Finance Glossary
Finance Glossary
Finance Glossary
Accounts Direction
A written document instructing officials how to prepare accounts.
Accruals Accounting
A method of recording expenditure as it is incurred (i.e. when the activity which
generates the costs arises), and income as it is earned, rather than when cash is paid or
received. This method of accounting is now used in the UK throughout the public and
private sectors (with the exception of very small charities and businesses). In the public
sector context it is also sometimes known as 'Resource' accounting.UK Government
Budgets (the DEL and AME limits) are also set in accruals rather than cash terms, and
although departments still have to forecast cash movements, they are free to seek as high
a cash requirement in their Estimates as is necessary to support the accruals budgets
allocated.
The principal advantage of accruals accounting over cash accounting (where cash
movements are all that is recorded) is that accruals accounting allows better financial
management and scrutiny by:
• matching expenditure in any period to revenues earned and obligations incurred in that
period; and
• matching the cost of assets to the period in which they are used or consumed, by
charging depreciation on them.
Administration budget
Budget limits controlling the resources set aside for the running costs (largely staff and
associated costs) of a government department, and which form part of its Resource
Departmental Expenditure Budget (DEL). Administration budgets are ring-fenced
budgets, set at the time of a Spending Review. The other part of the Resource DEL,
outside of the Administration Budget is referred to as programme expenditure. If the
department's administration budget is breached, the department's accounts will be
qualified by the auditor (see qualified accounts).
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OGL
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Foreword
I. This document updates the version published in 2007. Like the original, it sets out
the main principles for dealing with resources in UK public sector organizations
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.
II. The key themes also remain. They are the fiduciary duties of those handling
public resources to work to high standards of probity; and the need for the public
sector to work in harmony with parliament.
III. While these principles are invariant, the advice in this document cannot stand
forever. The law, business practices, and public expectations all change. So public
sector organizations can and should innovate in carrying out their responsibilities,
using new technology and adopting good business practice. Throughout
parliament always expects the government and its public servants to meet the
ethical standards in this document and to operate transparently.
IV. As before, the main text of the document is intended to be timeless. The Treasury
will revise the annexes from time to time as the need arises. All the text is
available freely on the gov.uk website.
V. 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 rise, commit and spend
resources. It falls to the Treasury to respect and secure the rights of both government and
parliament in this process.
1.1.2 The principles in this handbook complement the guidance on good governance in
the Corporate Governance Code1applying to central government departments. Some of
the detail applies to England only, or just to departments of state. There is separate
guidance for the devolved administrations. Where restrictions apply, they are identified.
1.1.3 Much of this document is about meeting the expectations of parliament. These
disciplines also deliver accountability to the general public, on whose behalf parliament
operates. The methods of delivery used should evolve as technology permits. Public
services should carry on their businesses and account for their
1 The Corporate Governance Code – see https://www.gov.uk/government/publications
/corporate-governance-code-for-central- government-departments
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Stewardship of public resources in ways appropriate to their duties and context and
conducive to efficiency.
1.2 Ministers
1.2.1 In the absence of a written constitution, the powers used to deploy public
resources are a blend of common law, primary and secondary legislation,
parliamentary procedure, the duties of ministers, and other long-standing
practices. This mix may of course change from time to time.
1.2.2 As the Corporate Governance Code makes clear, the minister in charge of
a department is responsible for its policy and business as part of the broad
sweep of government policy determined in Cabinet. They:
determines the policies of the departmental group;
chairs the departmental board;
allocates responsibilities among the ministers in the department;
chooses which areas of business to delegate to officials, and on what conditions;
looks to the department‟s accounting officer (see chapter 3) to delegate within the
department to deliver the minister‟s decisions and to support the minister in
making policy decisions and handling public funds; and
also has general oversight of other bodies on whose behalf they may answer in
parliament, including the department‟s arms length bodies (ALBs).
1.2.3 The Ministerial Code2 requires ministers to heed the advice of their
accounting officers about the proper conduct of public business. See
section 3.4 for how the minister may direct the accounting officer to
proceed with a policy if a point of this kind cannot be resolved.
1.2.4 The minister in charge of a department may delegate defined areas of its
business, or of its parliamentary work, to their junior ministers. Ministers
have wide powers to make policies and to instruct officials.
1.2.5 Only ministers can propose legislation to parliament to raise public
revenue through taxation, or to use public funds to pursue their policy
objectives. Specific primary legislation is normally required to spend
public funds (see section 2.1). Similarly, taxes may be collected, and
public funds may be drawn, only with parliamentary authority; and only
as parliament has authorised.
1.2.6 It is not normally acceptable for a private sector organisation to be
granted powers to raise taxes, nor to distribute their proceeds. Parliament
expects these responsibilities to fall to ministers, using public sector
organisations.
1.2.7 The House of Commons (and not the House of Lords) enjoys the
financial privilege to make decisions on these matters.
2 https://www.gov.uk/government/publications/ministerial-code
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1.3 Parliament
1.3.1 Parliament approves the legislation which empowers ministers to carry
out their policies. It also allows finance for services when it approves
each year‟s Estimates. See the Estimates Manual3 for more.
1.3.2 From time to time parliament may examine government activity. Select
committees examine policies, expenditure, administration and service
delivery in defined areas. The Committee of Public Accounts (PAC - see
section 3.5) examines financial accounts, scrutinizes value for money and
generally holds the government and its public servants to account for the
quality of their past administration.
3 http s//www.gov.uk/government/publications/supply-estimates-guidance-manual
4 See the Consolidated Budgeting Guidance for more https://www.gov.uk/government
/publications/consolidated-budgeting- guidance
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1.5 Departments
1.5.1 Within the standards expected by parliament, and subject to the overall
control and direction of their ministers, departments have considerable
freedom about how they organise, direct and manage the resources at
their disposal. It is for the accounting officer in each department, acting
within ministers‟ instructions, and supported by their boards, to control
and account for the department‟s business.
1.5.2 A departmental board, chaired by the senior minister, leads each
department. Boards can bring to bear skills and experiences from
elsewhere in, and outside of, the public sector (see section 4.1).
1.5.3 Within each department, there should be adequate delegations, controls
and reporting arrangements to provide assurance to the board, the
accounting officer and ultimately ministers about what is being achieved,
to what standards and with what effect. These arrangements should
provide timely and prompt management information to enable plans to be
adjusted as necessary. Similarly ministers should have enough evidence
about the impact of their policies to decide whether to continue, modify
or end them. This is discussed further in chapter 4.
1.5.4 In supporting ministers, civil servants should provide politically impartial
advice. Should they be asked to carry out duties which appear
incompatible with this obligation, the accounting officer should take the
matter up with the minister concerned (see also the Civil Service Code?).
1.5.5 Departments often operate with and through a variety of partners to
deliver their ministers‟ policies. It is important that these relationships
operate in the public interest: see chapter 7.
6 If there is a change of Accounting Officer in the course of the year, the Accounting Officer in place at the
year end takes responsibility for the whole year‟s accounts, using assurances as necessary.
7 http://www.civilservice.gov.uk/about/values
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Of subjects over a period, taking account of the risks to value for money and parliament‟s
interests.
1.6.3 The C&AG has a general right to inspect the books of a wide variety of
public organizations to further these investigations. When the NAO
investigates any public sector organization, it should get full cooperation
in provision of papers and other oversight. It is good practice to draw the
NAO‟s attention to the confidentiality of any sensitive documents
provided in this process. It is then for the independent C&AG to judge
what material can be published in the public interest.
1.6.4. In addition, the C&AG publish other independent reports to parliament.
The PAC (see section 3.5) may hold hearings to examine evidence on any
of these reports and on other related matters.
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Chapter 2
Use of Public Funds
This chapter explains the process for parliamentary authorization 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 authorized. Parliament expects the Treasury to oversee the operation of these
controls. The PAC may investigate specific issues further.
2.1.1 The Treasury runs the control process because parliament expects the Treasury to
control public expenditure as part of fiscal policy. The primary means through which the
Treasury controls public expenditure is multi-year budgets, agreed collectively at
spending reviews. The Consolidated Budgeting Guidance sets out the rules for their use.
(See also chapter 4).
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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:
2.2.1 The Estimate(s) presented to parliament for the department‟s annual expenditure
(consolidating its ALBs) are within the statutory powers and within the government‟s
expenditure plans; and
2.2.3 Use of resources is within the ambit of the vote and consistent with the
Estimate(s)- and must answer to parliament for stewardship of these responsibilities.
2.3.3 In turn departments should agree with each of their arm‟s length bodies (ALBS -
the public sector organizations they sponsor or finance) a similar set of delegations
appropriate to their business2 (see also chapter 7).
2.3.4 There is an important category of expenditure commitments for which the Treasury
cannot delegate responsibility. It is transactions which set precedents are novel,
contentious or could cause repercussions elsewhere in the public sector. Box 2.3 gives
examples. Treasury consent to such transactions should always be obtained before
proceeding, even if the amounts in question lie within the delegated limits.
2 Delegations to ALBs should never be greater than the delegated limits agreed between the Treasury and
the sponsor department.
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Box 2.3: examples of transactions requiring explicit Treasury consent
extra statutory payments similar to but outside statutory schemes
ephemeral ex gratia payment schemes, eg payments to compensate for official errors
special severance payments, eg compromise agreements in excess of contractual
commitments
non-standard payments in kind
unusual financial transactions, eg imposing lasting commitments or using tax avoidance
unusual schemes or policies using novel techniques
2.3.5 It is improper for a public sector organisation to spend or make commitments
outside the agreed delegations. The Treasury may subsequently agree to give
retrospective consent, but only if the expenditure in question would have been agreed if
permission had been sought at the right time.
2.3.6 Sometimes legislation calls for explicit Treasury consent, eg for large or critical
projects. There are also Whitehall wide controls on key progress points for the very
largest projects.3 In such cases it is unlawful to proceed without Treasury consent - and
Treasury consent cannot be given retrospectively.
2.4.2 Each departmental accounting officer should make sure that ministers in their
department appreciate:
the importance of operating with regularity and propriety; and
4 http://www.public-standards.gov.uk/
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the need for efficiency, economy, effectiveness and prudence in the administration of
public resources, to secure value for public money5.
2.4.3 Should a minister seek a course of action which the accounting officer cannot
reconcile with any aspect of these requirements, they should seek instructions in writing
from the minister before proceeding (see chapter 3).
2.4.4 Should departments need to resolve an issue about regularity or propriety, they
should consult the relevant Treasury spending team. Similarly, ALBs should consult their
sponsor departments about such issues, and the department concerned may in turn consult
the Treasury.
2.4.5 Neither improper nor irregular expenditure achieves the standards that parliament
expects. So any such expenditure must be noted in the department's annual report
and accounts. If the discrepancy is material it can result in a qualification to the accounts.
When any expenditure of this kind comes to light, it should be drawn to the attention of
both the NAO and the Treasury. The immediate follow up action is to identify the source
of any systematic problems so that there is no recurrence. The PAC may also call the
accounting officer to explain the matter at a public hearing.
routine matters covered by common law (the main examples are in box 2.5);
a very limited range of Consolidated Fund Standing Services (see section 5.3);
2.5.4 Projects or services which are modest or temporary (see box 2.6). This exception
cannot be used to plug a gap in spending authority before specific legislation for an
ongoing service is passed. The temporary services derogation only applies to initiatives
lasting no more than two years in total, and it is therefore important to note that this does
not provide a two-year grace period for spending on a new, ongoing service before
specific legislation is required.
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Box 2.5: expenditure which may rely on a Supply and Appropriation Act
Box 2.6: modest or temporary expenditure which may rely on a Supply and
Appropriation Act either services or initiatives lasting no more than two years, eg a pilot
study or one off intervention or expenditure of no more than £1.75m a year (amount
adjusted from time to time) provided that there is no specific legislation covering these
matters before parliament and existing statutory restrictions are respected.
These conditions are demanding. Treasury consent is required before they may be relied
on.
Box 2.7: conditions for access to the contingencies fund (see also annex 2.4)
the proposed expenditure must be urgent and in the public interest, ie with wider benefits
to outweigh the convention of awaiting parliamentary authority (political imperative is
not enough)
the relevant bill must have successfully passed second reading in the House of Commons
the legislation must be certain, or virtually certain, to pass into law with no substantive
change in the near future, and usually within the financial year
the department responsible must explain clearly to parliament what is to take place, why,
and by when matters should be placed on a normal footing.
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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.
3.1.1. Each organization in central government - department, agency, trading fund, NHS
body, NDPB or arm‟s length body - must have an accounting officer. This person is
usually its senior official. The accounting officer in an organization should be supported
by a board structured in line with the Corporate Governance Code.
3.1.2. Formally the accounting officer in a public sector organization is the person who
parliament calls to account for stewardship of its resources. The standards the accounting
officer is expected to deliver are summarized in box 3.1. The equivalent senior business
managers of other public sector organizations are expected to deliver equivalent
standards.
of its executive agencies, as agency accounting officers for their agencies; and
of other ALBs (including all NDPBs), as accounting officers for these bodies; and
at their discretion, additional accounting officers for defined part(s) of the
department‟s business.
3.2.4. In the case of appointment of principal accounting officers of departments and
accounting officers of trading funds, the relevant department should send a draft letter of
appointment directly to the Treasury Office of Accounts team via
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TOAEnquiries@hmtreasury.gov.uk for the signature of the Treasury Permanent
Secretary. This should be done at least fourteen calendar days before the accounting
officer is due to take up their role.
3.2.5. In the case of appointment of an accounting officer for an arm‟s length body, the
body should liaise with its sponsoring department to arrange a letter of appointment from
the principal accounting officer. Again, this should be done at least fourteen calendar
days before the accounting officer is due to take up their role. The private office of the
principal accounting officer should then promptly notify the TOA team.
3.2.6. These actions ensure that the register of accounting officers is kept up to date and
that appropriate training can be arranged.
3.2.7. If the timeframes above cannot be met, or in the event of a temporary gap between
the standing down of an accounting officer and the appointment of a new accounting
officer, the department should contact the TOA team to discuss the appropriate
mechanism to ensure accountability arrangements are maintained.
3.2.8. Template letters of appointment can be found on gov.uk. The TOA team is happy
to assist in the preparation of these letters.
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make all its decisions in line with the strategy, aims and objectives of the
organization set by ministers and/or in legislation
take a balanced view of the organization‟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 organizations, as appropriate
Use internal and external audit to improve its internal controls and
performance.
3.3.1. It is important that each accounting officer takes personal responsibility for
ensuring that the organization 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 organization, must personally approve:
voted budget limits; and the associated Estimates Memorandum.
3.3.2. The accounting officer of a corporate arm‟s length body should arrange for a board
member to sign the accounts as well as signing them himself or herself, if (unusually)
they are not a member of the board.
3.3.3. There are several other areas where accounting officers should take personal
responsibility.
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Value for money: ensuring that the organization‟s procurement, projects and
processes are systematically evaluated to provide confidence about suitability,
effectiveness, prudence, quality, and good value judged for the Exchequer as a
whole, not just for the accounting officer‟s organization (eg using the Green
Book1 to evaluate alternatives).
Control: the accounting officer should personally approve and confirm their
agreement to all Cabinet Committee papers and major project or policy initiatives
before they proceed.
Management of opportunity and risk to achieve the right balance commensurate
with the institution‟s business and risk appetite.
Learning from experience, both using internal feedback (eg through managing
projects and programs using techniques such as PRINCE2), and from right across
the public sector.
Accounting accurately for the organization‟s financial position and transactions:
to ensure that it‟s published financial information is transparent and up to date;
and that the organization‟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.
3.4.2. A systematic written accounting officer assessment helps to ensure good decision
making and provides positive assurance that the four standards have been properly
considered.
1 https://www.gov.uk/government/collections/the-green-book-and-accompanying-guidance-and-
documents
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3.4.3. An accounting officer assessment should be produced for projects or programs
which form part of the Government Major Projects Portfolio (GMPP):
alongside the request for the accounting officer‟s approval of the Outline Business
Case (or at the point when it enters the GMPP if this is later)
at subsequent stages of the project if it departs from the four standards or the
agreed plan - including any contingency - in terms of costs, benefits, timescales,
or level of risk, which informed the accounting officer‟s previous approval
if the Senior Responsible Owner (SRO) of the project decides one is merited at
any other stage of the project
3.4.4. In addition, it is good practice to prepare an accounting officer assessment for each
novel and contentious transaction or proposal involving the use of public funds. This may
be particularly useful where it is not possible to produce a fully developed business case,
for example due to lack of time and/or data, or the risk environment is higher than usual.
The Treasury often asks spending departments and organizations 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 organization‟s
senior officer for finance (usually Finance Director, Chief Financial Officer or Director
General for Finance) or alternate senior member of the finance function within the
department before being submitted to the Accounting Officer for final sign off.
3.4.7. Whenever an accounting officer assessment is produced for a GMPP project, a
summary of the key points should also be prepared and published. Accounting officers
may also choose to publish similar information from assessments made in other
circumstances at their discretion.
3.4.8. Further guidance on producing and publishing accounting officer assessments can
be found in Accounting Officer Assessments: guidance.2
2 www.gov.uk/government/publications/accounting-officer-assessments
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Methodology. However, the ultimate judgment in each case lies with the accounting
officer personally.
