January 2015 – Issue No 4

Happy New Year and welcome to the 4th quarterly edition of Network News; our essential quick reference digest to what is going on across local government, for

local government practitioners.

January is traditionally a time for reflection for us all, but it tends to be more of an individual and personal thing, often unspoken and known only to ourselves, as we promise to do better

in some areas, perhaps indulge rather less in others and generally strive to see the year finish in a rather better place than it started from a personal or family point of view.

It all sounds perfectly simple and do-able (especially after much wine and a slurred rendition of Auld Lang Syne during a New Years’ Eve party), so why not extend this same enthusiasm to

your work issues and bring a similar resolve to hitting those organizational targets or corporate goals? What could possibly be so difficult about that?

In many ways, this edition of Network News is doing one of two things for the reader in answering this question. Yes, it is a sober reminder of the many challenges that practitioners face in the year ahead; but rather than focusing on these articles and features as evidence of the glass being half empty, I would urge you to see them more as a reminder of how CIPFA is

helping to horizon scan and scope these challenges for you in the first place – and then (through our networks and the support of network advisors) help with options to deliver. Certainly you are not alone with all of these stretch service demands; of balancing your budget; introducing new reform agendas or closing your accounts even earlier this year, and

very often this thought alone could prove a real comfort.

I am also pleased to announce that CIPFA networks themselves are changing for 2015 in ways that are designed to provide further support during these challenging times. Our new

corporate pricing model is set to offer more affordable access to many more advisory services and give greater flexibility on the use of pre-paid delegate places; we are set to launch a new subscription service to support authorities who have set up (or looking to set up) a LA company, shared services or staff mutuals; our new funding advisory service (launched last September) will provide its members with more regular and tailored funding forecasts and analysis of grant income levels as funding models, streams and even the size of grant pools continue to change / generally reduce (an essential added value given the potential volatility

from an election year, changes in NHB or even adjustments at regional levels and a possible overhaul of Barnett). Even our open training events are now accessible via designated advisory networks and the pre-paid places of your network subscription.

These are all changes from CIPFA’s advisory networks that are intended to help authorities finish the year in a better place than they started it - because just as you may need some help with those personal resolutions from family and friends; so your authority may now need that

extra support from its Institute.

Cliff Dalton CPFA, SS (prac), Manager CIPFA Networks

T: 01262 851725

M: 07919018754

@CliffDalton

First of all some quick news updates:

Provisional Local Government Settlement 2015/16: A Different Take on the Figures from the CIPFA Funding

Advisory Service.

Figures published by the CIPFA Funding Advisory Service (FAS) working with Pixel

financial Management show that local government spending power will fall by 6% in

2015-16. Local government minister Kris Hopkins said that it would fall by just

1.8%.

CIPFA’s analysis used a different definition of “spending power” to that used by the

government. Its analysis did not count ring-fenced grants or the better care fund,

much of which is used to fund NHS services. CIPFA argues this should not be counted

because it is outside councils’ control. Its analysis also shows central government

funding to local government will be cut by 14.6% in 2015-16.

CIPFA found spending cuts were “falling most heavily upon areas of the greatest

need”. The figure would fall by 8% in London and 7.8% in the north east, it said,

compared to just 3.4% in the south east.

Rob Whiteman, chief executive of CIPFA, said: “The difference between what has

been presented today by the government and the actual cash figures for cuts to local

councils is stark.

“It demonstrates why we urgently need transparency about government funding

instead of this continued conflation and inflation spending which hides the true size

and scope of the cuts many local authorities face.” Mr Whiteman said the

government’s decision to include the better care fund towards its spending power

calculation was “seriously distorting” the figures.

CIPFA’s Funding Advisory Service issued over 90 provisional settlement funding

reports to its own subscribers (included within the subscription) and to paying

customers. If you want to find out more about CIPFA’s Funding Advisory Service

please contact Roman.Haluszczak@cipfa.org

North Dorset District Council – Car Parking Charges –

Legality of Application of Surpluses

It appears that the authority’s external auditor, in response to an objection by a local

council tax payer, has given a view that if an authority generates a surplus from off

street parking and applies that surplus to services other than traffic management

(i.e. to other services outside this definition) then it is acting unlawfully. The Council

has acknowledged its error and is addressing the pricing issue moving forward. The

authority’s auditor has decided to make a Report in the Public Interest under section

8 of the Audit Commission Act 1998. Other authorities should be made aware that

this could prompt similar challenges from their own council tax payers and are

advised to review their own surplus positions as regards any off street parking

operations that they are responsible for.

For those seeking any further advice CIPFA has published a “Practitioner Guide to

Income Generation” which examines many of the key issues relating to charging for

local authority services. See http://www.cipfa.org/policy-and-

guidance/publications/a/a-practical-guide-for-local-authorities-on-income-

generation-2013-edition

PWLB Reform

The CLG has now confirmed that HM Treasury are taking the steps to abolish the

Public Works Loan Board in the coming months. HMT have stressed that this is purely

to address the governance of the PWLB and that it will have no impact on existing

loans or the government’s policy on local authority borrowing.

Ministers tabled an amendment to the Infrastructure Bill just before Christmas which

would allow them to make an order under the Public Bodies Act 2011 abolishing the

PWLB commissioners and transferring their functions to another body. If the

amendment is approved by Parliament, ministers would remove the 12 unpaid

commissioners, who arguably have a largely ceremonial function. HMT has confirmed

that its lending function will continue unaffected albeit under a different body so that

LA’s will continue to access borrowing at rates which offer ‘good value for money’.

Whilst it is not yet clear what the new governance arrangements will be a

consultation on the restructure is due out shortly. The Network will keep you

informed of all developments and we will discuss this issue further at the TMN

Conference in London on the 5th March 2015.

Know your debt from your deficit

By L Forster

Albert Einstein once said ‘if you can’t explain it simply, you don’t understand it well

enough’. This is perhaps an apt sentiment for the politicians who try to describe the

UK’s financial position. On the one hand we have George Osborne telling us the

deficit is going down, yet on the other we have Ed Balls telling us it’s not. So who’s

right, and why is it not clear?

The argument lies, to a large extent in the wording, and understanding the difference

between deficit and debt.

Debt is basically the amount of money the government owes and our current total

debt of around £1,451bn (up from £811bn when the Coalition took power in 2010)

has been accumulated over a number of years. The government often use the term

‘public sector net debt’ – this is the total debt minus the government's liquid assets.

This is estimated to be 80.4 % of GDP this year, peaking at 81.1% in 2015/16 and

then gradually reducing until it is 1% of GDP in 2019/201.

When the Chancellor talks about the deficit he is usually referring to ‘net borrowing’.

This is the difference between what the government spends and what it receives i.e.

its spending gap. Net borrowing is linked to the annual deficit - which is a different

figure to our accumulated ‘debt’, however there is of course a link between the

annual deficit and debt – as borrowing more increases our debt.

Borrowing and the deficit are strictly speaking not the same thing. The deficit refers

to the current budget (i.e. the government’s everyday expenses on such as welfare,

and its departmental costs) whereas borrowing includes the amount needed to fund

the gap in the current budget plus any borrowing for investments. Interestingly the

different political persuasions of economic strategies can be seen in their borrowing

strategies - in calendar year 2007, the Labour government borrowed £37.7bn, of

which £28.3bn was invested in big projects (the balance of £9.4bn represents the

current budget deficit). Conversely, in 2013, the Conservative-led coalition borrowed

£91.5bn, with just £23.7bn invested2.

