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Government Resources And Accounts Bill

These notes refer to the Government Resources and Accounts Bill as introduced in the House of Commons on 18th November 1999 [Bill 3] Government Resources And Accounts Bill EXPLANATORY NOTES INTRODUCTION 1. These explanatory notes relate to the Government Resources and Accounts Bill as introduced in the House of Commons on 18 November 1999. They have been prepared by HM Treasury in order to assist the reader of the Bill and to help inform debate on it. They do not form part of the Bill and have not been endorsed by Parliament. 2. The notes need to be read in conjunction with the Bill. They are not, and are not meant to be, a comprehensive description of the Bill. So where a clause or schedule, or part of a clause or schedule does not seem to require any explanation or comment, none is given. 3. The primary purpose of the Bill is to enable departmental estimates and accounts to be prepared on a resource (ie an accruals accounting) rather than a cash basis. This is necessary to enable the full introduction of Resource Accounting and Budgeting (RAB). The notes do not, and are not intended to, provide a full description of RAB. SUMMARY 4. The main purposes of the Bill are:      a.     To replace and/or amend the existing legislation on Government accounts (principally the 1866 and 1921 Exchequer and Audit Departments Acts but also the NHS Act 1977 in respect of introducing RAB into the NHS) to enable the introduction of RAB and to modernise the operation of other aspects of the Exchequer and Audit Departments Acts.      b.     To put in place enabling legislation to enable the preparation and audit of consolidated accounts for the whole public sector (Whole of Government Accounts or WGA).      c.     To enable the Treasury to incur expenditure in respect of the formation of a new body for the purpose of carrying on public-private partnership business and to provide financial assistance to that body. THE BILL: COMMENTARY ON CLAUSES Clause 1: Application of sums issued 5. The system of supply is largely non-statutory and it is not intended to change this. This clause is not, therefore, intended to provide a comprehensive legal framework for supply under RAB. It is limited to amending, to take account of RAB, the existing statutory basis for determining on what cash issued from the Consolidated Fund can be spent. This clause maintains the principle of annuality. 6. Subsections (1) and (2) modernise the provisions of section 2(1) of the Public Accounts and Charges Act 1891, repealing the older legislation. These provide that where a Consolidated Fund or Appropriation Act authorises a sum of money to be issued from the Consolidated Fund for the service of a specified year then all such money must be used for the service of that year. 7. The purpose of this provision is to ensure that sums of money drawn by departments from the Consolidated Fund can be used only for expenditure in the authorised year. Any money drawn down and not spent would have to be surrendered back to the Consolidated Fund (or be offset against issues in the next year). This prevents departments from building up cash balances that could then be used to circumvent Parliamentary spending controls. Clause 2: Appropriations-in-aid 8. This clause provides the statutory basis for the retention and use by departments of income they receive. Under resource accounting appropriations in aid (a-in-a) will be recorded on an accruals basis (ie it will be recognised when the income is earned) rather than on a cash basis as is the case at the moment. However, additional provisions are required to deal with the cash effects of a-in-a. 9. Subsections (1) and (2) enable the Treasury to direct, by Treasury Minute, that income on a resource basis may be applied as a-in-a of resources authorised by Parliament to be used for the service of a particular year. This is subject to the overall limits on the amounts of a-in-a which have been approved by Parliament and are set out in the relevant Appropriation Act. The intention of this subsection is to give the Treasury powers in the RAB system similar to those it has under sections 2(2) and 2(3) of the Public Accounts and Charges Act 1891 in the present system. 10. Subsections (3) to (5) deal with the cash consequences of resource amounts which have been authorised for use as a-in-a. Timing differences between the recognition of a-in-a on a resource basis and the actual receipt of cash require special provisions for dealing with the cash. 11. Subsection (4) applies in the situation (which should apply in the great majority of cases) where cash is received in the same financial year as the resource a-in-a is authorised. In this case the cash can be retained by the department provided it is used for the purpose authorised in the Treasury direction. If it cannot be so used then the cash must be surrendered to the Consolidated Fund. 12. Subsection (5) applies in cases where cash is received in a year other than that for which the related resource a-in-a is authorised. This might happen where the time between the recognition of the income (inclusion as resource a-in-a) and the payment by the debtor straddles the end of a financial year or similarly where a payment is received in advance of the department carrying out