3.6 Directions
3.6.1. The accounting officer cannot simply accept the minister‟s aims or policy without
examination. Each departmental accounting officer should take care to bring to the
attention of their minister(s) any conflict between the minister‟s instructions and the
standards set out in box 3.2.
3.6.2. Where a departmental accounting officer determines that a proposal does not meet
one or more of these standards, the best next step is to consider whether the policy or
proposed course of action can be modified to make it fit. If not, and the minister decides
it is nevertheless appropriate to continue with the proposal, the accounting officer should
ask their senior minister for a formal written direction to proceed. An oral direction
should be confirmed promptly in writing.
3.6.3. Before finalizing 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 finalized.
3.6.4. As always, the ultimate judgment in each case must lie with the accounting officer
personally. The acid test is whether the accounting officer could justify the proposed
activity if asked to defend it.
3.6.5. There is no set form for requesting a direction, though the accounting officer
should be specific about their nature and the standard or standards that is/are not satisfied.
3.6.6. When a direction is made, the Accounting Officer should:
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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.
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3.7.9. The PAC expects the government to respond promptly and transparently through
both the initial Treasury Minute and subsequent Progress Reports. Accounting officers
should ensure the internal clearance processes within their organization are arranged to fit
with deadlines for responses.
3.7.10. In addition, if a department determines it is necessary to revise the target date for
implementing an agreed recommendation, the accounting officer should write
immediately to the PAC, copied to the Treasury Officer of Accounts, and provide a
detailed explanation for the deferral. Departments should not leave notification of the
delay in implementation until the publication of the next Treasury Minutes Progress
Report.
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
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take account of their special responsibilities and powers. In particular, they must respect
the legislation (or equivalent) establishing the organization and terms of the framework
document agreed with the sponsor department. See chapter 7 for more.
3.10.2. The framework document (or equivalent) agreed between an ALB and its sponsor
always provides for the sponsor department to exercise meaningful oversight of the
ALB‟S strategy and performance, pay arrangements and/or major financial transactions,
eg by monthly returns, standard delegations and exception reporting. The sponsor
department‟s accounts consolidate those of its ALBS so its accounting officer must be
satisfied that the consolidated accounts are accurate and not misleading.
3.10.3. Overall, the accounting officer of a sponsor department should make
arrangements to satisfy himself or herself that that the ALB has systems adequate to meet
the standards in box 3.1. Similarly, the accounting officer of an ALB with a subsidiary
should have meaningful oversight of the subsidiary. It is not acceptable to establish
ALBS, or subsidiaries to ALBs, in order to avoid or weaken parliamentary scrutiny.
3.10.4. Exceptionally, the accounting officer of a sponsor department may need to
intervene if an ALB drifts significantly off track, eg if its budget is threatened, its systems
are badly defective or it falls into disrepute. This may include replacing some or all of the
leaders of the ALB, possibly even its accounting officer.
3.10.5. There are sensitivities about the role of the accounting officer in an ALB which is
governed by an independent fiduciary board, eg a charity or company. The ALB‟s
accounting officer, who will normally be a member of the board, must take care that their
personal legal responsibilities do not conflict with their duties as a board member. In
particular, the accounting officer should vote against any proposal which appears to cause
such a conflict; it is not sufficient to abstain.
3.10.6. Moreover, if the chair or board of such an ALB is contemplating a course of
action that is inconsistent with the standards in box 3.1, then the accounting officer
should follow the procedure set out in the organization‟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 organization‟s board, which is often appointed under statute.
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Here, in assessing value for money and feasibility, the accounting officer must assess the
relative merits and costs of alternatives (including doing nothing).
3.11.3. Sometimes, it is possible to do no more than identify the scale of the problem to
be tackled and then examine why the proposed action should both be effective and have
tolerable cost. Wherever proposals or projects are taken forward, accounting officer
should identify and assess risks, and design and operate the most effective risk treatment
activities (including controls) possible in the time available.
3.11.4. The Treasury stands ready to help accounting officers think such issues through.
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Chapter 4
Governance and Management
Public sector organizations should have good quality internal governance and sound
financial management. Appropriate delegation of responsibilities and effective
mechanisms for internal reporting should ensure that performance can be kept on track.
Good practice should be followed in procuring and managing resources and assets; hiring
and managing staff; and deterring waste, fraud and other malpractice. Central
government departments have some specific responsibilities for reporting, including to
parliament.
4.1.3 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 organizations it is usual, or found valuable, for the board
to include members with designated responsibility or expertise, eg for regional affairs or
for specialist professional skills.
4.1.4 In order to carry out its responsibilities each board needs to decide, and document,
how it will operate. Box 4.2 outlines the key decisions. It is not
3 https://www.gov.uk/government/publications/corporate-governance-code-for-central-
government-departments for both the code and the good practice guidance
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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.
4 http://www.civilservice.gov.uk/about/values
5http://www.ombudsman.org.uk/improving-public-service/ombudsmansprinciples
25
The established mechanisms for controlling and reporting public expenditure,
including Treasury support or approval where necessary, should be respected.
4.2.4 In particular, departments should consult the Treasury (and ALBs their sponsor
departments) at an early stage about proposals to undertake unusual transactions or
financing techniques. This applies especially to any transactions which may have wider
implications elsewhere in the public sector (see paragraph 2.3.4 and box 2.3).
4.2.5 Working with the accounting officer, the finance director of each public sector
organization has special responsibility for seeing that the standards described in this
chapter are respected. Annex 4.1.sets this out in more detail.
appropriate internal delegations, with a single senior responsible officer (SRO) for
each significant project or initiative, and a single senior person leading each end to
end process
prompt, regular and meaningful management information on costs (including unit
costs), efficiency, quality and performance against targets to track progress and value
for money
proportionate administration and enforcement mechanisms, without unnecessary
complexity
use of feedback from internal and external audit and elsewhere to improve
performance regular risk monitoring, to track performance and experience and make
adjustments in response
Afterwards
26
This can mean that different organizations take different approaches to the same
opportunities or risks.
4.3.2 There should be a regular discipline of reappraising the opportunities and risks
facing the organization since both alter with time and circumstances, as indeed may the
chosen responses. This process should avoid excessive caution, since it can be as
damaging as unsuitable risk taking. The assessment should normally include:
maintaining a risk register, covering identified risks and contingent risks from
horizon scanning;
reputational risks, since poor performance could undermine the credibility, and
ultimately the creditworthiness, of the Exchequer as a whole;
consideration of the dangers of maintaining the status quo;
plans for disaster recovery;
appraisal of end to end risks in critical processes and other significant activities.
4.3.3 In making decisions about how to manage and control opportunity and risk, audit
evidence and other assurance processes can usefully inform choice. Audit, including
internal audit, can provide specific, objective and well-informed assurance and insight to
help an organization evaluate its effectiveness in achieving its objectives. It is good
practice for the audit committee to advise the governing board of a public sector
organization on its key decisions on governance and managing opportunities and risks. It
is also a good discipline for this process to include evaluating progress in implementing
PAC recommendations, where they have been accepted.
4.3.4 In turn the board should support the accounting officer in drawing up the
governance statement, which forms part of each organization‟s annual accounts. See
annex 3.1. Further guidance about managing risks is in annex 4.3 and the Orange Book.
4.4 Insurance
4.4.1 In the private sector risk is often managed by taking out insurance. In central
government it is generally not good value for money to do so. This is because the public
sector has a wide and diverse asset portfolio; a reliable income through its ability to raise
revenue through taxation; and access to borrowed funds more cheaply than any in the
private sector. In addition commercial providers of insurance also have to meet their own
costs and profit margins. Hence the public purse is uniquely able to finance restitution of
damaged assets or deal with other risks, even very large ones. If the government insured
risk, public services would cost more.
4.4.2 However, there are some limited circumstances in which it is appropriate for public
sector organizations to insure. They include legal obligations, and occasions
6 Eg ALBs should insure vehicles where the Road Traffic Act requires it
27
where commercial insurance would provide value for money. Further information about
insurance generally is in annex 4.4.
Selection of projects after appraisal of the alternatives (see the Green Book),
including the central clearance processes for larger commitments.
Open competition to select suppliers from a diverse range, preferably specifying
outcomes rather than specific products, to achieve value for money (see annexes
4.6 and 4.7).
Where feasible, procurement through multi-purchaser arrangements, shared
services and/or standard contracts to drive down prices.
Effective internal controls to authorize acquisition of goods or services (including
vetting new suppliers), within any legal constraints.
Separation of authorization and payment, with appropriate controls, including
validation and recording, at each step to provide a clear audit trail.
Checks that the goods or services acquired have been supplied in accordance with
the relevant contract(s) or agreement(s) before paying for them.
Payment terms chosen or negotiated to provide good value.
Accurate payment of invoices: once and on time, avoiding lateness penalties (see
annex 4.8).
A balance of preventive and detective controls to tackle and deter fraud, corruption
and other malpractice (see annex 4.9).
Integrated systems to generate automatic audit trails which can be used to generate
accounts and which both internal and external auditors can readily check.
Periodic reviews to benefit from experience, improve value for money or to
implement developments in good practice.
7 Eg where private sector contractors take out single-site insurance policies because they are
cheaper than each individual party insuring themselves separately.
8 See annex 4.5.
28
4.6 Receipts
4.6.1 Public sector organizations should have arrangements for identifying, collecting and
recording all amounts due to them promptly and in full. Outstanding amounts should be
followed up diligently. Key features of internal systems of control are suggested in box
4.5.
4.6.2 Public sector organizations should take care to track and enforce debts promptly.
The presumption should be in favor of recovery unless it is uneconomic to do so.
29
extra-statutory payments to claimants (where a similar statutory scheme exists);
ex gratia payments to customers (where no established scheme exists);
or
Severance payments to employees leaving before retirement or before the end of
their contract and involving payments above what the relevant pension scheme
allows.
4.7.5 Again it is important that these payments are made in the public interest, objectively
and without favoritism. 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.
A court ruling could mean that a public sector organization owed each of a large
number of people a very small sum of money. The cost of setting up and operating
an accurate payment scheme might exceed the total amount due. The organization
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
organization an amount too big for it to meet in a single year while staying solvent.
The customer might instead agree more favorable payment terms, with appropriate
safeguards, if this arrangement provides better value for money.
4.9 Staff
4.9.1 Each public sector organization should have sufficient staff with the skills and
expertise to manage its business efficiently and effectively. The span of skills required
should match the organization‟s objectives, responsibilities and resources, balancing
professional, practical or operational skills and policy makers, and recognizing the value
of each discipline. Succession and disaster planning should ensure that the organization
can cope robustly with changes in the resources available, including unforeseen
disruption.
4.9.2 Public sector organizations should seek to be fair, honest and considerate
employers. Some desirable characteristics are suggested in box 4.7.
30
Box 4.7: public sector organizations as good employers
selection designed to value and make good use of talent and potential of all
kinds
fairness, integrity, honesty, impartiality and objectivity
professionalism in the relevant disciplines, always including finance
arrangements to make sure that staff are loaded cost effectively
management techniques balancing incentives to improve and disciplines for
poor performance
diversity valued and personal privacy respected
mechanisms to support efficient working practices, both normally and under
pressure
Arrangements for whistleblowers to identify problems privately without
repercussions.
4.9.3 Similarly public sector employers have a right to expect good standards of conduct
from their employees. The qualities and standards expected of civil servants are set out in
the Civil Service Code. Other public sector employees should strive for similar standards,
appropriate to their context.
4.10 Assets
4.10.1 All public sector organizations own or use a range of assets. Each organization
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 organizations 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.
31
supplying a missing license) 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
organization‟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 organizations 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 organization such as an ombudsman.
4.12.2 Often such review processes are statutory. The activities of central government
departments and the NHS are open to review by the PHSO9, whose Principles of Good
Complaints Handling10 sets out generic advice on complaints handling and
administration of redress (see also annex 4.14). After investigation of cases of specific
complaint, the PHSO can rule on whether injustice or hardship can be attributed to
maladministration or service failure, and may recommend remedies, either for individual
cases or for groups of similar cases. If departments decline to follow the PHSO‟s advice,
they should lay a memorandum in parliament explaining why.
4.13 Transparency
4.13.1 All public sector organizations should operate as openly as is compatible with the
requirements of their business. In line with the statutory public rights11, they should
make available timely information about their services, standards and performance. This
material should strike a careful balance between protecting confidentiality and open
disclosure in the public interest.
4.13.2 All public sector organizations should adopt a publication scheme routinely
offering information about the organization‟s activities. They should also publish regular
information about their plans, performance and use of public resources.
4.13.3 The published information should be in sufficient detail, and be sufficiently
regular, to enable users and other stakeholders to hold the organization and its ministers
to account. Benchmarks can help local users to evaluate local performance more easily.
4.13.4 The primary document of record for central government departments is the report
and accounts, which should consolidate information about the relevant ALBs. It should
include a governance statement (see annex 3.1).
9 http://www.ombudsman.org.uk/
10 http://www.ombudsman.org.uk/improving-public-service/ombudsmansprinciples
11 Eg Freedom of information act 2000, Data protection act 1998, Environment information
regulations 2004 and the Re-use of public sector information regulations 2005.
32
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 organization‟s 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.
33
Box 4.8: factors to consider when planning policies or projects
design
Has the proposal been evaluated against alternative options, including doing nothing?
Should there be pilot testing before full roll out?
Are the controls agreed and documented clearly? Have the risks and opportunities been
considered systematically? Is the change process resilient to shocks? What contingencies
might arise?
Is the intended intervention proportionate to the identified need?
What standards should be achieved? How will performance be tracked and assessed? Could
the proposal be simplified without loss of function?
If partner(s) are involved, is the allocation of responsibilities appropriate?
Will the proposal be efficient, effective and offer good value for money?
Is the policy sustainable in the broadest sense? Should it have a sunset clause?
Does the planned activity meet high standards of probity, integrity and honesty?
Will the proposal deliver the desired outcome to time and cost?
Does the accounting officer assess the initiative as compatible with the public sector
standards?
control
What prior agreement is required, if any?
How will internal governance and delegation work? Will it be effective? Is it transparent?
Should there be an SRO?
Is there adequate legislation? If not, what is needed to make the action lawful?
How will the proposal be financed? Is there budget and Estimate cover? Is it appropriate to
charge to help finance the service? Are charges set within the law?
Is the proposed action within the department‟s delegated authorities?
What financial techniques will be used to manage rollout, implementation and operation?
Are project and programme management techniques likely to be useful?
How will the intended new arrangements be monitored and efficiency measured?
How will feedback be used to improve outcomes?
Does the design inhibit misuse and counter fraud? What safeguards are needed?
Has the risk of fraud been assessed to help inform policy or project design?
How will the associated risks be tracked and the responses adjusted?
What intervention will be possible if things go off track?
Would it be possible to recover from a disaster promptly?
accountability
How should parliament be told of the proposal and kept informed of progress?
What targets will be used? Are they sufficiently stretching?
Is public access called for? How?
Is the policy or service fair and impartial?
Will its administration be open, transparent and accessible?
Should there be customer standards? How are complaints used to improve performance?
Should there be arrangements for redress after poor delivery?
Is enforcement required? If so, is it proportionate?
Is an appeal mechanism needed?
Is regulation called for?
learning lessons
What audit arrangements (internal and external) are intended?
What information about the activity will be published? How and how often?
When and how will the policy or project be evaluated to assess its cost and benefits and to
determine whether it should continue, be adjusted, replaced or ceased?
34
Chapter 5
Funding
This chapter explores the means by which central government organizations may obtain
funds in order to finance public expenditure. The Treasury operates disciplines to respect
parliaments concern to prevent unauthorized expenditure.
5.1.1 Most public expenditure is financed from centrally agreed multi-year budgets
administered by the Treasury, which oversees department‟s use of their budget
allocations. In the main, departments have considerable discretion about how they
distribute these budget allocations, which are expressed net of relevant income. The main
source of receipts to be netted off is fees and charges (see chapter 6).
5.1.2 The Treasury oversees and directs the rules that departments should respect in
managing their budgets. Departments are expected to live within their allocations for
each financial year, with some limited exceptions, eg for certain demand led services.
The budgeting framework is explained in the Consolidated Budgeting Guidance, which is
refreshed each year.
5.2 Grants
5.2.1 Each central government department decides how much of its budget provision it
should cascade to its ALBs in each year of the multi-year agreement. Departments may
pay those grants (for specific purposes) and grants-in-aid (unspecific support) to finance
their spending; though it is the net spending of the ALB those 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 claw back of specific grants should the purposes for
which they are agreed not materialize (annex 5.2).
5.3 Estimates
5.3.1 The multiyear departmental budgets agreed collectively among ministers do not of
themselves confer authority to spend or commit resources. Parliamentary agreement,
usually through the Supply Estimate process, is also essential (see box 2.1).
5.3.2 Departmental Estimates are put to parliament covering one financial year at a time,
in the spring. Each covers the net expenditure of a department and its ALBs (ie all
spending in budgets and any voted spend outside of budgets). For the year ahead, the
provision sought should be taught and realistic, without padding. The Supply and
Estimates Guidance Manual has more detail.