Even if the government is running a budget surplus, rather than a deficit, it may still

need to borrow to cover its investments.

There is also something known as the structural deficit – this is the current budget

deficit, adjusted to strip out the cyclical nature of the economy i.e. the element of

the deficit that remains – and is unaffected by where the country currently is within

the cyclical trends of the economy.

So, what is our fiscal predicament?

The economy is growing at 0.7 % per quarter – a faster rate than last year –

however the volatility of the global economy, particularly the stagnation and

contraction of markets in the Eurozone mean that continued sustained growth is still

precarious. The OBR December 2014 report cites our ‘productivity gap’ as being one

of the most important and uncertain judgements in their analysis, and they have

revised future growth prospects downwards in this report from 2015 onwards.

For the UK government the elephant in the room must be the fact that the

government is spending more than its tax take. This is where our deficit and net

borrowing figures come under scrutiny.

Between 2003/04 and 2007/08 net borrowing was fairly static, varying between £34

billion and £42 billion. With the onset of the financial crisis in late 2007, net

borrowing rose sharply to a peak of £157 billion in 2009/10. 3

In 2010/11 government net borrowing was £140 billion; equivalent to 9.5 % of gross

domestic product (GDP).

1 Source:

http://cdn.budgetresponsibility.independent.gov.uk/December_2014_EFO-

web513.pdf 2 Source: http://www.bbc.co.uk/news/business-25944653 3 http://www.ons.gov.uk/ons/rel/psa/public-sector-finances/july-2013/sty-

public-sector-debt.html

This year the figure is forecast to be £91.3bn (around 5 % of GDP), which is £5bn

higher than was forecast in March, and significantly more than the 2010 forecasts

which predicted a deficit of less than £40bn in 2014/154 . On the plus side this figure

is predicted to continue falling and the deficit to be eliminated by 2019/20.

The Institute of Fiscal studies, in its analysis of figures released in December 2014

from the Office of National Statistics states that in order to hit the Office for Budget Responsibility's forecast for borrowing for the whole of 2014/15 (£91.3bn) borrowing over the next four months (December 2014 – March 2015) will need to be 26% lower than in the same months last year.

The chart below refers to net borrowing which is intended to cover the projected

annual budget deficit (largely current)

So –this is surely a result for the Coalition – we are borrowing less. Aren’t we?

If however we compare net borrowing this year with last year we see a marked

increase – net borrowing over the first half of 2014-15 was 10 % higher than the

same period last year, and in September 2014 borrowing was 15 % up on

September 2013. The reasons for this are complicated and often outside the direct

control of the government, however lower than forecast tax receipts- due to low-

wage recovery combined with tax cuts for low earners and higher than forecast

spending on welfare are two of the main contributory factors.

4

http://www.ifs.org.uk/uploads/publications/budgets/as2014/as2014_johnson.pdf

A good example of the complexity and the importance of the wording in

understanding the fiscal position can be seen in the 2015 Conservative election

campaign- which states that the deficit has halved. This may be true in terms of

measuring the reduction as a percentage of GDP (it has fallen from 10% to 5%) as

this reflects the rise in national income, however in cash terms the deficit has only

reduced by around one third.

As a general trend however, since 2010 our current budget deficit is reducing. The

reasons for this are cuts in public spending and some increased revenue (i.e.

increased VAT rate from 17.5% to 20%, introduction of bank levies). However, if we

look at our total government debt this presents a very different picture.

From the mid 1990’s until 2002 public sector debt as a % of GDP fell to 29%, it then

increased between 2002 – 2007, to 37% of GDP –this was primarily due to the

government’s decision to increase spending on health and education. Since 2008 it

has risen sharply due to the recession, and the government’s financial bailout of the

banks5. In 2010 this was £811bn, it is now around £1,451bn (up nearly 80%) with

annual interest charges around £55bn per annum.

The chart below shows the historic and forecast positions of public sector net debt

(not total gross debt- it does not relate directly to the £1.4-£1.5 trillion total

government debt level)

.

So, despite the government and the opposition all declaring their intention to clear

the deficit and create a surplus – there is still a huge debt to clear.

5 http://www.economicshelp.org/blog/334/uk-economy/uk-national-debt/

Servicing this national debt takes money away from our front line services, so it is

crucial that it is reduced as soon as is feasible. Low interest rates have proved

beneficial to the government, however if these are raised then our borrowing liability

is increased, and needs to be funded from somewhere!

There is also the issue of revenue raised through taxes, Autumn Statement 2014

included a number of tax giveaways (i.e. stamp duty, business rate reliefs, personal

allowances) which all mean less revenue to the Treasury in these areas–at least in

the short term. Balancing the books when your income stream is diminished can

surely only mean more spending cuts – and all parties have made it clear that this is

what is going to happen. As always the devil is in the detail, and we wait to see what

this particular devil looks like!

So when the parties argue they are reducing the deficit it may be true but the annual

deficit needs to be funded by extra borrowing which increases our total national

debt. Even if the deficit is eliminated (By 2018-19 if we are lucky) our total national

debt will still be considerable at circa £1,450bn? – If interest rates rise significantly in

the future then our current interest costs – circa £55bn might increase significantly,

thus putting pressure on our current government spending (increasing our deficit

again). Reducing the deficit is one thing, reducing total government debt will be an

additional challenge which our country will need to face for several years into the

future.

Lisa Forster, CPFA, SS(prac), FAN Advisor

lisa.forster@cipfa.org

@lisaforster7

Another uneventful year in treasury management?

By Neil Sellstrom

Since the giddy days of the Icelandic Bank crisis in 2008 which saw treasury

management become the hot topic not only for CFO’s but many of their Councillors

the activity has gradually slipped behind the scenes and off the agenda as the issues

of austerity take precedence. A benign interest rate environment offering ever

decreasing yields and a strategic aversion to credit risk at the expense of effective

risk management has created a very short counterparty list leaving most treasury

officers with little room for manoeuvre let alone produce some income to help out an

overstretched revenue budget. Exacerbated by a reduction in treasury management

resources (staffing) and turnover of many staff who ‘experienced’ the Iceland crisis

plus significantly increasing cash balances arising from austerity measures and MRP

policies it is hard to describe treasury management as anything other than

‘challenging’ over the last few years.

It is also reasonable to expect many of the issues mentioned above to continue into

2015 and beyond and so does another uneventful year beckon? Perhaps not as the

landscape may be changing - thanks to European Regulators! Six years after the

financial crisis those attempting to ensure ‘lessons are learnt’ are now reaching the

point of approving or implementing a range of new regulations, three of which could

have major implications for Local Authorities:

1. Bank ‘Bail in’ Directive.6 To address the risk of failure of systemically

important financial institutions which would require Government (taxpayer) bail outs

this would mean shareholders and creditors, ie. Local Authority deposits, would bear

the losses. Hence Local Authority cash would be directly exposed to the credit risk of

the bank and could be lost totally or partially during a crisis. To manage this risk

many Authorities are starting to look at alternative investment products, notably

secured deposits, which avoid ‘bail in’ risk. They are also considering a broader range

of products to diversify risk and achieve better outcomes in terms of liquidity and

yield.

2. MiFID II7. MiFID has been in force for over six years and is the cornerstone of

the European Union’s regulation of financial markets. It is being revised to improve

the functioning of financial markets in light of the financial crisis and to strengthen

investor protection. As part of this protection Local Authorities will initially be classed

as retail clients by financial institutions. Whilst affording them greater protections it

will limit the product range they are able to access. There will be the option to opt-up

to professional status but it will require appropriate expertise, experience and

knowledge to be demonstrated.

