive functions
• have consolidated financial reporting.

105Taken from Classification of Public Bodies Guidance for Departments:

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/519571/Classification-of-
Public_Bodies-Guidance-for-Departments.pdf
106 Public Sector Classification Guide
https://www.ons.gov.uk/methodology/classificationsandstandards/economicstatisticsclassifications/introductiontoeconomicstatisticscl
assifications

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A7.3.10. It is important to ensure that provisions in the Framework Document for any
government company are consistent with the company’s Articles of Association. If
there are obligations that need to be legally imposed on the company (e.g. matter
reserved for the Shareholder), these need to be included in the Articles (which are
legally binding on the Company). The template framework document for central
government companies considers these issues 107.

A7.3.11. Local Government Companies are outside the scope of Managing Public
Money.

Public corporations
A7.3.12. Companies established by government that meet the “market body test” are
classified by the ONS as Public Corporations. The “market body test” requires that the
company derives more than 50 per cent of its production cost from the sale of goods
or services at economically significant prices (that is, prices that have a substantial
influence on the amounts of products that producers are willing to supply and on
the amounts of products that purchasers wish to acquire) for all or most of the goods
and services they produce. Note that classification tests above refer primarily to Non-
Financial Corporations. The classification rules for Financial Corporations are
complex.

A7.3.13. Public Corporations’ powers are usually defined in statute, but otherwise all
the disciplines of corporate legislation apply. Sponsor departments should define any
contractual relationship with a corporate in a framework document108adapted to suit
the corporate context while delivering public sector disciplines. Public corporations
do not have accounting officers and are not subject to Managing Public Money as a
matter of course.

A7.3.14. They should instead be subject to levels of control and governance that are
deemed appropriate by the sponsor department and agreed in the context of the
framework document and approved by Treasury. It may be the nature of the body is
such that it would be appropriate to consider if that a requirement for compliance
with the principles of Managing Public Money should be imposed. This should be
achieved through the exercise of shareholder rights and is not the default position. If
this outcome is sought it may be appropriate to appoint the Chief Executive as an
accountable person mirroring the role of the accounting officer for central
government bodies to ensure the Shareholder expectations in this regard are met.

A7.3.15. Public Corporations are subject to Consolidated Budgeting Guidance 109 and
in in particular are expected to provide a return to government in respect of capital
employed. In the case of PCs performing essentially government-type functions, 3.5%
real will normally be appropriate. A PC competing in the market should typically be
expected to return a higher rate to reflect the prevailing market rate.

107

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1060591/Template_Framework_D
ocument_-_Central_government_companies.pdf
108

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1060597/Template_Framework_D
ocument_-_Public_Corporations.pdf
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Trading Funds
A7.3.16. Trading Funds are established under the Trading Funds Act 1973. Most
trading funds are public corporations, but some may be central government
companies. It is rare for new trading funds to be created and requires Treasury
consent. Unlike Public Corporations in general, trading funds have accounting
officers appointed by the Treasury and are subject to Managing Public Money by
default. In addition, Departments should have careful regard to Consolidated
Budgeting Guidance particularly regarding expected rates of return from trading
funds.

A7.3.17. Further guidance may be found in the Treasury’s Guide to the Establishment
and Operation of Trading Funds:
http://webarchive.nationalarchives.gov.uk/20130129110402/http:/www.hm-
treasury.gov.uk/psr_reporting_centralgovernment.htm

Legal status of companies

A7.3.18. In addition to the classification decisions above, companies can be
constituted either as companies limited by shares or as companies limited by
guarantee. When planning on setting up a government company, officials should
discuss with their legal advisors and with Treasury the appropriate legal status for
incorporation.

A7.3.19. A profit-making company will generally be better incorporated by shares and

non-profit by guarantee. A company limited by shares may also be preferable in joint
ventures where there is significant disparity between the capital contributed or the
support provided through income or otherwise. Different levels of share capital can
reflect such variation and further provide flexibility in the levels of control exercised
by shareholders.