35
5.3.3 Before the summer recess, the provision sought in the Estimate is formally
authorized in a Supply and Appropriation Act, which sets net expenditure limits for the
year. The Act is then the legal authority for public expenditure within the ambit of the
Estimate. The ambit itemizes a specific range of permitted activities and income streams
for the year.
5.3.4 Within a financial year, there is some scope for transferring (through virement)
provision from one section or subhead to another within any of the control limits in the
same Estimate. There is scope for adjusting Estimate provision through a Supplementary
Estimate late in the year if circumstances change. A Supplementary Estimate should
show all movements between sections, even if they would otherwise have been dealt with
through virement.
5.3.5 Departmental Select Committees may examine departmental witnesses on the plans
contained in Estimates. Usually such hearings take place after Estimates are laid in
parliament but before they are voted into law.
5.3.6 If there is under spending 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 authorize 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 this entire 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.
36
spending above the amount provided in an Estimate; and
Irregular expenditure outside the ambit, eg on an unauthorized service.
5.4.4 Parliament usually regards the latter as particularly unsatisfactory because it means
that the department concerned has flouted parliament‟s intentions12 and may have
defective systems of control. The auditor may identify such excesses as spending not
covered by statutory powers, even if the total amount spent does not exceed the voted
limit.
5.4.5 Expenditure in excess of provision on an activity agreed by parliament is also to be
avoided since the authority of a Supply and Appropriation Act is just as essential as
specific statutory authority (box 2.1). It is possible, with Treasury agreement, to raise the
amount in an Estimate during the course of the year in a Supplementary. But otherwise
accounting officers should reduce, reprioritize or postpone use of resources to keep
within the provision parliament has agreed for the year.
5.5 Commitments
5.5.1 Parliament is not bound 13 to honor minister‟s commitments unless and until there
are statutory powers to meet them and it authorizes public funds to finance them (through
an Estimate) in a given year. This discipline is especially important when ministers plan a
new service.
5.5.2 Because commitments can evolve into spending, they should always be scrutinized
and appraised as stringently as proposals for consumption (box 4.8 may help). Some
departments may agree with the Treasury blanket authority for defined and limited ranges
of non-statutory commitments, eg indemnities for board members and commitments
taken on the normal course of business. All other non-statutory commitments are novel,
contentious or repercussive, so Treasury approval is always essential before they are
undertaken.
5.5.3 Public sector organizations should give parliament prompt and timely notice of any
significant new commitments, whether using existing statutory powers or to be honored
through future legislation. Non statutory contingent liabilities (above a specified
threshold) should always be notified in this way. The process is set out in annex 5.4.
37
Box 5.1: contingent liabilities: notifying parliament
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 generalize about every possible set of
circumstances but some guidance is in box 5.1.
5.6 Tax
5.6.1 Public sector organizations should not engage in, or connive at, tax evasion, tax
avoidance or tax planning. If a public sector organization 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
should normally be rejected. It should be standard practice to consult HMRC14 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.
38
Patterns; but persistent underperformance against the agreed rate of return should not be
tolerated.
5.7.3 A department needs specific statutory power to issue PDC, together with supply
cover to pay it out of the Consolidated Fund. Sometimes instead of a specific issue of
PDC, the legislation establishing (or financially reconstructing) a public sector business
deems an issue of PDC to the new business. Dividends on PDC, and any repayments of
PDC, are paid to the sponsor department of the business.
5.7.4 Further information about the use of PDC can be found in Consolidated Budgeting
guidance.15
15 https://www.gov.uk/government/publications/consolidated-budgeting-guidance-2021-to-2022
39
5.9 External borrowing
5.9.1 Public sector organizations may borrow from private sector sources only if the
transaction delivers better value for money for the Exchequer as a whole. Because non-
government lenders face higher costs, in practice it is usually difficult to satisfy this
condition unless efficiency gains arise in the delivery of a project (eg PFI). Treasury
agreement to any such borrowing, including by ALBS, is also essential. Nevertheless it
can sometimes be expedient for public sector bodies to borrow short term, for example by
overdraft.
5.9.2 When a sponsor department‟s ALB borrows, the department should normally
arrange to guarantee the loan to secure a fine rate. This is not always possible, eg when a
guarantee would rank as a state aid (see annex 4.7). A department which guarantees a
loan normally16 needs a specific statutory power as well as Estimate provision. On
exceptional occasions temporary non-statutory loans may be possible.
5.9.3 The case for a guarantee should be scrutinized as thoroughly as if indeed a loan
were made. Since guarantees always entail entering into contingent liabilities, parliament
must be notified when a loan guarantee is given, using the reporting procedures in annex
5.4.
5.9.4 Occasionally there is a case for an ALB to borrow in foreign currency in its own
name rather than the government‟s. Because this can affect the credit standing of the
government as a sovereign borrower, and may well cost more, it is essential to consult the
Treasury beforehand. The same principles apply to the borrowing of any bodies, such as
subsidiaries, for which a department‟s ALBS are responsible.
16 The Concordat applies here in just the same way as to spending - see annex 2.3
40
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
minimizing 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 organizations to minimize 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 organization should establish a policy for its use of
banking services. See annex 5.6 for guidance. Sponsor departments should also make
sure that their ALBS are aware of the importance of managing this aspect of their
business efficiently and effectively (see box 7.2).
41
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 subsidies. It requires honesty
about the policy objectives and rigorous transparency in the public interest.
6.2.3 As elsewhere, organizations 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 organization supplies another with goods or services; and to certain statutory local
authority charges set by ministers.
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 skeptical because s102 substitutes secondary for primary
legislation.
42
6.3.4 When deciding the level of a charge, it is important to define:.
Box 6.2: how different charges can apply to different categories of service Different
categories could be recognized by:
6.3.6 However, different groups of customers should not be charged different amounts
for a service costing the same, eg charging firms more than individuals. Similarly, cross
subsidies are not standard practice, eg charging large businesses more than small ones
where the cost of supply is the same.
6.3.7 Charges within and among central government organizations should normally also
be at full cost, including the standard cost of capital. Any different approach would cause
one party to make a profit or loss not planned in budgets agreed by ministers collectively;
while the customer organization(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 organization
might be charged distorted fees.
6.3.8 Shared services (box 6.3) are a special case of charging within the public sector.
43
6.4 Setting a charge: non-standard approaches
6.4.1 Minister‟s policy objectives for a service where a charge is levied may not fit the
standard model in section 6.3. In such cases it may be possible to deliver the policy
objective in another way. Some ways of doing this are described below. Explicit Treasury
consent, and often formal legal authority, is always required for such variations. It is
desirable to consult the Treasury at an early stage to make sure that the intended strategy
can be delivered.
Cross subsidies
6.4.5 Cross subsidies always involve a mixture of overcharging and undercharging, even
if the net effect is to recover full costs for the service as a whole. So cross subsidized
charges are normally classified as taxes. They always call for explicit ministerial decision
and parliamentary approval through either primary legislation or a s102 order.
Information services
6.4.6 In the public interest, information may be provided free or at low charge. This
approach recognizes the value of helping the general public obtain the data they require
to function in the modern world. There are some exceptions - see annex 6.2.
6.5 Levies
6.5.1 Compulsory levies, eg payments for licenses awarded by statutory regulators, or
duties to finance industry specific research foundations, are normally classified as
taxation. Such levies may be justified in the wider public interest, not because they
provide a direct beneficial service to those who pay them. Depending on the
circumstances, the Treasury may allow regulators to retain the fees charged if this
approach is efficient and in the public interest.
6.5.2 As with other fees and charges, levies should be designed to recover full costs. If
the legislation permits, the charge can cover the costs of the statutory body, eg a
44
regulator could recover the cost of registration to provide a license 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 licensees (see box 6.2).
for sales into commercial markets, in line with competitor‟s assessment of their
business risk, rising to higher rates for more risky activities; or
Where a public sector body supplies another, or operates in a market without
competitors, the standard rate for the cost of capital (see annex 6.1).
6.6.3 If a publicly provided commercial service does not deliver its target rate of return,
outstanding deficits should be recovered, eg by adjusting charges. Any objective short of
achieving the target rate of return calls for ministerial agreement, and should be cleared
with the Treasury. But discretionary services should never undermine the supplier
organization‟s public duties, including its financial objective(s).
6.6.4 It is important for public suppliers of commercial services to respect competition
law. Otherwise public services using resources acquired with public funds might disturb
or distort the fair operation of the market, especially where the public sector provider
might be in a dominant position: see annex 6.3.
6.7 Disclosure
6.7.1 It is important that parliament is fully informed about use of charges. Each year the
annual report of the charging organization should give:
45
6.7.3 The FREM sets out the information public sector organizations should publish in
their accounts. It should include analysis of income.
Is it still right for a public sector body to use public resources to supply the
service?
Are there any related services for which there might be a case for charging?
Does the business structure still make sense? Are the assets used for the service
adequate?
How can efficiency and effectiveness be improved so that charges can be lower or
offer better value?
Is the financial objective right?
For a statutory (or other public sector) service, if full costs are not recovered, why
not?
For a commercial service, does the target rate of return still reflect market rates?
Is it still appropriate to net off against costs any agreed charges above cost?
Is there scope to secure economies of scale by developing a shared service?
What developments might change the business climate?
Do any discretionary services remain a good fit for the business model and wider
objectives?
Should any underused assets be redeployed, used to make a commercial return, or
sold?
Would another business model (eg licensing, contracting out, privatizing) be
better?
46
Chapter 7
Working with others
It often makes sense for public sector organizations to work with partners to deliver
public services. This chapter outlines how sponsor departments should keep track of their
ALBs, and where necessary control their activities. It is important that the public interest
and the need to keep parliament informed are given priority in setting up and operating
these relationships.
The decision to engage with a partner should rest on evaluation of a business case
assessed against a number of alternatives, including doing nothing.
Conflicts of interest should be identified so that handling strategies can be agreed,
eg by establishing early warning processes or safeguards.
Other.
The cultural fit of the partners should be close enough to give each confidence to
trust the
Accountability for use of public funds should not be weakened.
The terms of engagement, including governance, should be documented in a framework
agreement or equivalent (see box 7.2).
47
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
organization, 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 skeptical
about setting up a new ALB, since it will often add to costs.
7.2.3 ALBS cannot be given authority to make decisions proper to ministers, nor to
perform functions proper to sponsor departments. Only rarely is a non-ministerial
department the right choice as NMDs have limited accountability to parliament2. Nor is it
acceptable to use a royal charter to establish a public sector body since such arrangements
denies parliament control and accountability.
7.2.4 A sponsor department cannot relinquish all responsibility for the business of its
ALBS by delegation. It should have oversight arrangements appropriate to the
importance, quality and range of the ALB‟s business. Normally new, large, experimental
or innovative ALBS need more attention from the sponsor than established or small
ALBs doing familiar or low risk business. And the sponsor department always needs
sufficient reserve powers to reconstitute the management of each ALB should events
require it (see section 3.8). .
7.2.5 The sponsor department should plan carefully to make sure that its oversight
arrangements and the internal governance of any new ALB are designed to work together
harmoniously without unnecessary intrusion. The ALB also needs effective internal
controls and budgetary discipline so that it can live within its budget allocation and
deliver its objectives. And the sponsor department must have sufficient assurance to be
able to consolidate its ALB‟s; accounts with its own.
7.2.6 There is a good deal of flexibility about form and structure. It may be expedient, for
example, to set up an organization 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 customization.
7.2.7 If the PAC decides to investigate an ALB, the accounting officers of both the ALB
and its sponsor department should expect to be called as witnesses. The PAC will seek to
be satisfied that the sponsor‟s oversight is adequate.
2 The sponsor department also has less control as each NMD has its own budget, Estimate and
annual accounts. So if a ministerial department transfers work to an NMD, there is a greater risk
of excess votes in each.
48
Box 7.2: framework terms for partnership agreements
purpose
How strategic decisions about the future of the partnership will be made, with timetable,
terms for intervention, break points, dispute resolution procedures, termination process.
How the chain of responsibility should work, eg stewardship reporting, keeping track of
efficiency, risk assessment, project appraisal, management of interdependencies. How
the partnership will identify, manage and track opportunities and risks.
The status of the staff; and how they are to be hired, managed and remunerated. How
any professional input (eg medical, scientific) is to be managed and quality assured.
Arrangements for taking stock of performance and learning lessons from it.
Arrangements for intervention when necessary.
financial management
49
7.3.2 In framing founding documentation, the partners should adopt a proportionate
approach. Parliament expects that public funds will be used in a way that gives
reasonable assurance that public resources will be used to deliver the intended objectives.
7.3.3 In this process the aim should be to put the accounting officers of the parties in a
position to take a well-informed view on the current status of the relationship, enabling
timely adjustments to be made as necessary. It is good practice to develop structured
arrangements for regular dialogue between the parties to avoid misunderstandings and
surprises.
7.3.4 Further advice about framework documents is in annex 7.2. It is important that such
documents fit the business to which they relate (rather than following precedent or
copying a standard model).
7.4 Agencies
7.4.1 Each agency is either part of a central government department or a department in its
own right. Agencies are intended to bring professionalism and customer focus to the
management and delivery of central government services, operating with a degree of
independence from the center of their home departments. Some are also trading funds
(see section 7.8).
7.4.2 Each agency is established with a framework document on the lines sketched out in
box 7.2. With the exception of those agencies which are trading funds (see section 7.8),
they are normally funded through public expenditure supplied by Estimates. Departments
should consult the Treasury and Cabinet Office about the preparation of their framework
documents.
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Box 7.3: examples of joined up activities in central government
one partner can act as lead provider selling services (such as IT, HR, finance
functions) to other(s) as customers, operating under service level agreement(s)
cost sharing arrangements for common services (eg in a single building), allocated in
line with an indicator such as numbers of staff employed or areas of office space
occupied
joint procurement using a collaborative protocol
a joint venture project with its own governance, eg an agency or wholly owned
company, selling services to a number of organizations, some or all of which may be
public sector
an outsourced service, delivering to several public sector customers
7.5.3 Shared services often need funding to set up infrastructure, eg to procure IT. This
could be agreed in a spending review, or customers could buy in to the partnership by
transferring budget provision to the lead provider. Each of the accounting officers
involved should be satisfied that the project offers value for money for the Exchequer as
a whole. The provider‟s charges should be at cost, following the standard fees and
charges rules (see chapter 6).
7.5.4 In any joint activity, there must be a single accounting officer so that the lines of
responsibility are clear. If the PAC decides to investigate, the accounting officers of each
of the participants should expect to be summoned as witnesses.
7.6 Non-departmental public bodies
7.6.1 Non-departmental public bodies (NDPBs) may take a number of legal forms,
including corporates and charities. Most executive NDPBS have a bespoke structure set
out in legislation or its equivalent (eg a Royal Charter3). This may specify in some detail
what task(s) the NDPB is to perform, what its powers are, and how it should be financed.
Sometimes primary legislation contains powers for secondary legislation to set or vary
the detail of the NDPB‟s structure. Annex 7.1 has links to more about NDPBs.
7.6.2 Each NDPB is a special purpose body charged with responsibility for part of the
process of government. Each has a sponsor department with general oversight of its
activity. The sponsor department‟s report and accounts consolidates its NDPBS‟s
financial performance.
7.6.3 NDPBS show considerable variety of structures and working methods, with scope
for innovation and customization. Some NDPBS may also need to work with other
organizations as well as with their sponsor. All this should be documented in the
framework document (see annex 7.2).
7.6.4 NDPB‟s sources of finance vary according to their constitution and function. Box
7.4 shows the main options available.
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Box 7.4: sources of finance for NDPBS
7.6.5 In practice NDPBS always operate with some independence and are not under day-
to-day ministerial control. Nevertheless, ministers are ultimately accountable to
parliament for NDPB‟s efficiency and effectiveness. This is because ministers: are
responsible for NDPB‟s founding legislation; have influence over NDPB‟s strategic
direction; (usually) appoint their boards; and retain the ultimate sanction of winding up
unsatisfactory NDPBs.
52
Box 7.5: outline terms for a relationship with a public corporation
the shareholder‟s strategic vision for the business, including the rationale for public
ownership and the public sector remit of the business
the capital structure of the business and the agreed dividend regime, with suitable
incentives for business performance
the business objectives the enterprise is expected to meet, balancing policy, customer,
shareholder and any regulatory interests
the department‟s rights and duties as shareholder, including:
- governance of the business
- procedure for appointments (and disappointments)
- financial and performance monitoring
- any necessary approvals processes
- the circumstances of, and rights upon, intervention
details of any other relationships with any other parts of government
53
Box 7.6: sources of capital for trading funds
public dividend capital (equivalent to equity, bearing dividends - see annex 7.4)
reserves built up from trading surpluses
long or short term borrowing (either voted from a sponsor department or borrowed
from the National Loans Fund if the trading fund is a department in its own right)
temporary subsidy from a sponsor department, voted in Estimates
finance leases
54
7.11 Innovative structures
7.11.1 Sometimes central government departments have objectives which more easily fit
into bespoke structures suited to the business in hand, or to longer range plans for the
future of the business. Such structures might, for example, include various types of
mutual or partnership.
7.11.2 Proposals of this kind are by definition novel and thus require explicit Treasury
consent. In each case, proposals are judged on their merits against the standard public
sector principles after examining the alternatives, taking account of any relevant
experience. The Treasury will always need to understand why one of the existing
structures will not serve: eg the NDPB format has considerable elasticity in practice.