the service to which it relates (the resource a-in-a will not be recognised until the service is carried out and the income thereby earned) and these events falling into different financial years. Under these circumstances subsection (5) will enable the cash to be used towards the authorised purposes of the year in which it is received. If this is not possible then it will be surrendered to the Consolidated Fund. The ability to use this cash will reduce the department's overall cash requirement for the year (and hence reduce the amount it has to draw out of the Consolidated Fund) but it will not increase the level of resources available to the department in that year. Clause 3: Payments from the Consolidated Fund and National Loans Fund 13. This clause is intended to enable the modernisation of the procedures used to authorise payments out of the Consolidated Fund and National Loans Fund. 14. Subsection (1) will enable the Treasury, subject to the approval of the Comptroller and Auditor General (C&AG), to produce, authenticate and transmit the instruments necessary to enable payments to be made from the Consolidated Fund and National Loans Fund in whatever form the Treasury decides to adopt. The intention is to enable modern (in particular computerised) systems to replace the paper based procedures required by the existing legislation. 15. Subsection (3) repeals section 56 of the Finance Act 1975 which sets out the authorised signatories for requests for payments out of the funds. This provision is predicated on a paper based system of written authorisations which will not be required in a computerised system. Clause 4: Payments made in error to the Consolidated Fund 16. This clause is intended to enable the recovery of monies paid into the Consolidated Fund in error. This can arise, for example, where a department pays in money as Consolidated Fund Extra Receipts (CFERs) that it is actually entitled to retain as a-in-a. The inability to recover monies paid in error has, in the past, resulted in departments delaying the payment of CFERs until they are certain none of the money can be retained. It is hoped that the power to enable amounts paid in error to be recovered will encourage quicker payment of CFERs. 17. Subsections (1) and (2) allow the Treasury to direct that money paid into the Consolidated Fund in error may be repaid to whoever made the payment. 18. Subsection (3) makes the Treasury's power to repay amounts paid into the Consolidated Fund in error subject to the normal procedures for authorising issues from the Consolidated Fund. Clause 5: Preparation of resource accounts 19. This clause requires the preparation of resource accounts (which will replace appropriation accounts under RAB), makes provision for the Treasury to determine the form of the accounts and enables the Treasury to appoint accounting officers to be responsible for the preparation of the accounts. 20. Subsection (1) requires any departments for which Parliament has approved an estimate for a particular financial year to prepare a resource account for that year. Although they are not government departments (and hence are not bound by the requirements of this clause) it is intended that the House of Commons (in respect of Members' salaries), the House of Lords and the Parliamentary Commissioner for Administration will, when the move to RAB is complete, lay resource estimates before Parliament and produce resource accounts. 21. Resource accounts will detail in financial terms the use by departments of resources during the year (including their acquisition and disposal). 22. Subsections (2) and (3) provide that the Treasury shall direct the form of the resource accounts subject to the requirement that they shall conform to generally accepted accounting principles (GAAP) amended as necessary in the context of departmental accounts. In practice this means that resource accounts will follow the normal accounting standards and conventions used in the private sector and elsewhere in the public sector modified only where necessary to take account of the particular requirements of departmental accounts. 23. The accounting policies underlying resource accounts, which will form the basis of the Treasury direction, will be set out in the Resource Accounting Manual (published by The Stationery Office). The Financial Reporting Advisory Board (FRAB), which brings together representatives from the Treasury, departments, the National Audit Office, the Audit Commission, the Accounting Standards Board, industry and academia, must be consulted on all additions and changes (including proposals not to follow standard practice) to the Resource Accounting Manual. 24. It is proposed that resource accounts will consist of five major statements together with supporting notes: - A statement of outturn (showing actual outturn against the estimate); - An operating cost statement (analogous to a profit and loss account in company accounts); - A balance sheet; - A cash flow statement; and - A statement relating costs to objectives. The resource accounts for public sector pension schemes will adopt a different format (based on the requirements of private sector pension scheme accounts). The requirements for these resource accounts will also be detailed in the Resource Accounting Manual and will require consultation with the FRAB. 25. In addition to accounting information resource accounts will also have to include information, as required by Government Accounting (which is published by The Stationery Office), necessary to satisfy Parliamentary propriety. This will include, inter alia, a note of adjustments between estimated and actual outturn. 