3. Money Market Fund Reform8. Finally the EU is currently debating changes to

Money Market Fund Regulations which would fundamentally change the make-up of

these Funds or even result in many of them closing. Nothing has been agreed but

proposals to require capital buffers and a switch to variable net asset value (VNAV)

will lead to reduced liquidity and yields as well as accounting challenges resulting in

Authorities reconsidering the use of these products.

Many of the changes outlined above may take up to 2 years to implement but the

industry may act more swiftly and Authorities need to be prepared, particularly as

they are about to start drafting their 2015/16 investment strategies.

These issues and many more will be discussed at our forthcoming Treasury

Management Conference – Investment Strategies 2015/16: The Alternatives. We

hope to see many Local Authority delegates in attendance to share experiences and

hear the latest best practice. Find out more at:

http://www.cipfa.org/training/t/cipfa-banking-and-investment-forum-20150115

Neil Sellstrom CPFA, Treasury Management & Pensions Advisor

neil.sellstrom@cipfa.org

@NeilSellstrom

6 EU Bank Recovery and Resolution Directive http://www.bankofengland.co.uk/pra/Documents/publications/cp/2014/cp1314.pdf 7 Markets in Financial Instruments Directive II

http://www.fca.org.uk/firms/markets/international-markets/mifid-ii 8 EU regulation of Money market Funds http://www.europarl.europa.eu/sides/getDoc.do?pubRef=-%2f%2fEP%2f%2fNONSGML%2bCOMPARL%2bPE-

541.543%2b02%2bDOC%2bPDF%2bV0%2f%2fEN

Accounting for Business Rates Pooling

By Caroline White

2013/14 saw the introduction of the new business rate retention scheme and the

associated change in the accounting requirements. As part of this, it also saw the

creation of Business Rate Pools, whereby 90 authorities joined together in 13 pools in

the hope of retaining more business rates in their areas in a combined approach

rather than working as individual authorities. For 2014/15 there are 18 pools

consisting of 111 authorities.

In March 2014 we held two half day events to bring together revenues and

accounting practitioners from interested pooling authorities in an opportunity to

network with peers and share concerns and ideas about how pooling might work for

2013/14, given it was the first year of the scheme and there was very little in the

way of guidance. We have recently repeated these events for 2014/15, bringing

together practitioners who experienced pooling in 2013/14 alongside those who are

new to pooling for 2014/15 and also those who had applied to go into a pool in

2015/16 for the first time.

Pools are established under paragraph 34 of Schedule 7B to the Local Government

Finance Act 1988 (as inserted by Schedule 1 to the Local Government Finance Act

2012). Pools have to be designated by the Secretary of State for Communities and

Local Government. Each pool has to decide (and get approval from Government) on

its governance arrangements. These cover, at the least:

the rights and obligations of pool members, including

how money is to be disbursed to/between pool members and how payments

to central government are to be funded by the lead authority

the treatment of pool balances and liabilities following the pool’s dissolution.

Local authorities can withdraw from a designated pool before the pool comes into

effect if after seeing the draft Local Government Finance Report that sets out their

combined baselines and levy rate, they no longer perceive that pooling provides the

opportunities they had previously thought. To exercise this option a local authority

must write to the DCLG within 28 days of the publication of the draft Report and

before the final Report is laid before the House of Commons. The Secretary of State

will then revoke the designation. So for any pool which applied for designation in

2015/16 and now wishes to change their minds, the clock is ticking.

A core principle of pooling is that it is voluntary. So it is for local authorities to

establish whether pooling will benefit them. The benefit comes from having a

combined levy rate of all the participants in the pool that will apply to the total pool

growth (i.e. total pool retained income in excess of total pool funding baseline) that

is less than the sum of the individual levy rates of the individual authorities. It is

essentially a result of an average levy rate that needs to incorporate authorities with

either a nil or very low levy rate to bring the overall pool rate down below the 50%

cap.

One authority in the pool has to act as the lead authority, responsible for its

administration and processing the cash flows for top-ups, tariffs, safety net and levy

payments for the pool, as well as calculating and distributing the pool benefit. Local

authorities in a pool are treated as a single body, for the purposes of calculating

tariffs, top-ups, levy and safety net payments.

The technical accounting aspects for authorities that are in pool compared to those

that are not, are exactly the same, even to the point of calculating each individual

authority’s safety net or levy position, but there is then an additional step. The one

exception to the similarity is that top-up, tariff, safety net and levy cash payments

for members of the pool who are not the lead authority are made to/from Central

Government via the pool lead and not directly with Central Government. The lead

authority acts as agent for central government on behalf of other member authorities

of the pool.

For those authorities who used the CIPFA models to help with their Business Rates

accounting for 2013/14, the models reflect the previous paragraph in that they are

exactly the same for the authorities that did and didn’t pool, but the pooling version

has a bolt-on for the additional set of calculations that are needed for a pool, beyond

the calculation of the individual safety net/levy positions because it is at that point

when the additional accounting requirements kick in. At that point, the lead authority

must calculate the overall pool retained income and then apply this in the pool levy /

(and hopefully not) safety net calculations using pool total funding baselines and

safety net thresholds. Ideally the outcome will be a growth position for the pool and

it is the pool levy rate that is applied to this growth to determine the amount of levy

payable by the pool to Central Government. The benefit of being in the pool is then

found by comparing the pool levy position to the sum of the pool members’

(including the Lead’s) individual safety net/levy positions. This benefit must then be

allocated amongst all members of the pool in accordance with the pool governance

arrangements.

Every pool has its own unique governance arrangements which determine how the

pool benefit (the amount of levy saved from applying the levy rate to the whole

growth rather than individual rates to individual growth amounts), is distributed

amongst its members. Examples of allocation include an 80/20 split between

district/county members, with the allocation then being proportionate to growth

created in each area; others have chosen to split the pool benefit into a number of

‘funds’, with each fund being allocated in a different way; another approach has been

to retain all the benefit with the lead as accountable body, and distribute it to

economic development projects across the entire pool area. Many governance

arrangements allow for the top-slicing of the benefit to cover the administration costs

of the lead and also to fund safety net for any member of the pool who finds

themselves here. Any member of the pool who hits safety net therefore impacts on

the benefit of the pool as a whole and may even exceed the benefit amount, with the

other pool members then having to contribute more to the pool to cover this safety

net predicament. You may find yourself being asked to leave a pool, or not invited

to join one if you are a safety net authority.

If the governance arrangements allow for the benefit to be allocated back to the

member authorities, then debtor and creditor accruals will have to be established

between the non-lead members and the pool lead for these amounts. The

Comprehensive Income and Expenditure Statement side of the transaction should,

hopefully, serve to net down the amount of levy already accrued to Taxation and Non

Specific Grant Income and Expenditure under the individual authority’s calculation.