A7.3.20. Alternate legal structures are also available such as charities, community
interest companies and mutual. The Commercial Models Team in Cabinet Office can
provide support and advice. It is important that the model used follows the policy
objective rather than seeking to force policy objectives to fit a model.

Framework documents
A7.3.21. It is important to ensure that provisions in the framework document for any
government company are consistent with the company’s Articles of Association. If
there are obligations that need to be legally imposed on the company (e.g. matter
reserved for the Shareholder), these may need to be included in the Articles (which
are legally binding on the Company).

A7.3.22. For further guidance in relation to framework documents for government

companies see Annex 7.2 and published specimen templates.

Creation of new companies

A7.3.23. Companies are relatively easy to create by government departments
through simple incorporation under existing legislation. However, departments
should be wary of falling foul of the new services rules (see MPM 2.6). This is

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particularly likely to be the case if the company is due to perform functions that are
not already part of the department’s ambit of activity.

A7.3.24. Even where the new company performs pre-existing functions, it may that
the new delivery mechanism for that service is such that the new services rules may
be engaged. This should be considered on a case by case basis.

A7.3.25. Creating a new company will generally be novel and as such will require
Treasury consent.

A7.3.26. It will also be appropriate to share framework agreements with Treasury to

set out proposed governance arrangements. If the new company is likely to be
classified as a central government body consent will also need to be obtained from
Cabinet Office for the creation of a new public body110.

A7.3.27. As with the creation of all ALBs, departments should consider the guidance
as set out in Annex 7.1 and in particular the requirements and guidance as set out in
7.1.7.

Subsidiary companies
A7.3.28. Where ALBs establish subsidiary companies, the accounting officer of the
parent ALB shall have meaningful oversight of the subsidiary. It is not acceptable to
establish subsidiaries to ALBs in order to avoid or weaken parliamentary scrutiny.

A7.3.29. For subsidiary companies classified as central government companies

(CGCs), the responsibilities of the accounting officer of the parent ALB will also apply
to any subsidiaries set-up by the ALB. Subsidiaries cannot have a different
accounting officer to the accounting officer of the parent ALB.

A7.3.30. For subsidiaries classified as CGCs, the default position is that all the ALB’s
controls and delegations’ cascade down to the subsidiary. These arrangements
should be set out in the framework document between the ALB and the sponsor
department, and in a separate document between the parent ALB and the
subsidiary.

A7.3.31. ALBs can agree delegations to their subsidiary which are within their own
delegations, issued to them by their parent department. Where ALBs wish to provide
delegations or freedoms to their subsidiary which are outside of their own
delegations, Treasury consent is required. The ultimate test in these cases will be
whether the PAO would be comfortable defending the approach taken in
Parliament.

A7.3.32. Where the subsidiary companies are classified as a PC rather than CGC, the
position is that the ALBs own delegations and controls do not apply by default, and
the controls set out in A7.3.12 onwards apply.
A7.3.33. There are some commitments which can never be able to be delegated to
subsidiaries, regardless of their classification. These are commitments which incur
liabilities which would impact the parent ALB, and therefore engage the accounting
officer’s responsibilities, if they crystallised.

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Box A7.3A: Treasury consent for new subsidiaries111

• If the subsidiary is being established to deliver the ALBs existing activities within
its existing statutory powers and ambit, Treasury consent will not be required –
save where the expenditure undertaken breaches the department’s delegations
or other provisions of Managing Public Money.

• Where subsidiaries are established to deliver additional activities, potentially

outside of the ALBs existing statutory powers or ambit, Treasury consent will
always be required. Such expenditure is likely to be novel, contentious or
repercussive and might engage the New Services Rule (see 2.6) or require new
statutory powers (see 2.5).

Audit
A7.3.34. Companies in general are required by statute to have their accounts
audited112. It is expected that companies classified as NDPBs will be audited by the
Comptroller and Auditor General113. If the company is not for profit and the C&AG is
appointed as Auditor by an order under the Government Resources and Accounts
Act then the company is exempted from the requirement for a Companies Act
audit114. If the C&AG is appointed as auditor of the company by agreement between
the company and Minister of the Crown or by virtue of statute 115 then any Audit must
also fulfil the requirements of a Companies Act audit.