26. Subsection (4) requires all departments preparing resource accounts to send them to the C&AG for audit by 30 November of the financial year following that to which the accounts relate. This reproduces the timescale currently allowed to all departments, except for the Ministry of Defence (MoD), for appropriation accounts. MoD currently have a longer timescale in which to prepare their accounts but as this concession is now obsolete (MoD have in practice prepared their accounts to the same timescale as other departments for many years) the opportunity is being taken to bring MoD into line with other departments. 27. Subsection (5) allows the Treasury to appoint an official of a department (this will usually be the senior full-time official) as the department's accounting officer. Subsection (6) places a responsibility on the accounting officer for preparing the departmental resource accounts and transmitting them to the C&AG for audit. Subsection (7) enables the Treasury to appoint other officials in a department as accounting officers for part of a resource account. 28. The intention behind these subsections is to carry into the resource accounting system the Treasury's current powers to appoint accounting officers to be responsible for departmental accounts. They are not intended as a comprehensive statement of the duties and responsibilities of accounting officers (which will continue to be set out in "The Accounting Officer Memorandum" - which is reproduced in Government Accounting). 29. The distinction between the accounting officers covered by subsections (5) and (6) and those covered by subsection (7) is that the first type is responsible for the department's resource account overall, consolidated where necessary (although he or she may also have operational responsibility for specific parts of the account) whereas the second type is responsible only for a part of the account, normally corresponding with one or more requests for resources (roughly equivalent to Votes under the current system) within the resource estimate. Most departments will only have one accounting officer but where there are more than one, all the accounting officers will sign the accounts and a statement of their respective responsibilities will be appended to the account. Clause 6: Scrutiny of resource accounts 30. This clause sets out the requirements for the audit, by the C&AG, of resource accounts and the procedures for laying the accounts, together with the C&AG's reports thereon, before Parliament. In addition the Treasury's current power to sanction unauthorised spending by departments is modernised to take account of RAB. 31. Subsection (1) requires the C&AG to audit any resource account sent to him by a department. His audit certificate is required to state whether in his opinion the accounts show: - a true and fair view; - that money provided by Parliament has been expended for the purposes intended; and that - the financial transactions covered by the accounts are in accordance with the relevant authority which governs them. 32. The first assertion (the true and fair opinion) is the same as that given by auditors on company accounts. This differs from the opinion ("properly presents") currently given on the appropriation accounts and reflects the change from a cash to an accruals basis for the accounts. The second part of the audit opinion is the regularity assertion (that money has been spent as Parliament intended and that all financial transactions have been undertaken in accordance with the authority that governs them) and is very similar to the assurance currently given in the audit opinion on appropriation accounts. 33. Subsection (2) provides that when, in the course of his audit, the C&AG discovers a material use of resources that required, but did not receive, Treasury authorisation he shall inform the Treasury and the Treasury may retrospectively authorise the expenditure. This provision re-enacts (in a RAB context) the existing Treasury power contained in section 1(3) of the Exchequer and Audit Departments Act 1921. The Treasury cannot use this power to authorise illegal or improper expenditure -it can only retrospectively authorise expenditure that was itself legal and proper but which required Treasury approval. 34. Paragraph (a) of subsection (3) requires the C&AG to issue a certificate (which contains his audit opinion) and report on each resource account. Paragraph (b) requires the audited accounts to be sent to the Treasury by 15 January of the financial year following that to which they relate (as with clause 5(4) this reproduces the current timetable except that MoD are moving to the same timetable as other departments). Paragraph (c) requires the C&AG to inform the Treasury and report to the House of Commons where he is not satisfied with the results of any of his audits. 