The lead authority should result in having an equal and opposite debtor/creditor with

each pool member equal to their pool levy contribution, and an overall

debtor/creditor with Central Government for the total pool levy contribution due to

Central Government. The accounting elements of pooling are covered in a

webinar now available on the CIPFA website

http://www.cipfa.org/services/networks/finance-advisory-

network/webinars

The effect of forming a pool will be different in each case, depending on the

membership of the pool and their individual circumstances (i.e. the balance of top-

ups and tariffs) and the rate of growth in business rates income over the life of the

pool. Local authorities therefore need to undertake their own due diligence,

modelling the individual position alongside the pool position. From the workshop

discussions and the presentation by Kettering Borough Council on their approach and

findings from 2013/14, it became very apparent that obtaining data to allow such

modelling and monitoring of the pool position was one of the key recommendations

from 2013/14 for future years, so much so that the frequency of monitoring has

been stepped up by several pools. There were however concerns from some pools

that their lead authority had not asked for any in-year data of their individual

monitoring and forecast outturn position to date, therefore how are they doing any

forecasting of the pool position? How can informed decisions be made about whether

to continue with the pool?

Other key themes emerging from 2013/14 were the need to agree consistent

approaches to putting provisions for appeals together amongst pool members,

establishing and maintaining good communication links between the pool members

at all levels (not just strategic), and agreeing and sticking to closedown timetables

for sharing year-end data and quality assuring the outcome.

The areas of concern raised mirrored the 2013/14 findings around monitoring (or

lack of) the pool position to ensure support for robust decision making, how to deal

with the cash flows between the Lead and pool members, putting the theory into

practice, general NDR accounting queries and, unsurprisingly in the current climate,

around worries about how authorities would resource the pool lead function. What

these events did allow was the making of new contacts and possible avenues for

support amongst the practitioners who are all in the same boat. The lessons

learned, concerns and suggested approaches are explored in more detail for FAN and

CBRS members on the CIPFA website

http://www.cipfa.org/services/networks/finance-advisory-network/events-

material/accounting-for-the-ndr-regime-for-pooling-authorities.

Caroline White CPFA, FAN Advisor

caroline.white@cipfa.org

@CWcipfa

Faster closing of the accounts

By Robert Baxter

On 30 January 2014, the Local Audit and Accountability Act 2014 received Royal

Assent. To give effect to many of the provisions contained in the Act, secondary

legislation was also required.

To this end, in June 2014, the Government launched the Local Audit: Consultation.

The purpose of the consultation was to gauge the views of organisations affected by

these changes and other interested parties on the draft regulations. The consultation

closed on 18 July 2014.

A key element of the consultation was around the Account and Audit regulations and

within this was the proposal to shorten the accounts preparation timetable, from the

existing dates of 30 June and 30 September for the accounts being signed and

certified by the Responsible Financial Officer and then approved and published, to 31

May and 31 July respectively.

On the 5 December the Government published the summary of responses to the

consultation and has stated that it is minded to retain the proposed approach and

thereby bringing forward the date by which accounts must be published to July,

effective from the accounts for the year 2017/18.

The Government has intended that the period of notice given for this key change will

enable authorities to make the necessary changes to their processes and give

auditing firms time to adjust their business models accordingly.

In 2014 the Audit Commission congratulated 16 bodies where auditors were able to

issue an unqualified opinion and a VFM conclusion on the 2013/14 accounts by 31

July 2014, and the body published audited accounts promptly. Although, as only 21

principal bodies have managed to publish their audited accounts by 31 July since

2008/09, a move to bring the accounts publication date forward is likely to cause

significant challenges for the majority of public bodies.

So what are the necessary changes and what can authorities do now to make the

transition smoother?

The closure of the accounts at year end is a project and successful projects need to

have a sound project management methodology in place. Creating a schedule is one

of the first tasks you should do when given a project to manage and remember that

team planning is far more effective than planning in isolation, and ensures everyone

has a stake in the schedule and ownership of the outcome.

Another key element of a successful project is to challenge the existing timescales

and processes. A good place to start is lessons learnt from the previous year, what

went wrong and why? And consider the processes and practices that need to put in

place to ensure that it doesn’t happen again. When reviewing the processes you

should also consider what efficiencies could be gained by re-engineering the current

processes. This could be using your ledger system more effectively, perhaps by

reducing manual input and investing time in manipulating your ledger reporting

capability, which will save time in the future by making the reporting processes

automated to a larger extent.

Good practice is also a good place to start and for this we may need to look at the

private sector to some extent but we could also look closer to home in the 21

principal bodies mentioned by the audit commission above, that have managed to

publish their accounts by 31 July since 2008/09.

It is clear that these bodies are managing to close earlier by questioning the status

quo and applying more efficient practices. These include ‘soft closing’ accounting

periods for say the first six months of the year and then introducing ‘hard’ closes

from period 7 onwards. This enables your external audit firm to conduct an interim

audit prior to year end thereby spreading the work more evenly through the year as

opposed to the big bang approach that is currently the norm.

In order to be able to close periods in year, good housekeeping in year is crucial.

This will include reconciling control and holding accounts and inputting feeders from

other systems on a timely (weekly/ monthly) basis. Exercising control over inputs

and regular review of the outturn to the budget will ensure that figures in the ledger

make sense.

This will hopefully mean that when year-end comes around it is just one more month

to close! This will involve however using more estimates in the accounts as you will

have less time to establish the actuals. This should not unduly affect the quality of

the accounts as some of the most material figures in the accounts are based on

estimates (non-current assets/ pension liability to name but a few) it is just a change

in mind-set.

Effective quality assurance techniques are also key to ensure that you instil quality

assurance into the whole process of the accounts preparation and working paper

production. This will involve standardisation of electronic working papers, with cross

references to the CIPFA Accounting Code of Practice and CIPFA disclosure checklists.

It is also imperative that you have early dialogue with your external auditors so that

they can agree on your planned approaches and they can build capacity into their

work planning to support you in your new working methods.

So these are just a few of the possible approaches that authorities may wish to

consider in order to be ready for the move to faster closing but as yet we haven’t

discussed any of the benefits, of which there are many.

This change will ultimately reduce the burden of the closure process and enable

finance staff to give more time to in-year financial management. The changes in

processes in-year that will be required to achieve early closure will serve to tighten

up overall financial controls as issues will need to be dealt with during the year

rather than at year end.

It can also have a positive impact on staff experience and motivation as people are

freed up to focus on value added activities and accountants become business

enablers, rather than bean counters.

In addition early closure sends a positive message about the efficiency of local

government as a whole, to which we should all be proud.

CIPFA Finance Advisory Network (FAN) will be developing training and workshop

events to assist authorities in engaging with this agenda in the coming months, so

please look out for these as they will offer opportunities to network with your peers

and learn about the processes and practices required to be ready for the change.

Robert Baxter CPFA, SS (PRAC), FAN Advisor

robert.baxter@cipfa.org

@RBTealby

Autumn Statement 2014 – Highlights

By Roman Haluszczak

The Chancellor of the Exchequer, George Osborne presented his annual Autumn

Statement to Parliament on 3 December 2014.

The UK economic situation prior to the Autumn Statement was assessed by many

economic commentators as challenging , with some serious economic storm clouds

gathering. Although UK economic growth is higher than in Europe, the recovery

needs to be sustained. The distribution of growth is still more skewed to London and

the South East and does not appear to be benefitting the country in a uniform

manner.

The OBR published its revised economic predictions in line with the Autumn

Statement. The economic growth forecast for this year has been confirmed at 3%

and it is estimated to be 2.4% in 2015-16, 2.2% in 2016-17, 2.4% in 2017-18, and

2.3% in 2018-19 and 2019-20.