A7.3.35. Audit arrangements for Public Corporations, companies not classified as

NDPBs or companies where the auditor is not appointed automatically by statute
should be agreed with the Treasury. It will generally be good practice for the sponsor
department to seek the views of the NAO as to whether they think it appropriate to
take on the role of auditor. It should be noted that where a body is consolidated into
a department’s group accounts all elements of the group will be subject to the
C&AG’s opinion on regularity.

111 As well as these Treasury consent requirements, new subsidiary companies may also need approval from the Cabinet Office as new

public bodies.
https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/686716/The_Approvals_Process_f
or_the_Creation_of_New_Arm_s-Length_Bodies.pdf
112 https://www.legislation.gov.uk/ukpga/2006/46/section/475

113 https://webarchive.nationalarchives.gov.uk/20130102193106/http://www.hm-treasury.gov.uk/d/dao0108.pdf

114 https://www.legislation.gov.uk/ukpga/2006/46/section/482

115 https://www.legislation.gov.uk/ukpga/1983/44/section/6

213
 Annex 7.4
Using private finance
Some public services are delivered in partnership with private sector providers, using
some carefully controlled private finance. Because the private sector contractor puts
its own funds at risk, it can incentivise delivery of assets and services to time and cost,
and can offer value for money where the benefits of risk transfer and private sector
delivery offset the additional cost of private finance. Such deals are not appropriate for
every project.

A7.4.1. Although the use of private finance in the delivery of public sector assets and
services is one method of procurement, it is not suited to all types. Where it is used
effectively it can offer a number of strengths in delivering public assets (see box
A7.4A). These stem from:
• sharing risk in delivering public projects within a structure in which
the private sector contractor puts its own capital at risk
• payment to the private sector being structured in such a way as to
ensure the private sector is incentivised to deliver the required
services or obligations under the arrangement
• the private sector being incentivised to grow market share in the
joint delivery of services, or to grow the value in the joint
management of assets

A7.4.2. Contracts using private finance may include the ongoing maintenance and
operation of the asset and the delivery of associated services to outcome
specifications set by the public sector. Generally they are long term arrangement
between the parties.

Box A7.3A: strengths of using private finance to deliver public sector assets and services

• Getting projects built to time and to budget

• Improving whole-of-life risk allocation and management, creating disciplines and

incentives on the private sector to manage risk effectively

• Securing a greater focus on due diligence

• Securing better integration of design, construction and operational skills

• Securing a greater focus on growing market share or value of a joint asset or

business

A7.4.3. Private finance does not suit every project. It should only be used after the
rigorous scrutiny of all alternative procurement options, where:
• the use of private finance offers better value for money for the public
sector compared with other forms of procurement. Annex 4.6 gives

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 additional guidance on the value for money analysis that is required
alongside the assurance and approval process
• the structure of the project allows the public sector to define its
needs after construction as service outputs that can be adequately
contracted for in a way that ensures an effective and accountable
delivery of long-term public services
• the public sector partner is able to predict the nature and level of its
long term service requirements with a reasonable degree of
certainty.

A7.4.4.Conversely, private finance is not usually suitable for:

• individual projects too small to justify the transaction costs
• large innovative IT projects, or other services where it is not practical
to specify the requirements sufficiently firmly in advance or over the
long time-frame of the prospective contract life,

A7.4.5. The main procurement principles continue to apply when using private
finance. It is important that the output to be achieved is clearly specified rather than
the method to be used in carrying out the contract, so that the supplier can innovate
and manage risk effectively. However, it is sensible to clarify key areas of design early
on, to prevent false starts and later misunderstandings.