35. Subsection (4) requires the Treasury to lay the resource accounts (together with the C&AG's certificate and report) before the House of Commons. This must be done by 31 January in the financial year following that to which the accounts relate (as with subsections 5(4) and 6(3)(b) this reproduces the current timetable except that MoD are moving to the same timetable as other departments). Clause 7: Departmental accounts other than resource accounts 36. This clause provides for the preparation, audit and laying before Parliament of accounts prepared by departments other than resource accounts. The main type of accounts envisaged as being prepared under this section are those of executive agencies. This section replaces the similar powers of section 5 of the Exchequer and Audit Departments Act 1921. 37. Subsection (1) enables the Treasury to direct departments to prepare accounts other than resource accounts as considered necessary. As noted above the main accounts envisioned as being prepared under this section are those of executive agencies but the Treasury may direct that other accounts (such as trust accounts which are prepared where a department holds money and/or assets on behalf of others) not covered by specific legislation may also be prepared under this section. 38. Subsection (2) enables the Treasury to issue accounts directions specifying the form and contents of the accounts. Due to the likely heterogeneous nature of the accounts that will be produced under this section (full accruals, partial accruals and cash) no restrictions as to the form of the accounts are being included in the legislation. 39. Subsection (3) requires accounts prepared under this clause to be audited by the C&AG and laid before the House of Commons. It does not specify the form of the C&AG's audit certificate as this will vary depending on the nature of the accounts being produced. The timetable for audit and laying of accounts given in the subsection corresponds to that currently followed for accounts prepared under section 5 of the Exchequer and Audit Departments Act 1921 (the opportunity has been taken to dispense with the obsolete provision for certain MoD accounts to be prepared to a longer timetable). 40. Subsection (4) enables the Treasury to direct that any or all the accounts prepared under this clause may be laid before the House of Commons by the responsible department(s) rather than by the Treasury. Many accounts (especially those of executive agencies) which are prepared under section 5 of the Exchequer and Audit Departments Act 1921 are already effectively laid by the department themselves rather than the Treasury. This provision will enable formal responsibility to be transferred to the departments. Clause 8: Treatment of Value Added Tax 41. This clause enables the Treasury to lay down the method of accounting for VAT in departmental accounts. The intention is to enable departments to account for VAT according to accepted accounting practice (currently set out in Statement of Standard Accounting Practice 5). The accounting policy to be followed will be set out in the Resource Accounting Manual. Clause 9: Access to information by the C&AG 42. This clause requires departments to provide the C&AG with a right of access to departmental documents and a right to explanations as necessary for the purpose of conducting his audits of any departmental accounts. This clause is intended to reproduce, in a modern form, the provisions of section 28 of the Exchequer and Audit Departments Act 1866 which is the current basis for the C&AG's rights of access. Clause 10: Whole of Government Accounts - preparation 43. This clause places a duty on the Treasury to prepare consolidated accounts for the public sector in order to meet the commitment given in the Code for Fiscal Stability. It allows the Treasury to designate which public sector bodies will be covered and provides the Treasury with a power to request the audited information necessary to enable it to prepare the account. 44. Subsection (1) requires the Treasury to prepare consolidated accounts for the public sector. The bodies covered by the accounts are to be determined by the Treasury (see the discussion of subsections (3) and (4) below). This will enable the Treasury to expand the coverage of the accounts as required: it is envisioned that consolidated accounts will initially be prepared for the central government sector and will, over time, be extended to include all public sector bodies. 45. Subsection (2) gives the Treasury the power to determine the form of the accounts with the proviso that they must conform to generally accepted accounting practice modified as necessary for the needs of the public sector. It is intended that in practice the consolidated accounts will be prepared in accordance with resource accounting requirements. 46. Subsections (3), (4) and (6) provide for the Treasury to designate, subject to Parliamentary approval, those public sector bodies which are to be included in the Whole of Government Accounts. It is likely that the first accounts will only cover the central government sector (departments, trading funds and non-departmental public bodies) but that these will be expanded to include all public sector bodies (ie NHS bodies, local authority bodies, nationalised industries and other public corporations in addition to central government bodies). 