Boxes 4.8 and 7.2 may help with this analysis.
7.12 Outsourcing
7.12.1 Public sector organizations often find it satisfactory and cost effective to outsource
some services or functions rather than provide them internally. Candidates have included
cleaning, security, catering and IT support. A wider range of services is potentially
suitable for this treatment. Innovative approaches should be explored constructively.
7.12.2 The first step in setting up any outsourcing agreement should be to specify the
service(s) to be provided and the length of contract to be sought. At that stage it is usually
desirable to draw up an outline business case to help evaluate whether outsourcing makes
financial and operational sense. Any decision to outsource should then be made to
achieve value for money for the Exchequer as a whole.
7.12.3 It is good practice to arrange some form of competition for all outsourcing, as for
other kinds of procurement. If services are likely to be required at short notice - for
example legal services for advice on opportunities, threats or other business pressures
which emerge with little warning - it is good practice to arrange a competition to
establish a standing panel of providers whose members can be called upon to deal with
rapidly emerging needs.
7.12.4 contracting out does not dissolve responsibility. Public sector organizations 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.
55
as possible, of the risk of difficult future financial environments. It is not good practice to
embark on a private finance arrangement if it is dependent on other separate financial
transactions taking place during the project‟s lifetime
7.13.3 Procurement using private finance is a flexible, versatile and often effective
technique, so it should be considered carefully as a procurement option. Contracts should
normally be built up using standard terms and guidance published by the Treasury (see
Annex 7.4). Departure from standard guidance needs to be approved by the Treasury.
7.14.4 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 organization‟s
main objectives and activities. Similarly, it is not acceptable to acquire assets just for the
purpose of engaging in, or extending, commercial activity. If a public sector supplier‟s
commercial activity demands further investment to keep it viable, reappraisal is usually
appropriate. This should consider alternatives such as selling the business, licensing it,
bringing in private sector capital, or seeking other way(s) of exploiting the underused
potential in the assets or business.
7.14.5 It is a matter of judgment 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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7.15 Working with civil society bodies
7.15.1 Central government organizations may find they can deliver their objectives
effectively through relationships with civil society bodies: ie charities, social, voluntary
or community institutions, mutual organization, social enterprises or other not-for-profit
organizations. Such partnerships can achieve more than either the public or the civil
society sector can deliver alone. For example, using a civil society sector organization
can provide better insight into demand for, and suitable means of delivery of public
services.
7.15.2 It is good practice to plan relationships with civil society partners through a
framework document, as with other partnerships. Some guidelines on how these
relationships can work well in harmony with policy and spending decisions are in the
Civil Society Compact4.
7.15.3 In this kind of relationship a public sector organization may fund activities, make
grants, lend assets, or arrange other transfers to a civil society sector body performing or
facilitating delivery of services. It is desirable to build in safeguards to ensure that
resources are used as intended (see annex 5.2). This gives parliament confidence that
voted resources are used for the purposes it has approved.
7.15.4 The safeguards to be applied should be agreed at the start of the relationship
customization in nearly always essential. It is often right to require claw back, ie 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
The Comptroller and Auditor
General
Supported by staff of the National Audit Office (NAO), the Comptroller and Auditor
General (C&AG) is the independent auditor of nearly all central government institutions.
Using extensive statutory rights of access to records, the C&AG provides direct advice
and assurance to Parliament.
A1.1.1 the C&AG is an officer of the House of Commons appointed by The Queen. They
are responsible for the audit of most central government institutions. This work is carried
out under his or her direction by NAO staff (see www.nao.org.uk) or by contracting out.
NAO is in the public sector but independent of central government.
A1.1.2 The C&AG is appointed for a single non-renewable term of ten years; and can
only be removed from office by The Queen on an address of both Houses of Parliament.
The NAO‟s statutory board advises and supports the C&AG - for example, on the NAO‟s
strategic direction and the associated resource requirements. Audit related decisions such
as which examinations to perform and the specific audit and reporting approach, are
matters solely for the independent C&AG to decide.
A1.1.3 The NAO is financed by an Estimate submitted jointly by the C&AG and the
NAO chair to the Public Accounts Commission (TPAC), a committee of the House of
Commons. NAO‟s expenditure may include discretionary activities permitted under
statute if approved by NAO‟s board and subsequently by TPAC through its scrutiny of
the NAO‟s Estimate.
Audit
A1.1.4 In order to carry out financial audit work, the C&AG has extensive statutory
rights of access to information held by a wide range of public sector organizations. This
material is also required to compile Whole of Government Accounts, and extends to the
records of many contractors and recipients of grants. The C&AG also has a right to
obtain information about, and explanations of, any of this evidence.
A1.1.5 The C&AG is responsible for the financial audit of virtually all central
government organizations, 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‟s basis with an individual
entity as necessary. Financial audits are carried out in accordance with International
Standards on Auditing (UK and Ireland).
A1.1.6 In addition, the C&AG may carry out audits of particular areas of central
government expenditure to establish whether public funds have been used economically,
efficiently and effectively. Selection of these values for money (vfm) examinations -
having taken account of any proposals made by the Committee of
58
Public Accounts - is entirely at the C&AG‟s discretion, as is the manner in which they
are carried out and reported. The C&AG has the same level of access for vfm
examinations as for financial audit. Central government bodies must ensure that such
access is provided for within the terms and conditions of contracts and agreements with
third party contractors, sub-contractors and grant recipients.
A1.1.7 In the event of the C&AG requiring access to sensitive documents to inform his
work - for example, policy papers such as Cabinet, or Cabinet Committee, papers - then
public sector organizations 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 finalized.
A1.1.8 The Public Accounts Committee (PAC) may decide to invite witnesses to discuss
the findings of-both financial audits and vfm examinations. The PAC may also initiate
other hearings on related matters.
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Money resolutions
A2.1.5 A money resolution is required1 for legislation which creates a charge upon
public funds, either by way of new resource expenditure or by remission of debt. Further
advice on money resolutions should be sought from Parliamentary Clerks.
A2.1.6 The responsible department should clear the draft with the Treasury at official
level. When agreed, the Treasury will arrange for a copy initialed by the Financial
Secretary to be returned to Counsel.
Box A2.1A: examples of legislation matters which require explicit Treasury approval
Explanatory Notes
A2.1.9 Except for finance, consolidation and tax law rewrite bills, departments should
prepare explanatory notes for all government bills. The main items to be covered are set
out in box A2.1B. Guidance on preparation is on the Cabinet Office website2.
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Box A2.1B: Legislation authorizing expenditure: explanatory notes
1. Financial effects of the legislation:
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Annex 2.2
Delegated authorities
This annex expands on the requirement for departments to obtain Treasury consent to
their public expenditure and the process of delegated authorities.
A2.2.1 Treasury approval for expenditure is one aspect of the convention that Parliament
expects the Treasury to control all other departments in matters of finance and public
expenditure. Accounting officers are responsible (see first bullet of paragraph 3.3.3) for
ensuring that prior Treasury approval is obtained in all cases where it is needed.
A2.2.2 The need for Treasury approval embraces all the ways in which departments
might make public commitments to expenditure, not just Estimates or legislation,
important as they are. Box A2.2A identifies the main ways in which the need can arise. It
may not be exhaustive.
A2.2.3 Treasury approval:
62
Delegation
A2.2.5 Formally, Treasury consent is required for all expenditure or resource
commitments. In practice, the Treasury delegates to department‟s authority to enter into
commitments and to spend within predefined limits without specific prior approval from
the Treasury (but see A.2.2.12 for exceptions). Delegated authorities may also allow
departments to enter into commitments to spend (eg contingent liabilities) and to deal
with special transactions (such as some write-offs) without prior approval.
A2.2.6 Such delegated authorities strike a balance between the Treasury‟s need for
control in order to fulfill its responsibilities to Parliament and the department‟s freedom
to manage within its agreed budget limits and Parliamentary provision.
A2.2.7 Departments should not take general Treasury approval of an Estimate as
approval for specific proposals outside delegated limits even if provision for them is
included in the Estimate.
A2.2.8 The Treasury may also work through the Cabinet Office to set certain expenditure
controls applicable across central government1.
agree with the department how it will take spending decisions (e.g. criteria and/or
techniques for investment appraisal, project management and later evaluation);
establish a mechanism for checking the quality of the department‟s decision-
taking (e.g. by reviewing cases above a specified limit, or giving full delegation
but requiring a schedule of completed cases of which a sample may be examined
subsequently); and
Encourage delegation of authority within the department to promote effective
financial management. In general, authority should be delegated to the point
where decisions can be taken most efficiently. It is for the accounting officer to
determine how authority should be delegated to individual managers.
Box A2.2B: standard terms for delegated authorities
1 https://www.gov.uk/government/collections/cabinet-office-controls
63
the extent of each delegation, usually in financial terms, but potentially also in
qualitative terms, eg all items of a certain kind to require approval
any relevant authorities, eg the enabling legislation or letter from a Treasury
minister
the relevant budget provision
the relevant section of the department‟s Estimate
any effective dates
Arrangements for review. HMT requires that delegated authority limits be reviewed
annually.
A2.2.11 In turn departments should agree delegated authorities with their arm‟s length
bodies, making use of the template delegated authority letter. Delegations to ALBs
should be no greater than department‟s own delegated authorities.
Departments must seek HMT approval for the delegated authorities they agree with their
ALBs.
A2.2.12 there are some areas of expenditure and resource commitments which the
Treasury cannot delegate: see box A.2.2C.
items which are novel, contentious or repercussive, even if within delegated limits
items which could exceed the agreed budget and Estimate limits
contractual commitments to significant spending in future years for which plans
have not been set
items requiring primary legislation (eg to write off NLF debt or PDC)
any item which could set a potentially expensive precedent
where Treasury consent is a specific requirement of legislation
A2.2.13 strictly, the Treasury cannot delegate its power of approval where there is a
statutory requirement for Treasury approval. But in practice it can be acceptable to set
detailed and objective criteria where Treasury approval can be deemed without specific
examination of each case. This may be appropriate to avoid a great deal of detailed case-
by-case assessment. The Treasury may ask for intermittent sampling to check that this
arrangement is operating satisfactorily.
it would have granted approval had it been approached properly in the first place;
and
the department is taking steps to ensure that there is no recurrence.
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Requests for retrospective approval should follow the same format as requests submitted
on time.
A2.2.16 If the Treasury does not give retrospective approval or authorize 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
regularize the situation.
A2.2.17 It is unlawful to commit resources or incur expenditure without Treasury
consent, where such consent is required by statute. In such cases retrospective consent
cannot confer legality. Such consumption cannot, therefore, be regularized.
A2.2.18 In cases of unlawful expenditure, the responsible accounting officer must note
the department‟s accounts accordingly and notify the NAO. It will then be for the C&AG
to decide whether to report on the matter to Parliament with the relevant accounts and
whether to draw it to the attention of the PAC.
A2.2.19 the C&AG and the Treasury cooperate closely on questions of authority for
expenditure. The C&AG may bring a department‟s attention to any cases where the
department:
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Annex 2.3
PAC Concordat of 1932
A2.3.1 The PAC has had long standing concerns about how the government gains
authority from Parliament for each area of spending.
A2.3.2 In the mid19th 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 itemization.
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
recognized exceptions, that the powers and duties to be exercised should be defined by
specific statute.‟‟
A2.3.6 In reply, the Treasury Minute said:
66
„‟………. 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 regularized 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 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
A2.4.1 Chapter 2 (box 2.1) sets out the essential conditions for authorization of public
spending. New services are exceptions, ie services for which parliament would normally
expect to provide authorizing 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.
Box A2.4A: Expenditure parliament accepts may rest on a Supply and Appropriations Act
A2.4.3 It is important not to exceed these limits. The Treasury has agreed in the
Concordat (see annex 2.3) to seek to make sure they are respected. So departments should
consult the Treasury before relying upon them.
Anticipating a bill
A2.4.4 In addition, parliament is prepared to accept that departments may undertake
certain preparatory work while a bill is under consideration and before royal assent.
Examples are listed in box A2.4B.
1 Which becomes a Supply and Appropriation Act once it has been through its parliamentary
stages
68
Box A2.4B: expenditure that can be incurred before royal assent
pilot studies informing the choice of the policy option (because this process is part
of designing, modifying or even deciding to abandon the policy);
scoping studies designed to identify in detail the implications of a proposal in
terms of staff numbers, accommodation costs and other expenditure to inform the
legislative process;
in-house project teams and/or project management boards;
use of private sector consultants to help identify the chosen policy option, assist
with scoping studies or other work informing the legislative process;
work on the legislative process associated with the new service.
A2.4.5 Departments may be able to finance activities such as those in box A2.4B out of
their existing resources. When this happens, departments should make sure that the
ambit2 of the relevant Estimate covers the planned expenditure.
A2.4.6 It is also important to understand in which areas of new business parliament does
expect the normal rigor for authorization (box 2.1) to apply. For the avoidance of doubt,
some examples are shown in box A2.4C.
Box A2.4C: expenditure which may not normally incurred before royal assent
significant work associated with preparing for or implementing the new task
enabled by a bill, eg renting offices hiring expert consultants or designing or
purchasing significant IT equipment;
recruitment of chief executives and board members of a new public sector
organization;
Recruitment of staff for a new public sector organization.
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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 authorization in Estimates.
A2.4.10 In these circumstances there is a risk that allowing the spending to proceed might
be wasteful if royal assent is not achieve as expected. So it is good practice to try to find
other ways of making progress with the policy without anticipating royal assent.
A2.4.11 If, nevertheless. a department wants to spend early on matters to be empowered
by a bill before parliament, it may make a claim for an advance from the Contingencies
Fund with a plan to repay it out of the next Estimate when agreed3. The spending must
meet the conditions in box A2.4D.
A2.4.12 The Treasury judges applications for access to the Contingencies Fund
cautiously and on their merits. It is important to note that neither political imperative nor
ministerial preference is relevant to making this assessment.
A2.4.13 In rare circumstances a Contingencies Fund advance may be awarded to make
senior appointments to a new public sector body being set up under a bill. When this is
allowed, the people appointed must be clear that if for any reason the legislation fails, the
provisional appointments would have to be cancelled.
Notifying parliament
A2.4.14 the instances described in this annex all mean that parliament has less control
over certain items of public expenditure than it would normally expect. Departments
should therefore take great care to keep parliament informed of what is happening and
why.
A2.4.15 A timely written ministerial statement giving the amounts involved and their
timing is the essential minimum before Contingencies Fund resources can be released. If
possible an oral explanation at second reading, or a separate oral statement, is desirable.
In addition there should be:
notes in the explanatory memorandum and impact assessment to the relevant bill;
and
70
notes in the relevant Estimate - especially important if a department wants to
anticipate secondary legislation which a bill will empower.
A2.4.16 If the effect of the measure changes significantly, parliament should be given
timely information to keep it abreast of developments.
A2.4.17 It is good practice to keep the Treasury informed of the disclosure intended. The
Treasury pulls all information about anticipation of parliamentary agreement together and
publishes it annually at the close of each session.
Directions
A2.4.18 The exceptions in this annex to the requirements of box 2.1 provide a lot of
scope for pragmatic progress of essential government business. The advice in this annex
may be regarded as judicious extensions of the requirements of propriety, and acceptable
only if parliament is not misled.
A2.4.19 But sometimes even these easements are not enough. If the Accounting Officer
is unable to design the minister‟s policy to fit within the standards in this annex, he or she
will need to seek a ministerial direction (see section 3.4). The usual rules about disclosure
of course apply.
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Annex 3.1
The Governance Statement
It is fundamental to each accounting officer‟s responsibilities to manage and control the
resources used in his or her organization. The governance statement, a key feature of the
organization‟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) delegate‟s responsibilities within his or her
organization 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 organization 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 organization faces. In the
light of the board‟s assessment of the organization‟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 judgments 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 organization.
Supplementing the accounts, it should provide a sense of the organization‟s
vulnerabilities and resilience to challenges.
the board‟s annual review of its own processes and practices, informed by the
views of its audit committee on the organization‟s assurance arrangements;
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insight into the organization‟s performance from internal audit, including an audit
opinion on the quality of the systems of governance, management and risk
control;
feedback from the delegation chain(s) within the organization about its business,
its use of resources, its responses to risks, the extent to which in year budgets and
other targets have been met, and any other internal accountability mechanisms;
including:
- bottom-up information and assessments to generate a full appreciation of
performance and risks as they are perceived from within the organization;
- end-to-end assessments of processes, since it is possible to neglect
interdependent and compounded risks if only the components are
considered;
- a high level overview of the organization‟s business so that systemic risks
can be considered in the round;
- any evidence from internal control failures or poor risk management;
- potentially, information from whistleblowers;
- Material from any arm‟s length bodies (ALBS) connected with the
organization which may shed light on the performance of the organization
or its board.
A3.1.7 It is important that the governance statement covers the material factors affecting
the organization in the round, not neglecting the more serious (if remote) risks1,
emerging technology and other cutting edge developments. It should also mention any
protective security concerns in suitably careful terms2, with details reported to the
external auditor.
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A3.1.10 All the items in this box are important. The risk assessment is critical. This is
where the AO, supported by the board, should discuss how the organization‟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 organization. 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 materialized.