A7.4.6. Public sector organisations should not, however, use standard contracts
automatically. They should be intelligent customers, providing incentives to
stimulate enough competition to achieve good value in procurement costs. They
should also be aware that their own reputations may be at risk when privately
financed contracts are carried out. Where contracts include the ongoing
maintenance and operation of assets, public sector organisations need to commit
sufficient resource to effective long term contract management, including
monitoring performance and managing any service variation requirements or other
contract delivery issues over the project life.

A7.4.7. Once a major asset has been constructed, it may be possible for the private
sector partner to refinance the project debt on more favourable terms than achieved
at financial close. The contract should specify how the financial benefit of any
refinancing should be shared with the public sector purchaser. The Treasury has
produced a standard refinancing protocol to achieve this.

215
216
Glossary
Name Definition

Accounting officer A person appointed by the Treasury or

designated by a department to be
accountable for the operations of an
organisation and the preparation of its
accounts. The appointee is the head of a
department or other organisation or the
Chief Executive of a non-departmental
public body (NDPB) or other ALB. See
chapter 3.

Accounts direction A direction issued setting out the

accounts which a body must prepare,
and the form and content of those
accounts.

Affirmative resolution A parliamentary procedure exercising

control over secondary legislation (i.e. a
Statutory Instrument in the form of an
order or regulation). Parliament’s
positive approval is required before the
instrument can take effect.

Annually Managed Expenditure, AME Spending included in Total Managed

Expenditure (TME), which does not fall
within Departmental Expenditure Limits
(DELs). Expenditure in AME is generally
less predictable and controllable than
expenditure in DEL.

Arm’s length bodies, ALBs Central government bodies that carry

out discrete functions on behalf of
departments, but which are controlled
or owned by them. They include
executive agencies, NDPBs and
government-owned companies.

Capital spending Spending on the purchase of assets

(including buildings, equipment and
land), above a certain threshold (set by
the body concerned), which are
expected to be used for a period of at
least one year. Items valued below it are
not counted as capital assets, even
where they have a productive life of
more than one year.

217
Central government bodies Departments and departmental
executive agencies, NDPBs, and NHS
health authorities and boards. The Office
for National Statistics determines which
bodies are classified to central
government.

Chief executive Title for the head of an arm’s length

body, normally appointed as accounting
officer.

Civil service code A concise statement issued by the

Cabinet Office setting out the
framework within which all civil servants
work, and the core values and standards
they are expected to hold.

Clawback The concept that where an asset

financed by public money is sold, all or
part of the proceeds of the sales should
be returned to the Exchequer.

Commercial banks Bodies other than the Government

Banking Service which provide banking
services, including private sector banks
and building societies.

Committee of Public Accounts A committee of the House of Commons

which examines the accounting for, and
the regularity and propriety of,
government expenditure. It also
examines the economy, efficiency and
effectiveness, and feasibility of
expenditure. Commonly known as the
Public Accounts Committee (PAC).

Common law One of the historical sources of law in

the United Kingdom. Often used to
distinguish judge-made case-law and
longstanding legal principles from
legislation which has been made by
parliament.

Comptroller and Auditor General, C&AG The chief executive of the National Audit
Office, appointed by the Crown, and an
Officer of the House of Commons. As
Comptroller, the C&AG’s duties are to
authorise the issue by the Treasury of
public funds from the Consolidated
Fund and the National Loans Fund to
government departments and others: As
Auditor General, the C&AG certifies the

218
 accounts of all government
departments and some other public
bodies, and carries out value-for-money
examinations. See annex 1.2.

Concordat A long-standing agreement between

the Treasury and the Public Accounts
Committee that continuing functions of
government should be defined in
specific statute. See annex 2.3.

Consolidated Fund, CF The Consolidated Fund, operated by HM

Treasury, is central government’s
current account into which most
revenue from taxation, fines and
penalties and certain departmental
income is paid. Payments made out of
this account are in respect of general
government expenditure, which
includes funding for departments’
budgetary Supply Estimates approved
by Parliament and settlement of specific
liabilities that legislation charges directly
on the Consolidated Fund.