The government’s planned consolidation in the next Parliament is reflected in the

fiscal assumption that total managed expenditure (TME) will fall in real terms in

2016-17 and 2017-18 at the same rate as between 2010-11 and 2014-15. The

government’s neutral assumption is that TME will be held flat in real terms in 2018-

19 the year when the deficit is predicted to be eliminated. Therefore it can be

assumed that the level of reductions over the two years will be consistent with the

total reduction between 2010-11 and 2014-15.

In order to try and achieve its consolidation target the government intends to pursue

a number of policies, the main examples are detailed below;

The Autumn Statement announced the government will seek a further £10 billion of

efficiency savings by 2017-18. This will be led by the Cabinet Office, working closely

with HM Treasury and departments. As part of this, the government will take forward

a range of digital transformation measures, including increasing the digital uptake of

public services among those online by 10 percentage points in 2016 and improving

IT procurement to secure savings from contracts due for renewal over the next

Parliament, which are estimated to be worth £4 billion per year

At Autumn Statement 2013, the government increased the target for the sale

of corporate and financial assets to £20 billion between 2014 and 2020. Since the

beginning of 2014, £6.9 billion of assets have already been sold (35% of the target).

The government recognises underused public land can play a vital role in

delivering new homes. Autumn Statement announces an increased ambition for

public sector land and commits to releasing enough land for up to 150,000 homes

between 2015 and 2020.

To deliver reductions to departmental spending, the government has also

exercised firm restraint over public sector pay. Public sector pay restraint in this

Parliament is expected to save an estimated £12 billion by 2014-15.

The government continues to encourage better joint working between public

bodies and especially in the area of health and social care as epitomised by the

Better Care Fund developments

According to the OBR the flat real terms position of TME in 2018-19 and 2019-20 will

amount to another £16.2bn of austerity, £14.5bn of which will be imposed on

government departments. These will form significant pressures on the public sector

in the new parliament.

Speaking on the public finances and the pressures now faced by public services after

the Chancellors Autumn Statement, Rob Whiteman CIPFA’s Chief Executive said:

“The staggering pressure now upon public services, with continued budget reductions

to come well beyond the end of this Parliament, means they face increasing

challenges to maintain delivery for taxpayers.

“When you add in the impact of the ring-fencing of some budgets, such as the NHS

and the protection of pensioners, the significance of the cuts still to come for other

areas of public spending could damage their ability to deliver.

“However, today’s statement contained little recognition of this and no explanation

from the Government about how public services will continue under such long-term

pressures.

“CIPFA has long argued that we need to move beyond the short-term nature of

funding in this country and avoid measures aimed only at the next political cycle. As

we stated in our recent Manifesto, we urgently need to start to address our long-

term challenges and work to fix the public finances for the next decade, not just the

next election.”

The Autumn Statement also announced changes in :

Business rates :

extending the doubling of Small Business Rate Relief to April 2016,

extending the 2% cap on the RPI increase in the business rates multiplier to

April 2016,

increasing the £1,000 business rates discount for shops, pubs, cafes and

restaurants with a rateable value of £50,000 or below, to £1,500 in 2015-16,

benefitting an estimated 300,000 properties and to

carry out a review (fiscally neutral) of the future structure of business rates to

report by Budget 2016.

On the changes to business rates Rob Whiteman said:

“As Whitehall now only takes half the money raised by business rates, with the rest

going to local government to fund services, it is concerning that the Chancellor could

be dipping into someone else pocket to pay for his business rates tax cuts.

Devolution of power to cities and regions in England:

Changes proposed include the following:

Giving new powers in specific policy areas to local authorities.

The transfer of additional budgets alongside those powers.

Enhanced power over local taxes (council tax and business rates), additional

local taxation powers, and more flexibility around borrowing and financial

management.

The creation of combined authorities and/or directly elected mayors should also be

considered in this vein. By having more control over local spending and being

allocated a share of central funds, these local groupings should be in a better

position to have greater control over their own decisions and destinies

Investment in a northern powerhouse

In June the Chancellor set out plans to make the cities of the north a powerhouse for

the UK economy, and the Autumn Statement added detail to this. It confirmed

investment of £6 billion in the road network and £1billion in rail franchises. Other

investments will include;

£235 million in a new Sir Henry Royce Institute for advanced materials

research and innovation, which will be based in Manchester and have satellites in

cities including Leeds, Liverpool and Sheffield

a new £20 million Innovation Hub for Ageing Science, in Newcastle, and a

new £113 million Cognitive Computing Research Centre in Daresbury, Warrington

Funding NHS Pressures

The Autumn Statement has delivered circa £2bn (£1.95bn) to help stave off

immediate pressures on the NHS budget in 2015/16. Around £1.3bn of the planned

spend will come from national reserves, with £700m coming from reallocated health

spending already sitting in Department of Health budgets. The £1.95bn is meant to

be recurrent funding, becoming part of the baseline for NHS funding beyond 2015-

16. However it appears unclear as to where this money might come from in future

years Capital Investment – roads and flood defences

Further details were given of flood defence funding and also road investment

strategy. In terms of the macro economic effects of these strategies, it will offer

direct employment to those companies involved in these projects and there will be

knock on spending effects in the regions where these road investment strategies are

being delivered – both directly to the companies involved and indirectly in the local

economies where the investment is being made. There should also be positive effects

on both local and regional economic growth as good and services will be able to be

transported around the UK more easily and quickly.

Housing

The government has increased the capital settlement for affordable homes Business

The government will introduce a new tax (The Diverted profits tax), using a rate of

25% from April 2015, to counter the use of aggressive tax planning techniques used

by multinational enterprises to divert profits from the UK which were originally

earned in the UK. This means the government will therefore restrict the amount of

banks’ profits that can be offset by carried forward losses to 50%, increasing their

contribution to public finances through their tax payments.

Individuals

Stamp duty will be cut for 98% of people who pay it. The new system has got rid of

‘cliff edges’ Under the new rules you don’t start paying tax until the property price

goes over £125,000, and then you only pay tax on the price of the property within

the tax bands over that price. The rates will be:

No tax on the first £125,000 paid

2% on the portion up to £250,000

5% up to £925,000

10% up to £1.5 million

12% on everything above that.

The personal allowance will be increased again from £10,000 to £10,600 in

2015 to 2016.

Children (under 12 years) will be exempt from tax (Air Passenger Duty – APD) on

economy flights from May 2015 and for under 16s from March 2016.

From 3 December 2014, if an ISA holder dies, they will be able to pass on their ISA

benefits to their spouse or civil partner via an additional ISA allowance which they

will be able to use from 6 April 2015

People known as non-domiciled in the UK for tax purposes who have been here for

12 of the last 14 years will have to pay £60k to preserve their non-domiciled status.

There will be a new charge of £90k for those who have been resident in the country

for 17 out of the last 20 years

From April 2016 employers will not have to pay National Insurance contributions

(NICs) for all but the highest earning apprentices aged under 25.

Changes to the ability of migrants to claim welfare.

Conclusion – Impact and Actions

In the light of the major parties’ embryonic post-election public spending plans, it is

clear that the age of austerity is destined to continue until 2018-19 at least or even

beyond that. Spending on public services and administration is set to fall to 35% of

GDP by 2019-20, the lowest proportion since the Second World War. It is crucial that

public sector bodies prepare themselves for a world where the formal public sector

provision of public services will radically change. Public services will still be crucial to

the fabric and wellbeing of our country. Who delivers those services and how they

will be delivered will become more and more important in the context of the efficient

satisfaction of properly defined taxpayer service needs

This is part of a longer article on the Autumn Statement. The full version can be

found at: http://www.cipfa.org/services/networks/cross-networks-briefings

Roman Haluszczak CPFA, SS(prac), Lead FAN advisor

Roman.haluszczak@cipfa.org

@Roman_Haluszcz

Impact of the Government’s welfare reform programme on Local Authorities

By Sheldon Wood

The Government’s welfare reform process, along with its centre-piece, Universal

Credit is having, and will continue to have far reaching impacts on Local Authorities

(LAs) and LA benefit services.