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 organization 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.
Might the issue prejudice achievement of the business plan? – or other priorities?
Could the issue undermine the integrity or reputation of the organization?
What view does the board‟s audit committee take on the point?
What advice or opinions have internal audit and/or external audit given?
Could delivery of the standards expected of the AO (box3.1) be at risk?
Might the issue increase the risk of fraud or other misuse of resources?
Does the issue put a significant program me or project at risk?
Could the issue divert resources from another significant aspect of the business?
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Could the issue have a material impact on the accounts?
Might national security or data integrity be put at risk?
External audit
A3.1.15 The organization‟s external auditor will review the governance statement for its
consistency with the audited financial statement. The external auditor may report on:
any inconsistency between evidence collected in the course of the audit and the
discussion of the governance statement; and/or;
any failure to meet the requirement to comply with or explain departures from the
Corporate Governance Code or any other authoritative guidance.
3 See, https://www.gov.uk/government/collections/accounting-officer-system-statements
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Annex 4.1
Finance Directors
It is government policy that all departments should have professional finance directors
reporting to the permanent secretary with a seat on the departmental board, at a level
equivalent to other board members. It is good practice for all other public sector
organizations to do the same, and to operate to the same standards. This annex sets out the
main duties and responsibilities of finance directors.
be professionally qualified1;
have board status equivalent to other board members;
report directly to the permanent head of the organization;
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
organization. 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 organization
and its arm‟s length bodies (ALBs) in depth.
governance
financial leadership, both within the organization and to its ALBS, at both a
strategic and operational level
ensuring sound and appropriate financial governance and risk management
1 The term professional finance director in this context means both being a qualified member of one of the
five bodies comprising the Consultative Committee of Accounting Bodies (CCAB) in the UK and Ireland,
ie the Chartered Institute of Public Finance and Accountancy, the Institute of Chartered Accountants in
England and Wales, the Institute of Chartered Accountants of Scotland, the Institute of Chartered
Accountants i Ireland, the Association of Chartered Certified Accountants, or having equivalent
professional skills and/or qualifications; and having relevant prior experience of financial management in
either the private or the public sector.
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leading, motivating and developing the finance function, establishing its full
commercial contribution to the business
planning and delivering the financial framework agreed with the Treasury or
sponsoring organization against the defined strategic and operational criteria
challenging and supporting decision makers, especially on affordability and value
for money, by ensuring policy and operational proposals with a significant financial
implication are signed-off by the finance function
internal controls
co-ordinating the planning and budgeting processes
applying discipline in financial management, including managing banking, debt and
cash flow, with appropriate segregation of duties
preparation of timely and meaningful management information
ensuring that delegated financial authorities are respected
selection, planning and oversight of any capital projects
ensuring efficiency and value for money in the organization‟s activities
provision of information and advice to the Audit Committee
leading or promoting change programs both within the organization and its ALBS
external links
preparing Estimates, annual accounts and consolidation data for whole of
government accounts
liaison with the external auditor
liaison with PAC and the relevant Select Committee(s)
liaison with cross-government Finance Function
embedding of functional standards
A4.1.3 finance function should maintain a firm grasp of the organization‟s financial
position and performance. Supporting the accounting officer, the finance director should
ensure that there is sufficient expertise in depth, supported by effective systems, to
discharge this responsibility and challenge those responsible for the organization‟s
activities to account for their financial performance. It is important that financial
management is taken seriously throughout each public sector organization.
Financial leadership
A4.1.4 The finance director is responsible for leadership of financial responsibilities
within the organization and its ALBs. He or she should ensure that the information on
which decisions about the use of resources are based is reliable. Box A4.2B explains
some specific responsibilities of the role.
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maintaining a long term financial strategy to underpin the organization‟s financial
viability within the agreed framework
developing and maintaining an effective resource allocation model to optimize 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 organization‟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 organization
A4.1.6 Individual finance director posts will of course have duties specific to their
organizations and contexts in addition to those set out in this annex. But all finance
director posts should seek to operate to these standards as an essential minimum.
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Annex 4.2
Use of models
In modern government modeling 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.
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 recognized techniques.
A4.2.5 In an organization using a great deal of modeling, 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 organization use consistent
approaches.
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A4.2.6 It is always good practice to evaluate the risks associated with any model so that
the ultimate users of the model can appreciate what it can and cannot deliver.
Sophisticated models may demand specialist expertise and leadership but the vital
element of constructive lay oversight should never be skimped. Otherwise there can be a
danger that flaws are overlooked because the experts concentrate on the technical
complexities.
A4.2.7 In managing a model, the SRO should consciously decide how it can provide
good value for money. There is no point, for instance, in data collection to a high degree
of accuracy if the assumptions used in the model cannot be exact. Similarly, there is a
stronger case for investing in a model if it forms a central part of a decision making
process.
A4.2.8 References:
QA of government models: https://www.gov.uk/government/publications/review-of-
quality-assurance-of-government-models
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 andmodelling.
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 organization 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).
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the AO supported by the board, taking a broad and connected view across the whole
organization.
Identifying risks
A4.3.7 It is important to capture all the organization‟s risks so that they can be evaluated
properly in context.
A4.3.8 There is value in getting each part of the organization 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 organization‟s working environment. Some of the
critical risks that are easily overlooked are shown in box 4.3B.
A4.3.9 As well as drawing on risk assessment from within the organization, it may be
valuable to use an external source to make sure that nothing important has been
overlooked. Sometimes different public sector organizations can help each other out in
this way, to their mutual advantage. And it can be useful to get staff to work together to
consider the subject, eg in facilitated groups.
A4.3.10 Once the organization‟s risks have been identified, it is possible to draw up a risk
register. This is a list of recognized risks which can be kept up to date and which the
board can review regularly. Each organization needs to decide how to
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Prioritize its total risk exposure so that the board can take an informed strategic approach
to risk for the organization as whole.
Responding to risk
A4.3.11 Each organization needs to decide whether, and if so how, to respond to its
identified risks. Some standard responses are listed in box A4.3C.
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.
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 organizations find it useful to dry run these plans: first to
check that they work, second to make sure they are proportionate and third to boil out any
unnecessary features they may have.
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The Board
A4.3.14 Risk management is a key governance task for the board. It should take a
strategic view of risk in the organization 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 organization‟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 organization‟s responses to PAC reports. Each
Audit Committee should be chaired by a non-executive board member, drawing on input
from the organization‟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 organization 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
organization‟s experience. This applies particularly to perceived failures, eg an
unforeseen risk or a crystallized 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 organization‟s risks are being
treated appropriately. If damage has been prevented, it may be possible to adjust the
existing response to risk to achieve equally successful results by less expensive or less
invasive techniques, eg replacing physical controls with security cameras.
Departmental Groups
A4.3.22 nearly all government departments sponsor one or more arm‟s length bodies
(ALBs) for which they take ultimate responsibility while allowing them a degree of (or
sometimes considerable) independence (see chapter 7). The accounts
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Of these ALBS are consolidated with their sponsor department‟s accounts, emphasizing
that the sponsor stands behind them.
A4.3.23 It follows that each department board should consider the group‟s risk profile
including the businesses of its ALBs. The potential liabilities of some ALBs (eg in the
nuclear field) can be so great that they may overshadow the department‟s own, so this is
essential hygiene.
A4.3.24 References:-
The Orange Book: https://www.gov.uk/government/publications/orange-book
Other Treasury risk guidance:
http://webarchive.nationalarchives.gov.uk/20130129110402/http://www.hm-
treasury.gov.uk/psr_governance_risk_riskguidance.htm
NAO report on Managing risks in government:
http://www.nao.org.uk/report/managing-risks-in-government/
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Annex 4.4
Insurance
Central government organizations 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 organizations should not normally buy commercial insurance
to protect against risk. Since the government can pool and spread its own risks, there is
little need to pay the private sector to provide this service. In general it is cheaper for the
government to cover its own risks.
A4.4.2 However, in certain circumstances, as part of forming a risk management strategy,
the accounting officer in a public sector organization may choose to purchase commercial
insurance to protect certain parts of the organization‟s portfolio. Such decisions should
always be made after a cost benefit analysis in order to secure value for money for the
Exchequer as a whole. Some acceptable reasons for using insurance are set out in box
A4.4A.
Box A4.4A: Where commercial insurance may provide value for money
Building insurance as a condition of the lease and where the lessor will not accept
an indemnity: commercial insurance may be taken out where the cost of
accommodation, together with the cost of insurance, is more cost effective than
other accommodation options.
Overall site insurance: private sector contractors and developers usually take out a
single-site insurance policy because it is cheaper than each individual party insuring
themselves separately. So a client organization may be able to cover its risks at little
or no extra cost.
Insurance of boilers and lifts: which may be a condition of taking out a lease, and
typically involves periodic expert inspection designed to reduce the risk of loss or
damage.
Commercial initiatives: because these activities are outside the government‟s core
responsibilities, losses on a department's discretionary commercial activities
could reduce resources available for its core activities (see chapter 7). It will usually
therefore make sense to insure them. Any goods used for services sold to other parts
of central government should not, however, be insured.
Where commercial insurance is integral to a project: eg, where private contractors
insist, it may be appropriate to purchase insurance even if the net benefit is
negative. But this may be a sign that the project needs restructuring to avoid any
requirement to buy.
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commercial insurance, perhaps through letters of comfort or statements of support. The
costs and benefits of taking out insurance should be included in the appraisal of the
project as a whole.
Items the ALB is required to insure, eg vehicles where the Road Traffic Acts require
it.
Physical assets where a cost benefit analysis supports the case for insurance and the
sponsor department agrees.
Goods owned by ALBS receiving less than 50% of their income from the Exchequer
(through grant-in-aid or fees and charges). Commercial insurance protects the risk to
the Exchequer from claims from third parties.
Items used by an ALB for income generation schemes to supplement the approved
level of public spending. Commercial insurance is appropriate to cover the risks lest
costs or losses could not be met out of receipts.
Benefits:
transfer of risk, valued at the expected compensation for the insured losses
claims handling, where the insurance company will manage claims against third
parties
the value of guaranteed business recovery: the potential reduction in the time
taken to reinstate losses, reducing business interruption
1 https://www.gov.uk/government/publications/the-green-book-appraisal-and-evaluation-in-
central-governent
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Claims administration
A4.4.6 Managing claims against third parties can be time-consuming and require expert
attention. Insurance companies may be better placed than public sector organizations to
deal with claims economically and efficiently. So contracting-out claims administration
to an insurance company might be more cost-effective than retaining the work in-house.
Reporting
A4.4.7 Departments should inform their Treasury spending team of:
Insured losses
A4.4.11 Public sector organizations should make insurance claims in accordance with the
terms of the policy.
A4.4.12 ALBS may retain amounts paid under commercial insurance policies to meet
expenditure resulting from losses or third-party claims. If it is decided not to replace or to
repair an insured asset, the sponsor department may reduce any grant in aid payable to the
ALB.
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Claims between public sector organizations
A4.4.13 If two uninsured departments are involved in an incident causing loss to one or
other, it is immaterial to the Exchequer whether one claims on the other for the damage.
For small claims it would not be value for money for the Exchequer to make
interdepartmental adjustments in the case of minor damage. Similar waiver arrangements
should apply up to mutually agreed limits between other public sector organizations. 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 organization to seek legal redress from another central
government organization through the courts, meaning that Treasury consent is always
required.
A4.4.14 Box A4.4D shows how to proceed when one central government organization
makes a larger claim against one or more others.
Vehicles
A4.4.15 Most ALBS insure third-party vehicle claims to comply with the Road Traffic
Acts. Public sector organizations that are not insured for traffic accidents should refer any
third-party claims, either for or against, to the Treasury Solicitor who acts on behalf of
the government.
A4.4.16 Many claims between public sector organizations involving damage to, or loss
caused by, vehicles, can be handled using the arrangements in paragraph A4.4.13.
A4.4.17 Vehicles travelling in EU countries must comply with Directives. These require
vehicles operating in another‟s territory to be covered by insurance to the extent required
by the legislation in territory of the journey, unless there are acceptable alternative
arrangements, eg indemnities.
Loans
A4.4.18 When government assets are loaned to a body other than a public sector
organization which does not insure, it is important to protect the interests of the lending
organization. So the borrower should insure against damage or loss of the
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assets from the time of receipt and against claims by third parties including its own
employees. An indemnity by the borrower is an acceptable substitute if the lender is
satisfied that the borrower could and would meet any damage or other loss.
A4.4.19 Public sector organizations are usually expected to meet the cost of insuring any
government assets (eg. equipment or stores) held by a contractor in the normal course of
business. The cost of any insurance against risks arising from negligence or willful
misconduct by the contractor‟s employees should be borne by the contractor. These
arrangements should be explicitly set out in the relevant contract.
A4.4.20 Public sector organizations 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
organization‟s liability. And they may need to be reported if they fall within the
parliamentary reporting requirements (see annex 5.4).
A4.4.21 Borrowers should only take out commercial insurance for loaned items of value
if the owner insists upon it, or if the borrower has reason to believe that commercial
insurance would be more cost effective than giving an indemnity.
Employers’ liability
A4.4.22 The Crown is not bound by the Employers‟ Liability (Compulsory Insurance)
Act 1969. So departments need not insure the risks outlined in the Act. Decisions on
whether to insure should be taken on value for money grounds after an appraisal.
Similarly, parliamentary bodies such as the National Audit Office, the Parliamentary
Commissioner (Ombudsman) and the Independent Parliamentary Standards Authority
need not insure against employers‟ liability risks as they are exempted under the
Employers‟ Liability (Compulsory Insurance) (Amendment) Regulations 2011 (SI
2011/686).
A4.4.23 A body funded by grant in aid need not insure against employers‟ liability risks.
This is because the Employers‟ Liability (Compulsory Insurance) Regulations 1998 (SI
1998/2573) provide exemption for anybody (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 organization chooses not to insure,
responsibility for the issue of certificates in accordance with the Act rests with the
department responsible for paying grant in aid, provided that it is satisfied that this is the
appropriate course.
A4.4.24 The scope of the certificate should be strictly confined to the risks with which
the Employers‟ Liability (Compulsory Insurance) Act 1969 is concerned, and may not be
extended to any other risks. It should be in the form set out in Box A4.4E. Departments
should ensure that the circumstances in which certificates have been issued are reviewed
from time to time, so that certificates may be revoked if circumstances change.
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1(1) of the Employers‟ Liability (Compulsory Insurance) Act 1969 will, to any extent to
which it is otherwise incapable of being satisfied by the aforementioned employer, be
satisfied out of moneys provided by parliament.
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Annex 4.5
Senior Responsible Owner
Accountability
A4.5.1 Senior Responsible Owners (SRO) for Major Projects (as defined in the
Government‟s Major Project Portfolio) are in a special position in that they are expected
to account for and explain the decisions and actions they have taken to deliver the
projects for which they have personal responsibility. This line of accountability should be
made clear to SROs in their appointment letter which is published on GOV.UK.
A4.5.2 The Government publishes on an annual basis a list of the SROs for the
Government‟s Major Project Portfolio (as defined by the Infrastructure and Projects
Authority).
A4.5.3 Where a Committee wishes to take evidence from an SRO of one of these major
projects it will be on the understanding that the SRO will be expected to account for the
implementation and delivery of the project and for their own actions. Appointment letters
will make clear the point at which an SRO becomes directly accountable for the
implementation of the project in question. The SRO will also be able to disclose to the
Committee where a Minister or official has intervened to change the project during the
implementation phase in a way which has implications for cost and/or timeline of
implementation. In this respect the SRO should also be able to disclose their advice about
any such changes.
A4.5.4 Accounting Officers are ultimately accountable for the performance of all the
business under their control, including major projects for which an individual SRO has
direct accountability and responsibility. And in this respect, if a Select Committee calls
for evidence from an SRO, the Accounting Officer of the department may also be called
to support the SRO at a hearing.
A4.5.5 This line of direct accountability for SROS does not alter the special position and
relationship of Accounting Officers with the PAC.
A4.5.6 The Government Functional Standard GovS 002: Project Delivery sets the
expectations for the direction and management of portfolios, programs and projects for
all government departments and arm‟s length bodies. An SRO should refer to this
standard to ensure the breadths of practices required for successful delivery are used.
https://www.gov.uk/government/publications/project-delivery-functional-standard
A4.5.7 Further information on the accountability, relationship to other key leadership
roles in project delivery and the selection and appointment of an SRO is available in
Infrastructure and Project Authority guidance on the role of the senior responsible owner.
https://www.gov.uk/government/publications/the-role-of-the-enior-responsible-owner
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A4.5.8 Further information is available in Cabinet Office guidance for officials from
departments and agencies on giving evidence to Parliamentary Select Committees
(the Osmotherly Rules).
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Annex 4.6
Procurement
It is important to secure value for money in asset management through sound
procurement. Public sector organizations 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 organizations 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 Organization (WTO)
agreements and many of the UK‟s trade deals underpin these principles. The specific
responsibilities are set out in box A4.6A.
General
value for money, normally through competition;
compliance with legal obligations including those imposed by international agreements;
follow Government Procurement Service1 policies and standards on public procurement.
Management approach
leadership on the importance of procurement in delivering objectives;
define roles and responsibilities of key staff, with adequate separation of duties;
Promote awareness (including in ALBS) of the importance of procurement policy and the
GPS guidance.