Consolidated Fund standing services Payments for services which Parliament

has decided by statute should be met
directly from the Consolidated Fund,
rather than financed annually by voted
money.

Consolidated Fund extra receipts (CFER) Income, or related cash, that passes
through a department’s accounts but
may not be retained by the department
and is surrendered to the Consolidated
Fund.

Contingencies Fund A government fund, controlled by the

Treasury, which, subject to certain
criteria, can provide repayable advances
to finance urgent expenditure in
anticipation of parliamentary approval of
legislation or Estimates, or used to
finance expenditure in advance of
receipts. See annex 2.4.

Contingent liabilities Potential liabilities that are uncertain

but recognise that future expenditure
may arise if certain conditions are met or
certain events happen.

219
Corporate governance The system and principles by which
organisations are directed and
controlled.

Cost of capital The cost to the government of financing

investment, i.e. the rate at which it
borrows. This is included in the
calculation when setting fees and
charges and is calculated as a
percentage of the net asset value.

Data Protection Act Legislation (1998) which governs how

organisations can use personal
information which they hold.

Delegated Authority A standing authorisation by the Treasury

under which a body may commit
resources or incur expenditure from
money voted by Parliament without
specific prior approval from the Treasury.
Delegated authorities may also
authorise commitments to spend
(including the acceptance of contingent
liabilities) and to deal with special
transactions (such as write-offs) without
prior approval.

Depreciation A measure of the wearing out,

consumption or other reduction in the
useful life of a fixed asset whether
arising from use, passage of time or
obsolescence through technological or
market changes.

Derivative A financial instrument derived from

another, usually sold singly or in
packages to promote hedging, e.g.
interest rate and exchange rate options.

Detective controls Controls designed to detect error, fraud,

irregularity or inefficiency.

Devolved administrations The administrations established in

Scotland, Wales and Northern Ireland
under the Scotland Act 1998, the
Government of Wales Act 1998 and the
Northern Ireland Act 1998.

Discretionary services Services that are not required by statute

but are provided, often into
competitive markets.

220
Estimates Manual A practical reference guide issued by the
Treasury which provides detailed
information on the Supply Estimates
policy and process.

Estimates Memorandum An explanation of how provision sought

in the Estimate is intended to be
used and the relationship with other
spending controls. Primarily provided
for the departmental select committee
but made freely available online.

Excess Vote The means by which excess expenditure,

or otherwise unauthorised
expenditure, of cash, capital or
resources, is regularised through an
additional vote by Parliament. See
section 5.4.

Exchequer Central government’s central financing

arrangements, based on the
Consolidated Fund and National Loans
Fund, and managed by the
Treasury and the Bank of England.

Exchequer Pyramid A serious of accounts held at the Bank of

England through which the
overnight sweep and funding flows.

Feasibility The principle that proposals with public

expenditure implications should be
implemented accurately, sustainable
and to the intended timetable.

Finance Act The legislation through which

Parliament agrees the government’s tax
decisions. Normally passed in the
summer after the spring budget.

Framework document A document setting out the

accountabilities and relationships of
ALBs with their sponsor departments –
see annex 7.2

Freedom of Information Legislation designed to promote public

access to a wide range of public
sector data and information (but not
personal data).

Full cost The total cost of all the resources used in

providing a good or service in

221
 any accounting period (usually one
year). This includes all direct and
indirect costs of producing the output
(cash and non-cash costs) including
a full proportional share of overhead
costs and any selling and distribution
costs, insurance, depreciation, and the
cost of capital, including any
appropriate adjustment for expected
cost increases.

Funding Transferring monies to an account, so

that they are available when needed
for payments.

Generally accepted accounting practice The accounting and disclosure

in the UK, UK GAAP requirements of the Companies Act and
pronouncements by the Financial
Reporting Council (principally
accounting standards and Urgent Issues
Task Force abstracts), supplemented by
accumulated professional judgements.

Governance statement An annual statement that accounting

officers are required to make as part
of the accounts on a range of risk and
control issues.