47. Subsection (5) enables the Treasury to require all public bodies covered by the accounts to provide it with the audited financial information required in a specified form and within a specified timescale. In practice this information will be largely the same as the body requires to prepare its own accounts and would be audited by its existing auditors. However, the subsection is intended also be used to require departments to prepare consolidated information using the returns prepared by their sponsored bodies, and for this information to be audited before submission to the Treasury. Clause 11: Whole of Government Accounts - scrutiny 48. This clause provides for the C&AG to audit the WGA and for them to be laid before Parliament. 49. Subsection (1) requires the Treasury to send the WGA to the C&AG for audit. 50. Subsection (2) requires the C&AG to audit the accounts. Due to the nature of the accounts, which will merely consolidate accounts for which accounting officers in other bodies already have responsibility, there is no requirement for the C&AG to provide an audit opinion concerning the regularity of the accounts but simply to determine whether, in his opinion, they are true and fair. 51. Subsection (3) requires the C&AG to certify the accounts and issue a report on them. 52. Subsection (4) requires the Treasury to lay the accounts, together with the C&AG's report, before the House of Commons. 53. Subsection (5) grants a power to enable the C&AG to require from the auditors of bodies included in the WGA such information and explanations as he reasonably requires to satisfy himself that the information to be included in the WGA can be relied upon. Guidance on the operation of this power is already contained in professional auditing standards which are likely to be supplemented through the work of the Public Audit Forum which includes representatives of all the main bodies involved in public sector audit in the United Kingdom. 54. The C&AG is the auditor of, or has inspection rights at, many of the bodies that will be included in WGA. However, there are some bodies (notably local authority bodies audited by the Audit Commission) where he has no access. The power in this subsection will enable the C&AG to make enquiries of the auditors of these bodies to enable him, as auditor of the WGA as a whole, to satisfy himself that the audit has been carried out to an appropriate standard and that the information provided by the body can therefore be relied on. 55. Subsection (6) provides that once the dates by which the accounts must be prepared, audited and laid before the House of Commons have been decided upon the Treasury shall specify the dates by statutory instrument. Work on WGA is still at a developmental stage and it is not yet possible to set firm dates after the year end by which the necessary work must be completed. Clauses 12 and 13: National Health Service - Health Authorities and Primary Care Trusts 56. Health Authorities, Special Health Authorities and Primary Care Trusts are established by the Secretary of State under sections 8, 11 and 16A of the National Health Service Act 1977 ("the 1977 Act") (section 16A was inserted by section 2 of the Health Act 1999) to administer the National Health Service and to perform functions under that Act. They are funded almost entirely by payments made directly by the Secretary of State, or, in the case of Primary Care Trusts, by Health Authorities. 57. To enable the Secretary of State to ensure that he does not exceed the resources voted by Parliament for a particular year it will be necessary for him to control the use of resources by Health Authorities, Special Health Authorities and Primary Care Trusts. Clause 12 therefore provides for the Secretary of State to set a resource limit for each Health Authority and Special Health Authority, and clause 13 provides for Health Authorities to set resource limits for Primary Care Trusts. 58. The existing statutory provisions dealing with the public funding of Health Authorities and Special Health Authorities are sections 97 and 97A of the 1977 Act, as inserted by paragraphs 47 and 48 of Schedule 1 to the Health Authorities Act 1995, and amended by section 36 of, and paragraph 23 of Schedule 2 to, the National Health Service (Primary Care) Act 1997 and section 4 of the Health Act 1999. These sections provide for a cash based allocation and control system. Health Authorities are paid money in each year by the Secretary of State under section 97(1) and (3); Special Health Authorities are paid under section 97(4) which is broadly similar to section 97(3). Section 97(1) concerns the remuneration of persons providing services under Part II of the 1977 Act (for example, General Medical Practitioners). Unless such remuneration is excepted from section 97(1), it is not cash-limited. The Secretary of State is under a duty to pay each Health Authority the cost of such remuneration, and cannot impose a ceiling on such expenditure. This provision is unaffected by the Bill. Section 97(3), however, provides that the Secretary of State must pay to each Health Authority money not exceeding the amount allotted to it by the Secretary of State. This amount is allotted towards meeting an authority's "main expenditure" (defined in paragraph 2 of Schedule 12A to the 1977 Act, as inserted by section 4 of the Health Act 1999) which, in the case of a Health Authority, includes all expenditure attributable to the performance of their functions in relation to the provision of hospital-based