Skills
use procurement professionals throughout;
1 https://www.gov.uk/government/organisations/crown-commercial-service
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Ensure that there is sufficient skills capacity in undertaking and managing
procurements and projects.
Review
apply the Gateway™ 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.
A4.6.4 Purchasers need to develop clear strategies for continuing improvement in the
procedures for acquisition of goods, works and services. Public sector organizations
should collaborate with each other, following guidance, in order to secure economies of
scale, unless they can achieve better value for the Exchequer as a whole some other way.
Smaller suppliers should have fair access to see if they able to deliver better value for
money.
Legal framework
A4.6.5 Public sector organizations are responsible for ensuring that they comply with the
law on procurement (see box A4.6C) taking account of Cabinet Office guidance2.
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Range of models should be considered, for example employee-led mutual and joint
ventures as well as more traditional outsourcing.
A4.6.9 In carrying out efficient sourcing projects, central government should follow best
practice.
A4.6.10 One such approach is LEAN approach4 whose principles are designed to make
doing business with government more efficient and cost-effective (for both buyers and
suppliers) to support economic growth.
A4.6.11 During the evaluation stage of sourcing, it is important to for public sector
procuring organizations to:
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assess suppliers‟ economic and financial standing to gain confidence of their
capacity to carry out fully what the buyer requires within the pre-determined
timescale and deliver value for money;
Secure value for money (see box A.4.6B), using relevant and consistent criteria
for evaluating the key factors (cost, size, sustainability, design etc).
Contracts
A4.6.12 In drawing up contracts, purchasers should, where possible:
use model terms and conditions developed in the light of collective experience
and which may help avoid prejudicing the position of others using the same
supplier;
avoid variation of price clauses in contracts of less than two years‟ duration; and
Include prompt payment clauses.
A4.6.13 Purchasers cannot enter into contracts with other parts of the legal entity to
which they belong, so different parts of the Crown cannot contract with each other.
Instead internal agreements which fall short of being contracts are used (typically service
level agreements). These may have all the hallmarks of contracts other than scope for
legal enforcement.
Taxation
A4.6.16 Central government bodies should:
base procurement decisions independent of any tax advantages that may arise
from a particular bid;
avoid contractors using offshore jurisdictions, consistent with international
obligations and the government‟s stated objectives on tax transparency and
openness;
be vigilant in not facilitating tax arrangements with suppliers or their agents that
are detrimental or disadvantageous to the Exchequer. Public sector organizations
need to take special care in relation to the tax arrangements of public appointees
(see Cabinet Office guidance);
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employ internal management processes to ensure that transactions that give rise to
questions of propriety of tax arrangements are brought to the accounting officer‟s or, if
necessary, ministers‟ attention.
A4.6.17 In the case of bids under the Private Finance (PF2), it is particularly important to
ensure that comparisons of competing bids take account of any tax planning by bidders.
The Treasury‟s Green Book provides for a tax adjusted Public Sector Comparator to
allow for the (usually) material tax difference between a PF2 option and the wholly
public sector alternative. It would be inappropriate to apply this to bids where tax
planning has cancelled out this effect.
A4.6.18 Public procurement projects involving the transfer of real estate or assets that are
likely to appreciate in value can often give rise to specific tax issues, in particular liability
to capital gains tax. If public sector organizations are negotiating with bodies that wish to
structure procurement proposals in this way, they should consult the Treasury and HMRC
at an early stage to identify the likely tax implications and assess the proposal for
propriety generally.
Further guidance
A4.6.19 Central sources of guidance on procurement and related issues include:
the Government Commercial Function
(https://www.gov.uk/government/organisations/government-commercial-
function)
the Treasury‟s Green Book on project appraisal and evaluation in central
government(https://www.gov.uk/government/uploads/system/uploads/attachment
_data/file/179349/green book_complete.pdf.pdf);
Department for Business, Energy and Industrial Strategy guidance on compliance
with the subsidy obligations arising from the UK‟s international
agreements(https://www.gov.uk/government/publications/complying-with-the-
uks-international-obligations-on-subsidy-control-guidance-for-public-authorities)
Procurement Policy Notes (https://www.gov.uk/government/collections/procurement-
policy-notes);
The Crown Commercial Service (https://www.crowncommercial.gov.uk/);
Cartels and bid
rigging(https://www.gov.uk/government/uploads/system/uploads/attachment-
_data/file/284413/oft435.pdf); and
HM Revenue and Customs on tax avoidance issues
(http://www.hmrc.gov.uk/avoidance/).
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Annex 4.7
Subsidies
A4.7.1 The transition period which followed the UK‟;s departure from the European
Union ended on 31 December 2020, and EU law ceased to have any force in the UK
(save in those areas provided for by the Withdrawal Agreement).1 UK public bodies must
continue ensure compliance with all relevant domestic and international subsidies rules,
including World Trade Organization 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 organizations in complying where new obligations have arisen.
1 This annex has been retitled ‟Subsidies‟ from „State aids‟ to reflect this.
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Annex 4.8
Expenditure and payments
A4.8.1 Public sector organizations 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 organization‟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 organizations should;
1 The Late Payment of Commercial Debts (Interest) Act 1998 (as amended by The Late Payment
of Commercial Debt Regulations 2002 (SI 1674) and the Late Payment of Commercial Debt
Regulations 2013).
2 The Prompt Payment Code http://www.promptpaymentcode.org.uk./
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Payments outside the normal pattern
A4.8.5 Payments in advance of need should be exceptional, and should only be
considered if a good value for money case for the Exchequer can be made. Even then, as
advance payments lead to higher Exchequer financing costs, such payments are novel and
contentious and require specific Treasury approval. Advance payment should never be
used to circumvent expenditure controls or budgetary limits.
A4.8.6 In particular, it is not good value for money for public sector organizations to act
as a source of finance to contractors who have access to other forms of loan finance. So
advance payments to contractors (ie payments made before equivalent value is received
in return) should only be considered if, for example, a price discount commensurate with
the time value of the funds in question can provide a good value for money case.
Exceptions to these guidelines, which would not normally require specific Treasury
approval, include:
service and maintenance contracts which require payment when the contract
commences, provided that the service is available and can be called on from the
date of payment;
grants to small voluntary or community bodies where the recipient needs working
capital to carry out the commitment for which the grant is paid and private sector
finance would reduce value for money;
minor services such as training courses, conference bookings or magazine
subscriptions, where local discretion is acceptable; and
Prepayments up to a modest limit agreed with the Treasury, where a value for
money assessment demonstrates clear advantage in early payment.
A4.8.7 Interim payments may have an element of prepayment and so public sector
organizations 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, organizations 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 organizations should not, however, use interim payments to
circumvent public spending controls. For example, it is not acceptable to make payments
where value has not been received, simply to avoid under spending.
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 organization considering deferred payments must thus seek
Treasury approval before proceeding.
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Annex 4.9
Fraud
Governance in public sector organizations 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 organizations‟
risks, including fraud. Each organization faces a range of fraud risks specific to its
business, from internal and external sources. The Fraud Act 2006 recognizes 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:
1 http://webarchive.nationalarchives.gov.uk/20130129110402/http://www.hm-treasury.gov.uk/psr
managing risk of fraud.htm
2 http://www.nao.org.uk/report/good-practice-in-tackling-external-fraud-2/
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Assessing vulnerability to fraud
A4.9.4 Each organization should identify and assess at different levels how it might be
vulnerable to fraud with reference to the HMG standards for Fraud Risk Assessment.
Fraud should be always considered as a risk for the departments‟ risk register.
Evaluating the scale of fraud risk
A4.9.5 For any new major area of spend, departments shall assess the risk of and impact
from fraud at the outset when the spending is being proposed. This should identify the
potential for fraud and the different impacts that fraud could have for this spend area.
Once spending is approved this should result in the development and continued
maintenance of a detailed fraud risk assessment
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Having a program me of fraud risk assessment, and fraud measurement.
Having systems to report to the center all instances and values of prevented and
detected fraud from across the organization.
Having metrics with a financial impact based upon prevented and/or detected
fraud against a baseline.
Have a program me to test for, and measure, previously undetected and
unreported fraud
A4.9.7 It is good practice to measure the effectiveness of actions taken to reduce the risk
of fraud. Assurances about these measures can be obtained from Internal Audit fraud loss
measurement exercises, stewardship reporting, monitoring, or from other review bodies.
Reporting fraud
A4.9.8 Public sector organizations should retain records of internal and external frauds
discovered and actions taken, including an assessment of the value of any losses. They
may need to contribute to occasional reports and analysis of frauds. These should be
reported to the center of the government‟s Counter Fraud Function via the Consolidated
Data Return.
A4.9.9 Public sector organizations should also provide the Counter Fraud Function‟s
Centre of Expertise with details, of any novel or unusual frauds (or attempted frauds) so
that this information can be shared more widely. Public sector organizations should also
consider reporting frauds and suspected fraud to the NAO.
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Annex 4.10
Losses and write offs
This annex sets out what is expected when departments and their 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
organizations 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.
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Losses of accountable stores
the nature of the case, the amount involved and the circumstances in which it
arose;
the reasons for the proposed write-off, including any legal advice;
the reason for consulting the Treasury;
whether fraud (suspected or proven) is involved;
whether the case resulted from dereliction of duty;
whether failure of supervision is involved;
whether appropriate legal and/or disciplinary action has been taken against those
involved including supervisors, and, if not, why not;
whether those primarily involved will be required to bear any part of the loss; and
whether the investigation has shown any defects in the existing systems of control
and,
if so, what action will be taken.
Notification to parliament
A4.10.6 Losses should be brought to parliament‟s attention at the earliest opportunity,
normally by noting the department‟s annual accounts, whether or not they may be
reduced by subsequent recoveries. For serious losses, departments.
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should also consider the case for a written statement to parliament. Departments should
not hesitate to notify parliament of any losses which it would be proper to bring to their
attention.
the nature, gross amount (or estimate where an accurate value is unavailable), and
cause of each loss;
the action taken, total recoveries and date of write-off where appropriate; and
the annual accounts in which each loss is to be noted.
A4.10.8 A losses statement is required in annual accounts where total losses exceed
£300,000. Individual losses of more than £300,000 should be noted separately. Losses
should be reported on an accruals basis.
A4.10.9 where efforts are still being made to secure recovery of cash losses formally
written off, charged to the accounts and noted, public sector organizations should
consider including them in a record of claims to ensure that recovery is not overlooked.
1 Tax must be deducted from pay or pension subject to PAYE withheld in settlement of a loss, to
arrive at the amount attributed to debt repayment.
2 For example, Queen‟s Regulations
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Stores losses
A4.10.15 Stores losses are, in effect, money spent without the authority of parliament. In
establishing the amount of the loss, and hence whether the annual account should be
noted, the net value of the loss after crediting any sums recovered will be the determining
factor.
A4.10.16 Losses of stores arising from culpable causes should be noted in departmental
records, in accordance with normal practice. Such losses should also be noted in the
annual account, to ensure that such losses are brought to the attention of parliament in the
appropriate manner, and to aid departmental management in managing and accounting
for stores.
A4.10.17 Where there is an identifiable claim against some person, the loss need not be
noted immediately. However, if the department subsequently decides to waive the claim,
or finds that it cannot be presented or enforced, the loss should be treated as an
abandoned claim (see paragraph A.4.10.24) and noted accordingly.
A4.10.18 any loss recoverable from a third party, where a decision is taken to waive
recovery because of a knock for knock agreement, should be noted as a stores loss.
A4.10.19 where stores are to be written off, gifted, or transferred to other departments,
they should be valued in accordance with the FREM, unless circumstances justify
exceptional treatment, or other arrangements have been agreed3.
Fruitless payments
A4.10.20 A fruitless payment is a payment which cannot be avoided because the
recipient is entitled to it even though nothing of use to the department will be received in
return. Some examples are in box A4.10C.
A4.10.21 As fruitless payments will be legally due to the recipient, they are not regarded
as special payments. However, as due benefit has not been received in return, they should
be treated as losses, and brought to the attention of parliament in the same way as stores
losses.
3 Stores held by the Ministry of Defense may be valued according to their estimated supply price.
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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.
where it is decided to reduce the rate of interest on a loan, and therefore to waive
the right to receive the amount of the reduction
claims actually made and then reduced in negotiations or for policy reasons
claims which a department intended to make, but which could not be enforced, or
were never presented
failure to make claims or to pursue them to finality, e.g. owing to procedural delays
allowing the Limitations Acts (annex 4.11.11) to become applicable
claims arising from actual or believed contractual or other legal obligations which
are not met (whether or not pursued), e.g. under default or liquidated damages
clauses of contracts
amounts by which claims are reduced by compositions in insolvency cases, or in
out-of- court settlements, other than reductions arising from corrections of facts
claims dropped on legal advice, or because the amounts of liabilities could not be
determined
Remission of interest on voted loans.
A4.10.26 Waivers should be noted in annual accounts in accordance with the FREM. In
addition:
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a claim not presented should normally be noted at its original figure;
Where more than one department is involved, each should note its records to the
extent of its interest, without attempting spurious accuracy.
There is no need to note annual accounts if claims between departments are waived or
abandoned. These are domestic matters.
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Annex 4.11
Overpayments
This annex discusses how, and how far, public sector organizations 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.
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A4.11.3 when deciding on appropriate action, taking legal advice, organizations should
consider:
Good faith
A4.11.6 The decision on how far recovery of an overpayment should be pursued in a
particular case will be influenced by whether the recipient has acted in good or bad faith:
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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
Fraud
A4. 11.9 I f a public sector organization is satisfied that the circumstances
of an overpayment involved bad faith on the part of the recipient, it should
automatically consider the possibility of fraud in addition to recovery
action. For example, the recipient may have dishonestly given false
information or knowingly failed to disclose information. If there is
evidence of fraudulent intent, prosecution or disciplinary action should be
undertaken where appropriate and practicable. A criminal conviction in
such a case will not eliminate the public debt which had resulted from the
overpayment, and so recovery of the debt should also be pursued by any
available means.
Cost-effectiveness
A4. 11.10 Public sector organizations 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.
Lapse of time
A4. 11.12 There can be time limitations on recovery. In England and Wales,
a recipient might plead that a claim is time-barred under the provisions of
the Limitation Acts. Proceedings to recover overpayments must generally be
instituted within six years (twelve years if the claim is against the personal
estate of a deceased person) of discovery of the mistake or the time when
the claimant could, with reasonable diligence, have discovered it.
A4. 11.13 When public sector organizations claim against a private sector
organization or people who ignore or dispute the claim, the organization
should take legal advice about proceeding with the claim in good time so
that it does not become time barred.
A4. 11.14 If someone claims that they have overpaid a public sector
organization, they should be told promptly if the claim is time barred.
But if, on its merits, the
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Recipient organization decides that there is a case for an ex gratia payment, it should
obtain Treasury consent if the amount involved is outside the organization‟s
Delegated powers. Similarly, there may be a case for ex gratia payments to make good
underpayments to government employees unless they were dilatory in making their
claims.
Change of position
A4.11.15 The recipient of an overpayment may seek to rely on change of position if he or
she has in good faith reacted to the overpayment by relying on it to change their lifestyle.
It might then be inequitable to seek to recover the full amount of the overpayment. The
paying organization‟s reaction should depend on the facts of the case. The onus is on the
recipient to show that it would be unfair to repay the money. This defense is difficult to
demonstrate.
Estoppel
A4.11.16 A recipient who has changed his or her position may also be able to rely on the
rule of evidence estoppel if the paying organization misled the recipient about his or her
entitlement, even if the overpayment was caused by a fault on the part of the recipient.
However, a mistaken payment will not normally of itself constitute a representation that
the payee can keep it. There must normally be some further indication of the recipient‟s
supposed title other than the mere fact of payment.
A4.11.17 The paying organization 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 organization would almost certainly entitle
the recipient to conclude that the reply was satisfactory and that he or she could keep the
money.
A4.11.18 It is essential for public sector organizations to seek legal advice where change
of position or estoppel is offered as defense against recovery.
Good consideration
A4.11.19 Another possible defense 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 organization was acting in good faith
should be taken into account.
Hardship
A4.11.20 Public sector organizations 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 organization would be detrimental to the welfare of the debtor or
the debtor‟s family. Hardship is not necessarily limited to financial hardship; public
sector organizations may waive recovery of
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overpayments where recovery would be detrimental to the mental welfare of the debtor or
the debtor‟s family. Again, such hardship must be demonstrated by evidence.
Collective overpayments
A4.11.21 If a group of people have all been overpaid as a result of the same mistake, the
recipients should be treated in the same way. However, that does not mean that recovery
of all such overpayments should be automatically written off. For example, it may be
legitimate to continue to effect recovery from those who have offered to repay, or some
may not be subject to the same level of hardship.
A4.11.22 Public sector organizations should decide how best to handle collective
overpayments so that they do not inhibit the maximum recovery possible. If it is deemed
impractical to pursue recovery from some members of an equivalent group, there should
be no inhibition on pursuing others who may be able to pay. There is no obligation to
inform the group generally about what action is being taken against particular members
since all have the same legal obligation. Any differential treatment should be based on
advice.