Already, LAs are at the forefront of the reforms. Reforms of Housing Benefit (HB)

including the spare room deduction (Bedroom Tax) and the household benefit cap,

involving often significant reductions in HB entitlement, are the responsibility of LAs

to administer and to provide advice and support to benefit claimants.

Local Council Tax Reduction Schemes and Local Welfare Provision provide LAs with

additional responsibilities, not just for administration of support but in designing and

implementing their own local arrangements and the roll out of Universal Credit

which, although eventually resulting in reducing LA responsibilities for the

assessment and payment of support with housing costs, will introduce new, wider

responsibilities for the provision of advice and support services in claiming and

maintaining claims for Universal Credit.

A recent report from the Institute of Fiscal Studies (IFS) however, shows that the

welfare reforms are failing to deliver the savings expected. The report highlights

that, although the reforms to benefits and tax credits were intended to save nearly

£20bn in the current financial year, they have produced only £2.5bn in actual cash

savings.

The reasons that savings had not been realised say the IFS, is a £5bn higher-than-

projected spending on pensioner benefits offsetting savings from other measures.

This was mainly a result of higher spending per pensioner. On average, each

recipient receives nearly £500 a year following policy decisions to give pensioners

more generous benefits, such as the triple-lock on annual pension uprating.

Once pensioner benefits are removed, around £7.5bn of extra spending is accounted

for by an increase in Housing Benefit payments and higher than expected spending

on tax credits, mainly as a result of increasing numbers of claims from those now in

work, but who are on low earnings.

Nevertheless, many benefit claimants have experienced significant reductions in the

level of benefit payments they receive. LAs have been given additional funding to

make Discretionary Housing Payments (DHP) in order to mitigate the financial impact

of the reforms on the more vulnerable claimants. This involves LAs in additional

assessments of the impact of the changes on vulnerable families and in identifying

the level and nature of additional support requirements.

This may include additional top-up payments, support in finding alternative smaller

accommodation and financial help and other support in helping them move or to

budget for household bills.

In addition, the reforms have impacted on other LA services, such as increasing

housing rent arrears impacting on collection rates and evictions and additional

provision of support from social services authorities and departments.

Figures released by the Ministry of Justice show that, the cuts to housing benefit

payments is one of the main factors leading to more than 100 rented home

repossessions a day. Possession claims in the third quarter show that of the 40,859

issued between July and September, 25,955 were by social landlords such as local

councils and housing associations. 11,100 rented properties were repossessed in the

same period, the highest quarterly figure since the records began in 2000. In

contrast, just 2,805 mortgage borrowers lost their homes in the same period.

In addition, the New Policy Institute has revealed that Council tax arrears and court

costs have increased most in areas where the level of council tax support has been

cut the most.

This however, is just the start for local authorities. The real impact will be felt once

(or, if ever) Universal Credit starts to be rolled out in a meaningful way.

Three years ago, LAs were told that, with Housing Benefit being merged into

Universal Credit and administered by DWP agencies, the responsibilities of LAs for

the provision of support with housing costs would reduce year on year between April

2014 and October 2017. The original plan was that all new claims for HB would end

from April 2014, with existing claims starting to be migrated from Oct 2014 and

would be completed by mid 2017.

Despite consistently expressed concerns over the progress of the project from a wide

range of organisations extending from the Public Accounts Committee, National Audit

Office, OBR and the Major Projects Authority, Iain Duncan Smith has continued to

insist the project remains ‘on time and on budget’.

LA Chief Executives and Treasurers in response to these assurances and timescales

have seen an opportunity to start reducing the funding and resources for LA benefit

services, in the expectation that LA responsibilities in this area would rapidly reduce

over the proposed three year Universal Credit (UC) implementation period. Many

remain under this misapprehension, even as the timetable has repeatedly slipped

since these initial estimates.

Despite the assurances of Ministers, the UC programme has been beset by problems,

delays and additional costs, not helped by overambitious timetables and arbitrary

Treasury savings, potentially undermining the work incentives built in to the new

benefit.

The UC project has been stopped, reviewed, reset and restarted; tens, of millions of

pounds of IT development costs have already been written off, with tens if not

hundreds of millions more to come. Margaret Hodge, chair of the Public Accounts

Committee, has predicted that the next Government will have to write off a further

£500m invested in IT for UC.

The project has recently appointed its 7th head in 2 years and it has been delayed by

nearly three years, with full roll out not now expected until at least the end of 2019.

The Office for Budget Responsibility (OBR) has concluded that there remains

'considerable uncertainly' about the delivery of Universal Credit.

This is despite Work and Pensions Secretary Iain Duncan Smith’s announcement in

September that the national roll out of Universal Credit system will be ‘accelerated’

and will be rolled out nationally to all jobcentres and local authorities across the

country in 2015-16, starting in February 2015.

This is however, just the first stage of roll out involving the most straightforward of

claims who would otherwise have claimed Jobseekers Allowance.

The OBR has assumed that the second part of the scheme’s introduction, which will

expand Universal Credit beyond Jobseeker’s Allowance claimants, will be delayed

another six months, on top of the government’s latest plans.

In its December 2014 Economic and Fiscal Outlook (EFO), the Office for Budgetary

responsibility (OBR) sets out forecasts for the economy and the public finances, and

an assessment of whether the government is likely to achieve its fiscal mandate.

This includes an assessment that even the much-revised schedule to introduce the

new benefit remains ‘too optimistic’.

In relation to Universal Credit, the OBR highlights that, since its March 2014 EFO, the

DWP, Major Project Authority (MPA) and the Treasury have agreed a new business

case for Universal Credit which involves the bulk of the roll out of UC being pushed

back once again to the following schedule -

the pace of the roll out for jobseeker's allowance (JSA) single cases has been

increased slightly with full roll out across the country by March 2016;

new claims for Housing benefit are due to cease on a rolling geographical

basis from May 2016 to December 2017;

Migration of existing benefit claims will not now begin until January 2018 and

last 24 months; and

The migration of employment and support allowance (ESA) and tax credits

cases (along with associated HB claims) will occur ‘at some point’ beyond the

forecast profile.

The DWP’s latest delays, plus the OBR’s assumption of another delay on top of that,

means 2.2m fewer people will move on to Universal Credit in 2016-17, 2.9m fewer in

2017-18 and 1.6m fewer in 2018-19. There will still be significant numbers of the

more complex Housing Benefit recipients who have not moved on to Universal Credit

until 2020.

In addition, Treasury has still not signed off the business case for Universal Credit

and will not decide whether to do so until summer next year. A final decision might

not come until 2016.

In response, the latest Senior Responsible Officer (SRO) for Universal Credit, Neil

Couling, commented that he was 'blown away' by the positive reaction to Universal

Credit from some of those that had moved onto it, and added -

'Instead of being driven by hard deadlines of numbers of millions of people on the

system and pressing buttons, hoofing and hoping on this, to their immense credit

ministers, permanent secretaries etc haven’t taken that easy route.