Grant Payments made by departments to

outside bodies to reimburse
expenditure on agreed items or
functions, and often paid only on
statutory conditions.

Grant in aid Regular payments by departments to

outside bodies (usually NDPBs) to
finance their operating expenditure.

Hedging Transaction(s) designed to reduce or

eliminate financial risk, e.g., because of
interest rate or exchange rate
fluctuations.

International Financial Reporting International accounting standards

Standards (IFRS) reflected in UK GAAP. Adapted by
government for the public sector.

Irregular expenditure outside the ambit Expenditure outside the ambit of a vote,
of a vote i.e. resources spent on matters
which were not included in the relevant
ambit in the departmental

222
 Estimate and therefore Parliament has
not authorised. See section 5.4

Joined-up government Arrangements under which

policymaking and service delivery are
unhindered by departmental
boundaries.

Judicial review A procedure by which the courts can

review the legality of decisions and
actions of public authorities, including
the government. Judicial review
looks at the fairness of the decision-
making process rather than the merits
of the decision itself.

Levies Licences to operate public goods, often

set to recover associated costs
such as supervision by a regulator.

Misstatement A statement which is untrue. The maker

of a misstatement can be sued for
damages by those who have relied on
the misstatement, but only if in the
circumstances it was reasonable to rely
on it.

National Accounts Accounts produced by the Office for

National Statistics in accordance with
the European System of Accounts 1995,
which promotes standardisation
in the way in which public sector
income and expenditure is measured.

National Audit Office, NAO A corporate parliamentary body set up

to provide resources, support and
constructive challenge to the C&AG. See
annex 1.2.

National Insurance Fund, NIF A government fund used to meet the

cost of contribution-based benefits,
financed mainly by contributions paid
by employers and individuals.

National Loans Fund, NLF The fund through which passes most of
the government’s borrowing
transactions and some domestic
transactions.

Non-departmental public body (NDPB) A body with a role in the processes of

government, but not a government

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 department or part of one. NDPBs
accordingly operate at arm’s length
from Ministers.

Notional costs of insurance A cost which is taken into account in

setting fees and charges to improve
comparability with private sector service
providers. The charge takes
account of the fact that public bodies do
not generally pay an insurance
premium to a commercial insurer.

Office for National Statistics, ONS The independent body responsible for
collecting and publishing official
statistics about the UK’s society and
economy.

Officer of the Paymaster General, OPG Now incorporated within the

Government Banking Service, it has
statutory
responsibilities to hold accounts and
make payment for government
departments and other public bodies.

Orange book The informal title for Management of

Risks: Principles and Concepts,
guidance published by the Treasury for
public sector bodies.

Overdraft An account with a negative balance

Parliamentary authority Parliament’s formal agreement to

authorise an activity or expenditure

Prerogative powers Powers exercisable under the Royal

Prerogative, i.e. powers which are
unique to the Crown, as contrasted with
common-law powers which may
be available to the Crown on the same
basis as to natural persons.

Primary legislation Acts which have been passed by the

Westminster Parliament and, where
they have appropriate powers, the
Scottish Parliament and the Northern
Ireland Assembly. Begin as Bills until
they have received Royal Assent.

Propriety The principle that patterns of resource

consumption should meet high
standards of public conduct, and robust
governance and respect

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 Parliament’s intentions, conventions and
control procedures, including any
laid down by the PAC. See box 2.4.

Public Accounts Committee See Committee of Public Accounts.

Public Accounts Commission A Select Committee of the House of

Commons set up under the National
Audit Act 1983 to regulate the National
Audit Office.

Public corporation A trading body controlled by central

government, local authority or other
public corporation that has substantial
day to day operating
independence. See section 7.7.

Public Dividend Capital, PDC Finance provided by government to

public sector bodies as an equity stake;
an alternative to loan finance.

Public Private Partnership, PPP A structured arrangement between a

public sector and a private sector
organisation to secure an outcome
delivering good value for money for
the public sector. It is classified to the
public or private sector according to
which has more control.