A4.11.23 If a public sector organization is minded to forgo recovery of the whole or any
part of a collective overpayment, it should consult the Treasury (or its sponsor
department, as the case may be) before telling the recipients of the overpayments. The
Treasury will need to be satisfied that a collective waiver is defensible in the public
interest or as value for money. And any such waivers should be exceptional.
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Annex 4.12
Gifts
This annex explains how departments should notify parliament of gifts, both given and
received. It is important to assure parliament that propriety has been respected through
transparent reporting
A4.12.1 A gift is something voluntarily donated, with no preconditions and without the
expectation of any return. In this document, the term gift includes all transactions which
are economically indistinguishable from gifts: see box A4.12A.It is also important to be
clear about transactions which do not score as gifts. For example:
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donations by departments
Transfers of land and buildings, or assignment of leases, to private sector bodies at
less than market price (the gift is valued at the difference between the price agreed
and the market price).
Approval
A4.12.3 Treasury approval is needed for all gifts valued at more than £300,000, and any
other gifts not covered by a department's or ALB‟s delegated authorities. ALBs
should consult their sponsor departments about gifts.
A4.12.4 The WMS and minute must then be laid before the House of Commons, on the
same day, at least fourteen parliamentary sitting days before the department proposes to
make the gift. In cases of special urgency, it is permissible, exceptionally, for all or part
of the fourteen day notice period to fall during an adjournment or recess, or for a shorter
notice period to be given. In such cases, with Treasury approval, the reasons for urgency
should be explained.
A4.12.5 The WMS and minute must contain the standard opening and closing paragraphs
in box A4.12B. These terms have the PAC‟s endorsement and can be changed only with
Treasury approval.
Box A4.12B: standard paragraphs for written ministerial statement and departmental
minute
Opening paragraph:
It is the normal practice when a government department proposes to make a gift of a value
exceeding £300,000, for the department concerned to present to the House of Commons a
minute giving particulars of the gift and explaining the circumstances; and to refrain from
making the gift until fourteen parliamentary sitting days after the issue of the minute, except in
cases of special urgency.
Closing paragraph:
The Treasury has approved the proposal in principle. If, during the period of fourteen
parliamentary sitting days beginning on the date on which this minute was laid before the
House of Commons, a Member signifies an objection by giving notice of a Parliamentary
Question or a Motion relating to the minute, or by otherwise raising the matter in the House,
final approval of the gift will be withheld pending an examination of the objection.
A4.12.6 The WMS and minute should also set out briefly the nature of the gift, its value,
the circumstances in which it is being given, and the recipient. where the gift is to be
replaced, information about the cost and nature of the replacement, when it is expected to
be acquired, and the Estimate to which the expenditure will be charged should be
included. In the case of non-voted expenditure, the account to which the replacement cost
will be charged should be quoted.
Parliamentary objections
A4.12.7 Members of Parliament may object to gifts by letter, Parliamentary Question or
through an Early Day Motion. In such cases, departments may wish to advise their
ministers to take the initiative by making contact with the MP concerned. This
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may be particularly appropriate if it is proposed to make the gift urgently or promptly on
expiry of the waiting period.
A4.12.8 Where an objection is raised, the gift should not normally be made until the
objection has been answered. In the case of an Early Day Motion, the MP should be
given an opportunity to make a direct personal representation to the Minister. The
Treasury should be notified of the outcome of any representations made by MPs.
Gifts received
A4.12.10 Departments should maintain a register detailing gifts they have received, their
estimated value and what happened to them (whether they were retained, disposed of,
etc). Gifts received need not be noted in accounts unless the Treasury or department
concerned considers there is a special need for them to be brought to parliament‟s
attention.
A4.12.11 Donations, sponsorship or contributions, eg from developers should also be
treated as gifts.
A4.12.12 When offered services on a gratuitous basis, accounting officers should
consider the potential for such services to give rise to future expenditure, as well as anti-
competitiveness risks and propriety issues more broad
A4.12.13 For example, if services may be withdrawn in the future either at the discretion
of the supplier or in the event of the supplier entering insolvency it may lead to a pressure
to continue provide such services on fee paying basis in the future. It may also be that the
provision of services may lead to an incumbency benefit for the supplier that put them at
competitive advantage in any future procurement.
A4.12.14 The fact there are no up fronts costs to a proposal does not relieve the
Accounting Officer of the need to consider future costs or the need for HMT consent for
novel contentious or repercussive transactions.
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Annex 4.13
Special payments
This annex explains how public sector organizations 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 authorize special payments only after careful appraisal of
the facts and when satisfied that the best course has been identified. It is good practice to
consider routinely whether particular cases reveal concerns about the soundness of the
control systems; and whether they have been respected as expected. It is also important to
take any necessary steps to put failings right.
A4.13.3 Arm‟s length bodies should operate to similar standards as departments unless
there are good reasons to the contrary, eg overriding requirements of the statutory
framework for Companies Act companies. Departments should ensure that their oversight
arrangements (see chapter 7) enable them to be satisfied that their arm‟s length bodies
observe the standards.
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might create a precedent for other departments;
may be deemed novel, contentious, or repercussive; or
arise because of obscure or ambiguous instructions issued centrally.
A4.13.7 The Treasury does not condemn all special payments out of hand. Each needs to
be justified properly in the public interest against the key public sector principles set out
in Chapter 1, box 1.1, with particular emphasis on value for money since there is no legal
liability. Any proposal to keep a special payment confidential must be justified especially
carefully since confidentiality could appear to mask underhand dealing. Also financial
reporting requirements and Freedom of Information legislation should be complied with.
The Treasury‟s bottom line is usually to ask the department to establish that the
responsible accounting officer(s) would feel able to justify the proposed payment in
parliament if challenged.
A4.13.8 Departments should also consult the Treasury about proposals for special
payments above the relevant delegated limits. They should explain:
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an assessment of the value for money of the case
any non-financial aspects;
Whether the case in question could have wider impact.
Severance Payments
A4.13.9 Special severance payments when staff leaves public service employment should
be exceptional. They always require Treasury approval because they are usually novel,
contentious and potentially repercussive. So departments should always consult the
Treasury in advance when considering a special severance payment.
A4.13.10 The Treasury adopts a skeptical approach to proposals for special severance
settlements, in particular:
precedents from other parts of the public sector may not be a reliable guide in any
given case;
legal advice that a particular severance payment appears to offer good value for
the employer may not be conclusive since such advice may not take account of
the wider public interest;
even if the cost of defeating an apparently frivolous or vexatious appeal will
exceed the likely cost of that particular settlement to the employer, it may still be
desirable to take the case to formal proceeding;
Winning such cases demonstrates that the government does not reward failure and
should enhance the employer‟s reputation for prudent use of public funds.
Severance payments will only be approved where they provide value for money for the
Exchequer as a whole, rather than simply for the body concerned.
A4.13.11 Departments should not treat special severance as a soft option, eg to avoid
management action, disciplinary processes, unwelcome publicity or reputational damage.
Box A4.13B sets out the factors the Treasury needs to evaluate in dealing with special
severance cases.
A4.13.12 It is important to ensure that Treasury approval is sought before any offers,
whether oral or in writing, are made. A proforma for seeking Treasury approval is
available1.
A4.13.13 Departments and their ALBs are also required to seek ministerial approval
(including the approval of the Minister for the Cabinet Office) of confidentiality clauses
in certain circumstances. Cabinet Office guidance on the use and approval of such
agreements is also available?
1 https://www.gov.uk/government/publications/managing-public-money
2 https://www.gov.uk/government/publications/civil-service-settlement-agreements-special-
severance-payments-and-confidentiality- clauses
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Box A4.13B: factors to consider in special severance cases
Any case for special severance put to the treasury should explain:
the circumstances of the case
any scope for reference to a tribunal with its potential consequences, including the legal
assessment of the organization‟s chances of winning or losing the case and likely scale of
any award
the management procedures followed
the value for money offered by the possible settlement
any non-financial considerations, eg where it is desirable to end someone‟s employment
without dismissal, perhaps because of restructuring
whether the case could have wider impact, eg for a group of potential tribunal cases
- avoid unnecessary delays which might lead to greater severance payments than
might otherwise be merited;
- avoid offering the employee concerned consultancy work after severance unless
best value for money can be demonstrated and the proposal is in line with Cabinet
Office approvals and controls3;
- ensure any undertakings about confidentiality leave severance transactions open
to adequate public scrutiny, including by the NAO and the PAC;
- ensure special severance payments to senior staff are transparent and negotiated
avoiding conflicts of interest.
A4.13.15 Organizations seeking retrospective Treasury approval for special severance
payments should not take it for granted that approval will be provided, since such
payments usually appear to reward failure and set a poor example for the public sector
generally. Requests for retrospective approval will be considered as if the request had
been made at the proper time and should contain the same level of detail as if the case
had been brought to the Treasury in advance.
Retention Payments
A4.13.16 Retention payments, designed to encourage staff to delay their departures,
particularly where transformations of ALBs are being negotiated, are also classified as
novel and contentious. Such payments always require explicit Treasury approval, whether
proposed in individual cases or in groups. Treasury approval must be obtained before any
commitment, whether oral or in writing, is made.
A4.13.17 Organizations considering proposals for retention payments should subject
them to strict value for money analysis. Sponsor departments should submit a business
case to the Treasury, supported by market evidence, together with an
3 https://www.gov.uk/government/publications/cabinet-office-controls
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evaluation of the risks and costs of alternative options. The Treasury will always be
skeptical of whether they are necessary.
Reporting
A4.13.18 As parliament does not provide for special payments when voting Estimates or
passing specific legislation, special payments should be brought to parliament‟s attention,
usually through a note in the organization‟s account. Any special severance payments for
senior staff will in any case be itemized in annual accounts.
A4.13.19 Notification is separate from accounting treatment, which will depend on the
nature of the special payment. Special payments should be noted in the accounts even if
they may be reduced by subsequent recoveries.
A4.13.20 Special payments should be noted in annual accounts where the total value
exceeds £300,000. Individual payments of more than £300,000 should be noted
separately.
4 https://www.gov.uk/government/publications/civil-service-settlement-agreements-special-
severance-payments-and-confidentiality- clauses
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Annex 4.14
Remedy
Prompt and efficient complaint handling is an important way of ensuring customers
receives the service to which they are entitled and may save public sector organizations
time and money by preventing a complaint escalating unnecessarily.
If their services have been found deficient, public sector organizations should consider
whether to provide remedies to people or firms who complain. This is separate from
administering statutory rights or other legal obligations, eg to make payments to
compensate. Remedies may take several different forms and should be proportionate and
appropriate.
Remedies
A4.14.4 As section 4.11 explains, when public sector organizations have caused injustice
or hardship because of maladministration or service failure, they should consider:
providing remedies so that, as far as reasonably possible, they restore the wronged
party to the position that they would be in had things been done correctly, and
whether policies and procedures need change, to prevent the failure reoccurring.
1 http://www.ombudsman.org.uk/improving-publicservice/ombudsmansprinciples/ principles-of-
good-complaint-handling-full
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The remedies available
A4.14.5 Remedies can take a variety of forms, including (alone or in combination):
an apology;
an explanation;
correction of the error or other remedial action;
an undertaking to improve procedures or systems; or
Financial payments, eg one off or as part of a structured settlement.
A4.14.6 Financial remedies for individual cases are normally ex gratia payments. Where
a pattern develops, and a number of cases raising similar points need to be dealt with, it
may make sense to develop an extra statutory scheme (see annex 4.13). If any such
scheme seems likely to persist, the organization concerned should consider whether to
bring forward legislation to set it on a statutory footing (see sections 2.5 and 2.6).
Designing remedies
A4.14.7 The normal approach to complaints where no financial payment is called for is to
offer an apology and an explanation. This may be a sufficient and appropriate response in
itself. People complaining may also want reassurance that mistakes will not be repeated.
A4.14.8 It may be more difficult to judge whether financial compensation is called for,
and if so how much, especially if there is no measurable financial detriment. Great care
should be taken in designing financial compensation schemes since they may set
expensive precedents.
A4.14.9 where financial remedies are identified as the right approach to service failure,
they should be fair, reasonable and proportionate to the damage suffered by those
complaining. Financial remedies should not, however, allow recipients to gain a financial
advantage compared to what would have happened with no service failure. Consideration
should always be given by the public sector organization that the circumstances of a
complaint do not involve bad faith on the part of the complainant, and the possibility of
fraudulent intent.
A4.14.10 Public sector organizations 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.
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The circumstances of the person complaining, eg whether the action or inaction of
the public sector organization has caused knock on effects or hardship.
Whether the damage is likely to persist for some time.
Whether any financial remedy would be taxable when paid to the person
complaining. Any advice from the PHSO.
A4.14.11 If a compensation payment includes an element because the person
complaining has had to wait for their award, it should be calculated as simple interest.
The interest rate to be applied should be appropriate to the circumstances and defensible
against the facts. Some rates worth considering are the rate HMRC pays on tax
repayments and the rate used in court settlements.
A4.14.12 When a public sector organization recognizes that it needs a scheme for a set of
similar or connected claims after maladministration or service failure, it should ensure
that the arrangements chosen deal with all potential claimants equitably. It is important
that such schemes take into account the PHSO‟s Principles of good administration2. They
must be well designed since costs can escalate if a problem turns out to be more extensive
than initially expected.
A4.14.13 If those seeking compensation have suffered injustice or hardship in a way
which is likely to persist, it may not be appropriate to pay compensation as a lump sum.
Instead it may make sense to award a structured settlement with periodic (eg monthly or
annual) payments. Public sector organizations considering such settlements should seek
both legal and actuarial advice in drawing them up.
A4.14.14 essentially, designing a compensation scheme is no different from designing
other services. Good management, efficiency, effectiveness and value for money are key
goals (see Chapter 4). Some specific issues which may require special care for
compensation schemes are outlined in box A4.14B.
2 http://www.ombudsman.org.uk/improving-public-service/ombudsmansprinciples/principles-of-
good-administration
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Consulting the Treasury
A4.14.15 When considering making individual remedy payments, departments need to
consult the Treasury (and sponsored bodies need to consult their sponsor departments)
about cases which:
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Annex 4.15
Asset management
Each public sector organization 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.
Asset registers
A4.15.4 A4.15.4 It is good practice for each organization 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
organization‟s current assets base and thus for planning change.
A4.15.5 The assets on an organization‟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 organization should decide on a meaningful valuation threshold in line
with best practice.
A4.15.6 In drawing up the asset register, particular care should be taken with two sorts of
asset:
Attractive items, such as works of art and items similarly susceptible to theft.
These may be included even if they are below the valuation threshold, in line with
guidance provided by the Government Art Collection; and
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investments in the form of debentures and shares in commercial companies. These should
be checked at least annually.
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Consider whether any retained assets have potential to generate revenue through
commercial services.
A4.15.8 Knowledge assets (also known as intangible assets, some examples of which are
listed above in Box A4.15A) should be considered as part of a public sector
organization‟s asset management strategy. Proper management of such assets is essential
for the efficient and effective use of resources within public sector organizations, and it is
therefore important that organizations are able to identify, protect, and maximize the
value of these assets. To assist with this, government has published guidance to support
organizations and clarify best practice for public sector knowledge asset management [1],
and recommends that organizations:
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 organization‟s knowledge asset management strategy
Efficiency improvements
A4.15.9 Efficiency in the use of workspace may make it possible for a public sector
organization 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 organizations where this
is practicable. It may be necessary to consider a budget transfer between organizations,
with Treasury consent, to help meet the initial relocation costs.
A4.15.10 Prior to marketing any land or building asset, public sector organizations
should also make use of the following:
„‟ Disposal of Surplus Public Sector Land and Buildings - Protocols for Land
holding Departments"1 which describes the procedures to be followed to
dispose of land with development potential;
The Cabinet Office‟s National Property Controls which detail the rules on lease
extensions, lease renewals, acquisitions, disposals as well as required space
standards associated with major refurbishments of buildings;
The Register of Surplus Land, part of ePIMS (electronic Property Management
Information Mapping Service), a mandatory central database recording
information on the civil estate. The data base does not cover leasehold property
with less than 99 years outstanding;
the Civil Estate Occupancy Agreement governing relationships among Crown
bodies sharing accommodation and the Civil Estate Coordination Protocol which
is designed to improve the planning, acquisition, management, rationalization and
disposal of property and other workspace on the civil estate;
Latest guidance and advice available from the Government Property Unit.
1 https://www.gov.uk/government/publications/knowledge-asset-management-in-government
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Asset Sales
A4.15.11 when undertaking an asset sale, departments should follow the Asset Sales
Disclosure Guidance. The guidance requires government departments to disclose the
impacts of an asset sale on Public Sector Net Borrowing (PSNB), Public Sector Net Debt
(PSND), Public Sector Net Financial Liabilities (PSNFL) and Public Sector Net
Liabilities (PSNL), as well as disclosing the proceeds and whether the sale was above,
within or below the retention value range. Departments should also include a rationale for
the sale, as well as justification for its format and timing, and include these alongside the
impacts in a Written Ministerial Statement laid in Parliament after the sale.
Transfer of property
A4.15.12 Public sector organizations 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.
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A4.15.15 In addition, the overage provisions may be agreed by a central government
purchaser of property where it is a condition of the sale of that property by a local
government or devolved administration body. In all cases the purchase must represent
value for money for the Exchequer as a whole and Treasury consent should be sought.