and community health services, all their administrative costs, the costs of drugs attributed to them by the Secretary of State and certain other expenditure. The amount allotted constitutes a limit on the cash which may be spent by the authority. To enforce the cash limits set by the Secretary of State, section 97A provides that each authority is under a duty to ensure that their expenditure does not exceed the aggregate of the amount allotted and certain other income received during the year. 59. The Health Act 1999 inserts new provisions into the 1977 Act which provide for the establishment and operation of Primary Care Trusts. Each Primary Care Trust will be established for an area contained within the area of a Health Authority. The existing statutory provisions dealing with the public funding of Primary Care Trusts mirror those for Health Authorities - sections 97C and 97D as inserted by section 3 of the Health Act 1999. Under section 97C, each year the Health Authority must pay each of its Primary Care Trusts (a) the cost of "general Part II expenditure" incurred by the trust (ie subject to certain exceptions, the remuneration of persons providing Part II services) and (b) money not exceeding the amount allotted by the authority for that year towards meeting "main expenditure". Under section 97D the Primary Care Trust has a statutory duty to ensure that their expenditure does not exceed the aggregate of the amount allotted and certain other income received during that year. 60. Clauses 12 and 13 insert two new sections into the 1977 Act (sections 97AA and 97E). These new sections provide for the setting of "resource limits" for every Health Authority, Special Health Authority and Primary Care Trust in addition to the existing cash limits. 61. Section 97AA concerns resource limits for Health Authorities and Special Health Authorities. Subsection (1) imposes a duty on every Health Authority or Special Health Authority to ensure that their use of resources in a financial year does not exceed the "resource limit" set for them by the Secretary of State. This limit can be altered during the year (subsection (6)). 62. Subsections (2) to (4) of the new section 97AA are concerned with what is or is not to be taken into account for the purposes of determining whether an authority has remained within its resource limit for a particular year. 63. In particular subsection (2) ensures that the use of resources for the purpose of "general Part II expenditure", ie the cash expenditure on remuneration of persons providing Part II services, is not taken into account. This expenditure is not cash limited and will not therefore be subject to any resource limit. Subsection (3) enables the Secretary of State to give directions defining the categories of resources and uses of resources that are to be taken into account when considering whether or not an authority has met its duty under subsection (1). In particular paragraph (b) enables the Secretary of State to provide that certain uses of resources may be attributed to a Health Authority to reflect the payments for drugs that have been apportioned to the authority under paragraph 3 of Schedule 12A to the 1977 Act (as inserted by section 4 of the Health Act 1999). Subsection (4) applies section 97A(6) to (8) of the 1977 Act in relation to the duty under subsection (1) and so ensures that funds held by Health Authorities or Special Health Authorities as charitable trustees or obtained by their fund raising activities are outside the scope of the duty. 64. Subsection (5) applies the direction-making power in section 97A(3) to the duty under subsection (1). This enables the Secretary of State to give directions to a Health Authority or a Special Health Authority to secure that the authority complies with the duty imposed on them by subsection (1). Such directions might for instance mirror the current directions under section 97A(3) that require authorities to approve annual income and expenditure financial budgets for cash limited expenditure, and to monitor actual financial performance against these budgets on a monthly basis. 65. Subsection (7) ensures that a reference to the "use of resources" in section 97AA is to be interpreted in the same way as such references are to be interpreted in the Bill (clause 22 of the Bill and paragraph 90 of these Explanatory Notes). 66. Section 97E puts in place arrangements for Primary Care Trusts that mirror those that section 97AA puts in place for Health Authorities and Special Health Authorities. Subsection (1) of section 97E provides that it is the duty of every Primary Care Trust to ensure that it does not exceed the resource limit set for it by the Trust's Health Authority; the limit can be varied under subsection (4). As with Health Authorities - - use of resources for the purposes of "general Part II expenditure" is excluded (subsection (2)); - the Secretary of State will be able to direct as to the categories of resources or uses of resources that are or are not to be taken into account (subsection (3)); - charitable funds and other property held on trust are excluded (subsection (5)); - the Secretary of State will be able to direct Primary Care Trusts to secure that they comply with the duty under subsection (1) (subsection (6)).

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Prepared: 19 November 1999