Rate of return The financial remuneration delivered by

a particular project or enterprise,
expressed as a percentage of the net
assets employed.

Regularity The principle that resource

consumption should be 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. See box
2.4

Restitution A legal concept which allows money and

property to be returned to its
rightful owner. It typically operates
where another person can be said to
have been unjustly enriched by
receiving such monies.

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Return on capital employed, ROCE The ratio of profit to capital employed of
an accounting entity during an
identified period. Various measures of
profit and of capital employed may
be used in calculating the ratio.

Royal charter The document setting out the powers

and constitution of a corporation
established under prerogative power of
the monarch acting on Privy
Council advice.

Second reading The second formal time that a House of

Parliament may debate a bill,
although in practice the first substantive
debate on its content. If
successful, it is deemed to denote
parliamentary approval of the principle
of the proposed legislation.

Secondary legislation Laws, including orders and regulations,

which are made using powers in
primary legislation. Normally used to set
out technical and administrative
provision in greater detail than primary
legislation, they are subject to a
less intense level of scrutiny in
Parliament.

Section An ‘Estimate line’ within the Part II:

Subhead detail table in an Estimate.

Select Committee Both Houses of Parliament have select

committees that scrutinise the work
and expenditure of government. In the
House of Commons, responsibilities
of departmental select committees
include oversight of the policies,
administration and spending of
particular government departments.

Service level agreement Agreement between parties, setting out

in detail the level of service to be
performed. Where agreements are
between central government bodies,
they are not legally a contract but have a
similar function

Spending review A cross-government review of

departmental aims and objectives and
analysis of spending programmes.
Results in the allocation of multi-year

226
 budgetary limits.

Statement of Excesses A formal statement detailing

departments’ overspends and irregular
spending as identified by the
Comptroller and Auditor General as a
result of undertaking annual audits.

Supply Resources voted by Parliament in

response to Estimates, for expenditure
by
government departments.

Supply and Appropriation Acts Acts of Parliament, which give formal

approval to departmental Supply
Estimates. The Main Estimates are
approved by a Supply and
Appropriation (Main Estimates) Act and
the Supplementary Estimates by a
Supply and Appropriation (Anticipation
and Adjustments) Act

Supplementary Estimate The means by which departments seek

to amend parliamentary authority
provided through Main Estimates by
altering the limits on resources,
capital and/or cash or varying the way in
which provision is allocated.
Normally presented in February each
year.

Target rate of return The rate of return required of a project

or enterprise over a given period,
usually at least a year.

Trading fund Public sector organisation that has a

financing framework allowing it to
meet outgoings from commercial
revenues. In national accounts they are
normally classified as public
corporations.

UK Government Investments A company owned by HMT, established

in 2016 through the merger of
the Shareholder Executive and UK
Financial Investments. Its overarching
governance objective is to promote the
organisational performance of the
UK government’s ALBs from the
perspective of government as owner.

227
Value for Money The process under which organisation’s
procurement, projects and processes are
systematically evaluated and assessed
to provide confidence about suitability,
effectiveness, prudence, quality, value
and avoidance of error and other waste,
judged for the Exchequer as a whole.

Virement The use of savings on one or more

sections (Estimate lines) or subheads to
meet excesses on another section or
subhead within the same voted limit
in an Estimate.

Vote The process by which Parliament

approves funds in response to supply
Estimates.

Voted expenditure Provision for expenditure that has been

authorised by Parliament. Parliament
‘votes’ authority for public expenditure
through the Supply Estimates process.
Most expenditure by central
government departments is
authorised in this way.

Windfall Monies received by a department which

were not anticipated in the spending
review.

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HM Treasury contacts
This document can be downloaded from www.gov.uk
If you require this information in an alternative format or have general
enquiries about HM Treasury and its work, contact:
Correspondence Team
HM Treasury
1 Horse Guards Road
London
SW1A 2HQ
Tel: 020 7270 5000
Email: [email protected]
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