Box A4.15D: protocol for disposal of land, property and other assets
Value assets at market prices using Royal Institute of Chartered Surveyors‟ Red Book
(www.rics.org).
Dispose of surplus land property within three years.
Dispose of surplus residential property within six months.
Sell plant, machinery, office equipment, furniture and consumable stores by public
auction as seen; or by open tender. Obtain payment before releasing the goods.
If an asset is sold or leased at a loss, the proceeds forgone (compared to market value)
should be treated as a gift, and the routine in annex 4.12 should be followed.
A4.15.17 Sometimes private finance projects involve disposals. Each such case should be
evaluated as part of the private finance project, with due attention to the need to secure
good value for money. Further guidance is an annex 7.4.
A4.15.18 Public sector organizations which make grants to third parties for the
acquisition of assets should normally include a claw back condition under which they can
recoup the proceeds if the recipient of the grant later sells the asset. There is some scope
for flexibility in this discipline: see annex 5.2.
A4.15.19 Disposals to charities require particular care. Their trust deeds sometimes place
restrictions on how they may use their assets. It is good practice to consider the possible
disposal of assets by such recipients before making gifts to them.
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Central asset registers
A4.15.22 From time to time government gathers information in order to publish a
national assets register. Central government organizations and NHS bodies should supply
the information on their assets when requested.
A4.15.23 under Crown copyright policy, certain public sector organizations are required
to supply details for the official bibliographic database. See annex 6.2 for further details.
Digest of guidance
Office of Government Property (Cabinet Office) –
https://www.gov.uk/government/policy-teams/government-property-unit-ogp
Government‟s Estate Strategy: delivering a modern estate –
https://www.gov.uk/government/publications/government-estate-strategy-2018
Common Minimum Standards for
Constructionhttps://www.gov.uk/government/publications/common-minimum-
standards-for-construction
recording property details on the government‟s ePIMS (electronic Property
Information System)
https://www.epims.ogc.gov.uk/ProgrammeHub/public/DAO%20Letter%20Manda
ting%20e-PIMS.pdf?id=258687de-b5ce-4d28-9430-1e259c56897b
Property disposal- https://www.gov.uk/government/publications/guide-for-
thedisposal-of-surplus-government-land
Crichel Down rules - offering land and property acquired by the public sector
back for former owners -
https://www.gov.uk/government/publications/compulsory-purchase-process-and-
the-crichel-down-rules-guidance#historyC
Disposal of Heritage Assets https://historicengland.org.uk/images-
books/publications/disposal-heritage-assets/guidance-disposals-final-jun-10/
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Annex 5.1
Grants
This annex sets out how government departments should arrange and control grants,
including to arm's length bodies such as NDPBs.
A5.1.1 Central government departments normally offer two kinds of financial support to
third parties, using statutory powers:
grants: made for specific purposes, under statute, and satisfying specific
conditions eg about project terms, or with other detailed control;
Grants in aid: providing more general support, usually for an NDPB, with fewer
specific, but more general controls on the body, and less oversight by the funder.
A5.1.2 Grants should not be confused with contracts. A public sector organization funds
by grant as a matter of policy, not in return for services provided under contract.
Payment
A5.1.3 Grants should be paid on evidence of need or qualification, depending on the
terms of the grant scheme. For example:
·the recipient may need to demonstrate financial viability and delivery capability;
the recipient may need to submit a claim with evidence of eligibility;
the recipient may need to show that it meets the conditions of the
scheme, eg a farmer may need to disclose details of his or her business; there may
be a timing condition;
small third sector organizations may need to demonstrate a clear operational
requirement for project funding to be made before grant is paid.
A5.1.4 Grants in aid should also match the recipient‟s need. Significant sums should be
phased through the year in installments designed to echo the recipient‟s expenditure
pattern. In this way the recipient organization need not carry significant cash balances,
which would be an inefficient use of public money.
Control
A5.1.5 Payment of both grants and grants in aid normally requires specific empowering
legislation as well as cover in Estimates. There is scope for temporary ex
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gratia grant schemes to be financed on the authority of the Appropriation Act alone
provided that the scheme meets the standard conditions (see section 2.5).
A5.1.6 The accounting officer of the funding organization 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:
1 https://www.gov.uk/govemment/publications/grants-standards
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Endowments
A5.1.13 Grants and grants in aid are normally paid to meet the needs of the recipients.
Exceptionally, there may be a case for funding by way of endowment or dowry, ie a
modest one-off grant to enable the recipient to set up a fund from which to draw down
over several years. The recipient should then be able to make a clean break with the need
for support.
A5.1.14 Departments contemplating such funding arrangements should consult the
relevant Treasury spending team (and in turn arm‟s length bodies should consult their
sponsor departments) as this form of funding is always novel and contentious. The
Treasury will need to consider the value for money case for this form of funding,
including:
the opportunity cost of locking public funds into a particular endowment, using
investment appraisal techniques;
the value of the particular programme or project against others. The Treasury will
need to be satisfied that such funding would not protect any low-value projects or
programmes from proper expenditure scrutiny;
the sustainability of the funded body and whether such funding will remove future
reliance on public funding;
whether there are clear objectives, outputs and outcomes of the funding; and
the risk of further call on public funds.
A5.1.15 any such endowment should:
reflect genuine need for capital funding that could not be raised through other
methods;
be made only to recipients with the competence to manage the endowment over
time; and
Avoid skewing public funding away from other projects that have genuine cash
needs.
A5.1.16 The terms of an endowment should:
·be clear that the funded body should not subsequently approach the donor for
annual funding;
Maintain clear boundaries between the funder and recipient.
A5.1.17 Endowments should never be used as a way of bringing expenditure forward to
avoid an underspend. Nor is it acceptable to make a string of endowment payments to a
single recipient instead of taking specific provision in legislation to pay grants.
A5.1.18 Endowments are intended for situations where a clear financial break will be
advantageous to both recipient and donor. Normally the recipient will be a civil society
body or equivalent status.
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Annex 5.2
Protecting the Exchequer interest
(claw back)
This annex discusses how public sector organizations which provide grants to the private
sector and others should protect their investments where grants are used to buy or
improve assets.
Claw back
A5.2.1 Public sector organizations 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 claw back. 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:
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procurement of goods and services, where any liability is adequately discharged
once the goods and services have been provided
where a grant has been provided for research and not specifically for the creation
of physical asset, the successful conclusion of the research might be adequate
return
A5.2.4 because funders, recipients and circumstances can vary so much, there is no single
model for claw back. 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.
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:
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Duration of charge
A5.2.7 It can make sense to relate the funder‟s right to claw back 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 claw back 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 claw back
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 claw back period.
A5.2.9 It is common to prohibit recipients from using the assets they acquire or improve
using grants as collateral in borrowing transactions. This is because the public sector
funder might be forced to take up the recipient‟s legal liability to service debt should it
fail. However, if a funder agrees that a recipient may use assets acquired or developed
with grants as collateral, it should consider carefully what conditions it should apply.
Some freedom of this kind may help the recipient make the transition to viability or
independence. For example, a funder might allow a recipient to retain income generated
by using spare capacity in the funded asset.
A5.2.10 But normally it is important for the funder to retain some control over any use of
the funded asset outside the grant conditions. Typically the funder will require the
recipient to obtain the funder‟s consent before raising funds on any part of a funded asset
so long as the claw back 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.
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funder becoming exposed to assuming the recipient‟s debts. It is usual to take a registered
charge on land under the Land Registration Act 2002 and its Rules. If the recipient is a
Companies Act company, it may make sense to secure a registered charge on the
company‟s book debts.
A5.2.12 The form and intended duration of any charge should be recorded in the
founding documents charting the relationship between the funder and recipient. Both
parties will need legal advice, eg covering the statutory background) and on how the
charge would be enforceable. Both parties should also keep track of their outstanding
charges. It is good practice to register a land charge, so that it will automatically be taken
into account during any sale process.
A5.2.13 Sometimes a funder may decide not to enforce claw back when a funded asset is
sold, even though the agreed claw back 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:
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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 authorized, 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:
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sums due under bespoke legislation: paid as specified, eg the proceeds of national
insurance contributions paid into the National Insurance Fund
receipts of trading funds: treated as specified in the founding legislation
sums due to departments financed through Estimates:
either paid into the Consolidated Fund as CFERS
or applied to support spending in the Estimate if the Treasury agrees.
A5.3.5 Specific legislation, with Treasury approval, is normally required to authorize use
of income directly to meet resource consumption ie to offset current or capital
expenditure. In effect this process means that the department seeks less finance through
Estimates because part of the cost of the service is met from income. Parliament has an
interest because otherwise resource consumption would require specific approval through
the Estimates process.
A5.3.6 Following the Clear Line of Sight reforms, there is no longer a specific control
over the amount of income that can be retained by departments and used to offset
spending. However controls over income remain.
A5.3.7 In order for a department to retain income to offset against spending within the
Estimate it must be within the budget boundary (i.e. classed by the Treasury as negative
DEL or departmental AME) and be properly described in the Estimate. There must also
be a direct relationship between the income and the spending and departments may not
use additional income on one part of the Estimate to offset shortfalls of income (or
overspends) in another part of the Estimates without Treasury approval. Such approval
will only be given where the additional income has an appropriate relationship to the
expenditure it is being used to cover.
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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 recognize 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 has
powers to take on liabilities, because these would in effect bind their sponsoring
departments. So the documentation governing the relationship between a department and
an ALB (see chapter 7 and annex 7.4) should require the ALB to gain the sponsor
department‟s agreement to any commitment, including borrowing, into which it proposes
to enter. Departments should ensure that ALBs have systems to appraise and manage
liabilities to the standards in this annex, so that they can report to parliament any
liabilities assumed by ALBS in the same way as they would their own.
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Be scored as the department‟s best assessment of the need to pay out in support of the
liabilities.
A5.4.6 In the nature of giving liabilities, many will arise with little notice. Departments
should report these to parliament at the earliest opportunity. There is a standard procedure
for doing this: see paragraphs A.5.5.22 to A.5.5.36 of this annex.
A5.4.7 If a liability taken on in this way seems likely to persist, the department concerned
should consider backing it with statutory cover. This is because any expenditure which
arises because of it is subject to the same parliamentary expectations about statutory
powers as any other expenditure (see section 2.1). If a contingent liability could give rise
to a loan, the organization 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.
liabilities arising in the course of the purchase or supply of goods and services in
the discharge of the department‟s business
contractual commitments to make payments in future years arising under long-term
contracts, eg major building works
commitments to pay grants in future years under a statutory grant scheme
Contingent liabilities resulting from non-insurance (see annex 4.4).
A5.4.9 If procurement in the normal course of business gives rise to proposals for
liabilities outside the normal range (eg a cap on the contractor‟s liabilities), the public
sector organization should consider renegotiating. The acid test is whether two private
sector bodies would use the same terms. In cases of doubt, the Treasury should be
consulted.
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A5.4.10 PFI contracts are a special case of procurement and so can cause departments to
take on liabilities. There is no need to notify use of standard PFI terms to parliament, but
any use of non-standard terms should be reported like any other.
A5.4.11 there are additional conditions for taking on non-standard conditions, namely:
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Unenforceable in UK law, for example death or personal injury caused by negligence,
fraud, or fraudulent misrepresentation or breach of any obligation as to title implied by
section 12 of the Sale of Goods Act 1979 or section 2 of the Supply of Goods and
Services Act 1982, are not permitted.
A5.4.18 Subject to the statutory powers of the public sector organization and its
delegated authorities, it is important for an organization contemplating assuming a new
liability to consult the Treasury (or the sponsor department, as the case may be) before
assuming it. Departments‟ delegated authorities or incurring liabilities should include the
liabilities of any sponsored bodies.
A5.4.19 HM Treasury approval must be sought for all contingent liabilities that are novel,
contentious or repercussive. In addition, a completed Contingent Liability approval
framework checklist must be submitted to HM Treasury before entering into a contingent
liability with a maximum exposure of £3m or more. This process is also required for
remote contingent liabilities.
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Types of liability
A5.4.20 Public sector organizations may take on liabilities by:
2 https://www.gov.uk/government/publications/civil-servants-terms-and-conditions
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Notifying liabilities to parliament
A5.4.26 the rules for notifying parliament of liabilities are very similar to those for public
expenditure. Generally speaking there is no requirement to inform parliament about any
liability which:
use the standard wording for the opening and closing passages, which
has been agreed with the PAC (box A.5.4C);
describe the amount and expected duration of the proposed liability,
giving an estimate if precision is impossible;
explain which bodies are expected to benefit, and why;
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if applicable, explain why the matter is urgent and cannot observe the normal
deadlines (paragraph A5.4.26_);
explain that authority for any expenditure required under the liability will be
sought through the normal Supply procedure;
be copied to the chairs of both the PAC and departmental committee.
A5.4.32 The contingent liability should not go live until 14 parliamentary sitting days,
after the Minute has been laid. Every effort should be made to ensure that the full waiting
period falls while parliament is in session. Where a contingent liability is reported less
than 14 days before the end of the session, the contingent liability should only go live
after lying before parliament during 14 sitting days, ie some days after the start of the
next session.
A5.4.33 If MP objects by letter, Parliamentary Question or Early Day Motion, the
indemnity should not normally go live until the objection has been answered. In the case
of an Early Day Motion, the Member(s) should be given an opportunity to make direct
personal representations to the minister, eg proactively arranging a meeting with them.
The Treasury should be kept in touch with representations made by MPs and of the
outcome.
A5.4.34 If, exceptionally, the guarantee or indemnity would give rise to an actual
liability, the department should consult the Treasury about the wording of the Minute.
The department should discuss the implications for the actual liability on its budget,
Estimate and accounts.
A5.4.35 There is not usually a requirement to notify parliament in instances where a
contingent liability arises due to events outside a department or ALB‟s control rather than
through an active policy decision. An example of something that would be outside a
department or ALB‟;s control would be legal proceedings being brought against them.
Events of this nature should still be disclosed in the entity‟s Annual Report and Accounts
in line with the requirements of the Government Financial Reporting Manual (FReM).
Closing passage
The Treasury has approved the proposal in principle. If, during the period of fourteen
parliamentary sitting days beginning on the date on which this Minute was laid before
parliament, a member signifies an objection by giving notice of a Parliamentary Question
or by otherwise raising the matter in parliament, final approval to proceed with incurring
the liability will be withheld pending an examination of the objection.
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Non-standard notification
A5.4.36 Sometimes it is not possible to give details of a contingent liability with full
transparency. In such cases the department should write to the chairs of both the PAC and
departmental committee to provide the same details as those outlined in paragraph
A5.4.24, with the same notice period. The letters should explain the need for
confidentiality. Any objection by either chair should be approached in the same way as
MPs' objections (paragraph A.5.4.27). If departments continue to have concerns
about writing to parliament, in particularly sensitive or confidential cases, they should
seek advice from the Treasury.
A5.4.37 Sometimes departments want to report an urgent contingent liability providing
less than the required 14 days‟ notice. In such cases, the department should follow the
procedure in paragraph A.5.4.27 and explain the need for urgency, agreeing revised
wording to the final standard paragraph with the Treasury.
A5.4.38 If the proposal is more urgent than this rule would allow, the department should
write to the chairs of the PAC and the departmental committee, giving the information in
paragraph A.5.4.28 and explaining the need for urgency. Where possible, the Chairs
should be given 14 working days from receipt of the letter to raise an objection in
writing, in which case the department would withhold final approval to proceed with
incurring the liability pending an examination of the objection. As a matter of record,
when parliament reconvenes, a Written Ministerial Statement and departmental Minute
should be laid explaining what has happened, including any liabilities undertaken.
A5.4.39 The same procedure as in paragraph A.5.4.29 should be used to report liabilities
during a parliamentary recess. In such cases the notice period should be 14 working days‟
notice, ie excluding weekends and bank holidays.
A5.4.40 similarly, it is possible that a department might want to undertake a non-
statutory contingent liability when parliament is dissolved. Every effort should be made
to avoid this, since members cease to be MPs on dissolution, and committees will be
reconstituted in the new parliament. If the department nonetheless considers the proposed
liability to be essential, it should consult the Treasury. When parliament reconvenes a
Written Ministerial Statement should be laid explaining what has happened, including
any liabilities undertaken.
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time of publication. Actual liabilities should appear as provisions. The rubric should refer
back to notification of parliament.
A5.4.44 when the conditional features of contingent liabilities are met, it is good practice
to wait until parliament has approved the relevant Estimate before providing the
necessary resources. But if providing support is more urgent, departments should apply
for an advance from the Contingencies Fund (see Annex 2.4 and the Estimates Manual3
under the usual conditions). If an advance is approved, a statement to parliament should
explain what is happening, and in particular how the crystallized liability is to be met.
International agreements
A5.4.45 International treaties, agreements or commercial commitments which mean the
UK incurring specific contingent liabilities should follow the parliamentary reporting
procedures as far as possible whether or not the agreement is covered by legislation. Even
if an international agreement does not require legislation for ratification, it should
nevertheless be laid before parliament, accompanied by an explanatory memorandum, for
21 sitting days before it is ratified (the Ponsonby rule).
3 https://www.gov.uk/government/publications/supply-estimates-guidance-manual
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