The effect of these further delays, uncertainties and timescale revisions on LA benefit

services is that, far from being able to ‘wind down’ benefit services, LAs will have a

continued responsibility for the administration of working age Housing Benefit claims,

probably until 2020, with the bulk of claims not starting to reduce until 2018/19.

In addition, there are a number of other benefits related services which will continue

to be the responsibility of LAs. These include

Administration of pensioner HB claims (which usually make up over half of an

LA’s benefits caseload) until at least 2020

Administration of HB claims from those in specialist supported accommodation

and hostels which will not transfer to UC.

Continued administration of DHP benefit ‘top ups’

Administration of Council Tax Support through locally designed schemes, but

linked to UC claims and using shared information.

Administration of Local Welfare Provision schemes which replaced the

discretionary element of the social fund in 2013

Provision a new front line ‘Universal Credit Support’ service including provision

of help, support and advice in making digital claims and in managing household

budgets under the single monthly UC payment arrangements.

As a result of these delays, the DWP has confirmed continued LA funding for

administering HB claims, but only, so far, for 2015/16

A decision is also unlikely to be made for at least another year on whether 27,000

benefits staff will transfer from LAs to central government as part of the rollout of

Universal Credit.

In places where Universal Credit has been piloted, the DWP has set up local

partnership agreements which pay local authorities for the costs associated with

‘Universal Credit Support’. It is intended that this process will be rolled out in all LA

areas in parallel with the roll out of UC, although the detailed administrative

arrangements and funding proposals have yet to be published.

These funding arrangements will be vital to the success or otherwise of this proposed

new local service. For example, under the local welfare provision schemes referred to

above, three quarters of local authorities have said they would either scale back or

cease local welfare provision if central government funding ends in April 2015, as the

DWP suggested earlier this year.

Sheldon Wood

Benefits Advisor, CIPFA Benefits & Revenues Service (CBRS)

Sheldon.wood@cipfa.org

@wood_sheldon

Difficult choices for schools in the face of reduced funding.

By Lisa Forster

In 2010 the coalition gave education funding ‘flat cash’ protection and continued with

the ring fencing of the dedicated schools grant.

Fast forward to 2015 however and this protection is starting to look more precarious.

The Lib Dems have raised serious concerns that if the Tories win the next election,

education funding will fall by roughly a quarter, this is around £9bn which equates to

the equivalent of scrapping the funding of more than two million pupils, while £640m

will be slashed from the pupil premium. Their analysis is based on the fact that the

2014 Autumn Statement announced certain tax, borrowing and spending

commitments, but has not promised to protect school budgets, despite giving

assurances that NHS funding will be spared from further cuts. Their comments were

given added credibility this week when a daily Telegraph article included a

photograph of William Hague’s private speech notes which showed that Tory

frontbenchers were told to dodge questions about whether the education budget

would be cut.

This is hardly unexpected news, as in October Lord Nash told schools they would

need to ‘cut their cloth’ accordingly after the next election.

So what does this mean for schools?

A survey in November 2014 by Browne Jacobson and ASCL9 showed that 55% of all

school leaders have earmarked reducing costs as a major priority over the coming

academic year, rising to 71% amongst secondary school leaders.

Many head teachers have in the past claimed ‘ I don’t do figures’ , however as the

above survey shows this is an area rapidly ascending the priority ladder, and many if

not all have found their role is now significantly widened to include the necessity of

being ‘financially savvy’.

Local authorities have had a few years head start on having to cut their cloth

accordingly – and it has often been painful and unpalatable. But how do schools

follow suit?

Aside from the general efficiency drive in cutting costs there are a number of

restructuring options here, namely class sizes, breadth of curriculum options and

shared services.

Around 75-80 percent of a schools budget is spent on staffing, so in order to make

savings you can tinker with the smaller stuff, such as cutting unnecessary supplies

and services and being more efficient with procurement, but for big savings – the

staff is where it’s at!

The first thing to note is that restructuring in a school is largely dependent on pupil

numbers, the more pupils you have the more classes you need, and the more staff

you need to ‘man’ these classes. It is the class size that is important here, small

class sizes may be desirable, but not financially possible.

If you increase class sizes, you need less staff and so make savings on salary costs –

but what effect does this have on attainment and parental choice?

To a large extent this depends on your cohort (behaviour and ability) and also the

9 http://www.ascl.org.uk/news-and-views/news_news-detail.survey-reveals-half-of-schools-look-

to-cut-costs-to-balance-budgets.html

teaching and support staff, in being able to manage larger classes. From the parents

point of view, schools with large class sizes are likely to be less attractive than those

who offer smaller classes –so do they vote with their feet and head for those schools

offering smaller classes (if they can find what is likely to become a rare beast in the

future). In fact a 2014 mumsnet survey claimed that up to 10 percent of parents

responding were considering removing their children from schools due to

overcrowding issues.

John Bangs, from Cambridge University's Faculty of Education, suggests that

"smaller classes are part of guaranteeing better educational outcomes”, however

with rising pupil numbers in many areas of the country this is often simply not

possible. Issues of dealing with overcrowding and simply having the physical space

to educate pupils is the more immediate challenge.

A study from the Organisation for Economic Co-operation and Development (OECD)

in 2014 showed that class sizes in the UK were higher than the international average

of 21 and above levels seen in countries such as Estonia, Greece, Luxembourg and

Slovakia. The OECD have put forward the argument that there is a trade-off between

paying teachers more, (and attracting outstanding teachers) and having larger class

sizes – with many high performing countries choosing the latter.

Andreas Schleicher, the OECD's director for education and skills, looking at Finland,

Japan, Singapore and Korea said “All those countries prioritise teaching and teachers

over infrastructure and class size."

You can only spend your money once, and whether you put it into teaching- in terms

of volume or pay is a decision each school will need to take based on its own

experiences.

The other area to consider in restructuring is what the sixth form offers. School

funding in this area has been cut to college levels and courses need careful

consideration as to their financial and academic worth. Some schools, particularly

smaller rural ones claim they can no longer afford to run a sixth form, others are

reducing the A level choices to the most popular courses only. A lean choice of

subjects may be financially effective for the school, but if students feel it doesn’t

offer them what they want, they may head for other institutions which can meet

their needs. We are then into a vicious circle – less students means less money –

and so the round of cuts begin again!

Playing with class sizes, restricting curriculum options and managing parents

expectations can be a tricky and delicate balance – and one where a virtuous circle

can so easily turn into a vicious one.

As we see the financial pressures start to bite, schools may look increasingly at

shared services. This is already evident in the growing number of academy chains

and collaborations but there are still many academies and local authority schools that

are still stand alone institutions. The shared service trend has escalated in recent

years within local authorities, and the irony now is that when economies of scale are

most needed, many schools on their own do not simply have the buying power of a

local authority. Shared staffing, procurement, back office and curriculum delivery

across schools may grow as a matter of economic necessity rather than choice.

Of course all this is conjecture, we don’t know the outcome of the forthcoming

election, we don’t know what the education financial settlement will be but we do

know that austerity is continuing and that schools should not expect a funding boost

anytime soon, in fact they would be well advised to have a think now ….just in case!

Lisa Forster, CPFA, SS(prac), FAN Advisor

lisa.forster@cipfa.org

@lisaforster7

Difference between Contracts and Grants

By Mohamed Hans

How do grants and contracts differ?

A grant is a payment to help the recipient (e.g. charity). In return, the grant funder

(a public body) gets no services delivered directly. A grant is usually provided

subject to conditions that state how the grant must be used (for example to support

the wider objectives of the public body in promoting the social, economic or

environmental well being of their area).

Grant funding is usually preceded by a call for proposals. One example would

be a grant to support a local community centre hold activities for children during the

summer holidays. The grant offer letter will normally set out general instructions as

to how this is to be achieved, for example, that children need to be kept entertained

by taking them on excursions and have sporting activities.

A "contract" on the other hand is an agreement between two or more parties which

is intended to give rise to legal relations. Under a contract, payment is made in

return for the delivery of goods or services. The agreement is defined by terms and

conditions set out in the contract which is different from the grant, as it involves a

mutual bargain involving reciprocal obligations.

Need to distinguish between contract and grant

There are clear legal and procurement reasons why it is necessary to distinguish

between a contract and a grant. Much will depend on the individual facts and

circumstances surrounding the relationship. The lack of clear definitions means that

they are sometimes used vice versa.

The Public body must however decide which funding channel is the most suitable for

their programme, service or intended outcome and is likely to provide the better

value for money. There may also be scope and good reasons to use both in some

situations especially in respect of Payment by Results contracts.

EU Procurement Rules and Grant Funding

The EU Public Procurement Directives set out the legal framework and procedures for

public procurement and apply when contracting authorities seek to acquire goods,

services and works above a specified threshold.

Contracts within the scope of the Directives - The purpose of the EU Public

Procurement Rules is to open up the public procurement market to competition to

ensure the free movement of goods and services within the EU and to ensure

equality of treatment through a standard transparent process.

Contracts outside the scope of the Directives - Even where a tender process is

not subject to the Directives, for example because the estimated value of a contract

falls below the relevant threshold, EU Treaty principles of non-discrimination, equal

treatment, transparency, mutual recognition and proportionality apply and some

degree of advertising (where there is interest from suppliers in other member

states), appropriate to the scale of the contract, is required to demonstrate

transparency.

Some services, including health, cultural and social services, are subject to less

onerous procedures as they are lesser value or non-priority contracts (Part B

Services, although this will change in the next few months under the new

procurement rules). If public bodies do not comply with the EU Public Procurement

Rules, then the decision can be challenged through the Courts.

Delivery under Contract/ Grant?

Whether a service is delivered under contract or grant will depend on the nature of

the services to be provided and the relationship the public body wishes to have with

the service provider. For example, grant funding will not be appropriate if a public

body requires a specific service to be delivered and wishes to specify, in detail, how

the service should be delivered. Grant funding may, however, be appropriate if a

public body wishes to provide financial support for a particular activity or project.

Factors to Consider:

1. Legal Power - The Public body must make sure that it has the legal powers

to make a grant. The power to make grants may be in specific terms, such as ‘a

council may make grants for the improvement of its local environment’.

2 Value for money – This allows for the inclusion, as appropriate, of wider

environmental, social and economic objectives within the procurement process. It

will not be possible to include detailed terms and conditions in a grant funding

relationship to deliver social services as will be the case in a contract. In addition,

whilst some monitoring arrangements can be put into place under a grant scheme, it

will not be very extensive as will be the case in a contract. This may be a material

factor as public bodies need to evidence clear accountability and transparency.

3. Legal risks – A key question for the public body is whether the user/

authority needs/ requirements can be delivered and secured by a grant or a contract.

Some service areas will include high legal risks as regards delivery and to mitigate

any risks the public body will need to secure appropriate terms and conditions to

protect it from potential eventualities (reputational risks, litigation, not complying

with statutory duty etc). There are also EU procurement litigation risks in the event

that an arrangement is treated as a grant when it should actually have been

procured.

4. Complexity of Service – The public authority is under a duty to ensure that the

chosen supplier is providing best value for money, are technically and commercially

capable of offering an acceptable quality of service, financially sound and likely to

remain so over the duration of the term and whether it will be able to have a good

working relationship. The more detailed and complex issues that arise, the greater

the move towards a contractual relationship rather than a grant scheme.

5. State Aid - Any award of grant funding should comply with the European

Commission's rules on the provision of State aid to economic undertakings. As

outlined in Article 107(1) of the Treaty on the Functioning of the European Union,

grant funding may constitute State aid if it strengthens the position of the service

provider relative to other competitors and therefore has the potential to distort

competition. This means that grant funding may not be the appropriate route for

establishing and maintaining most social care services.

6. Breach - The basic consequence of breaking a grant agreement is that the grant

money becomes repayable. In practice, it may be difficult to recover monies paid out

as grants and any recovery process will be timely and expensive. Breach of a

contract provision means the service provider will be required to compensate for the

loss caused under an action for damages. Any potential recovery may be higher than

the mere repayment of invoices received.

7. VAT Liability - There are different tax consequences for grants and

contracts. A grant may be eligible for Gift Aid and VAT is not payable on the grant.

Payments under a contract do not attract Gift Aid and are subject to VAT. If an

agreement is documented as a grant when it is in fact a contract, it can result in an

unplanned VAT liability for the charity and may result in risk to the future viability of

the charity.

If the contract does not state that VAT is payable in addition to the price then the

service provider (usually the charity) will be liable to pay the VAT to HMRC and so

will lose 20% of the income. Prices should be stated "exclusive of VAT" in all

agreements. If VAT is payable then the charity will receive this in addition to the

price.

8. State of the market - The market for the service required may be highly

competitive, with many potential service providers with high levels of capacity.

Alternatively, there may be no real market, with perhaps a single organisation with

limited capacity (or even no potential provider). Generally, the more competitive the

market, the more likely it is that public bodies will choose a contractual relationship –

as opposed to a grant - as the basis for receiving a service.

An important factor is competition. In some cases, the ‘market’ may consist solely

or largely of community or volunteer groups, for example bereavement support. In

these cases, a competitive grant process may be appropriate rather than a

procurement process.

One reason public bodies give grants to Civil Sector organisations (CSO) is to build

their capacity to deliver public services. Often, these services will be for people in

great need and who are hard to reach. Sometimes, a particular CSO may be the only

organisation that can reach the group. But the CSO may lack capacity in areas such

as governance, HR and premises. In such cases, the public body may decide on a

capacity building grant.

Mohamed Hans, Insurance, Procurement and

Commissioning Advisor

Mohamed.hans@cipfa.org

@CProcurement

Forthcoming Network Events: January – March 2015

Benefits and Revenues

Universal Credit and Welfare reform Update – January (dates to be confirmed)

Spring strategic update – Case Law and Welfare Reform –March (dates to be confirmed)

Completing the NNDR3 for 2014 - learning the lesson's from last year –March (dates to be confirmed)

Better Governance Forum

Managing Information Risk – January (dates to be confirmed)

Risk Management- February (dates to be confirmed)

Implementing the code of practice on managing the risk of fraud – March (dates to be confirmed)

Children’s services Network

Education finance update – March (dates to be confirmed)

Finance Advisory Network

Introduction to LA accounting and accounts closedown – step by step – January

Undertaking the 2014/15 Accounts Closedown – February and March – (various dates)

Pensions

LGPS Governance Summit - January

Accounting and audit workshops for pensions – February

Police

Accounting for Collaboration – January

Procurement Network

Key legal procurement issues in setting up public sector trading companies – February

Tax Advisory Service (FANTAS)

Tax and Alternative Service Delivery Models- January (dates to be confirmed)

Treasury Management

CIPFA TM Conference: 2015/2016 investment strategy - the alternatives – January

For all events visit www.cipfa.org/events