Guidance

042/19 Eligibility and use of internal cost transfers for ESF Project Costs

Updated 16 August 2024

Date Issued	04 December 2019
Review Date	31 December 2020

Who should read

ESF Applicants, ESF Grant Recipients, including Co-Financing Organisations, ESFManaging Authority, Greater London Authority, IBs, GIAA.

Purpose

This action note provides clarification on the eligibility and use of internal cost transfers for payment of ESF Project costs.

Background

The purpose of this Action Note is to provide clarification on the eligibility and use of internal cost transfers between an ESF Project and a parent organisation or similar, in relation to goods or services provided by that parent/other organisation to the ESF Project.

An example of where this might occur is where a ESF project is being delivered by one team within a Local Authority and is based within Local Authority premises. In turn the Local Authority as a whole or a different team within the Local Authority organisation may provide goods or services to the ESF project and may charge the ESF Project for those goods or services via an internal invoicing and cost transfers approach.

This Action Note explains the circumstances under which the ESF Managing Authority may consider such cost transfers to be eligible ESF costs and the evidence requirements to be met by the Grant Recipient when claiming such costs from the ESF Programme.

ESF and Simplified Cost Options

The ESF 2014-2020 Programme uses Simplified Cost Options (SCO) which cover flat rate financing, standard scales of unit costs and lump sums

ESF uses two flat rates to support SCOs, these are:

• 15% Flat Rate for Indirect Costs (FRIC) - indirect costs calculated as 15% of eligible direct staff costs. Projects using the 15% FRIC do not have to provide evidence to support the claim for their indirect costs, it is claimed and paid as 15% of their direct staff costs. Claims for direct costs in addition to direct staff costs must be eligible and defrayed (paid). Evidence to support the claim for direct costs must be available to prove eligibility, justification and defrayal to a third party.

• 40% Flat Rate Indirect Costs (FRIC) – all other costs to the project (indirect and direct) are covered by the 40% FRIC and projects using the 40% FRIC only need to provide evidence to support their direct staff costs.

The 15% FRIC or 40% FRIC is agreed by the ESF project and the Managing Authority during the appraisal and approval of the project.

The requirement for evidence of a cost being incurred i.e. defrayed, also applies to direct costs paid by internal cost transfer or a similar transfer of funds process between the ESF Project and another organisation.

Internal Costs

Where an ESF Project incurs a charge/cost from a parent organisation or similar, in relation to goods or services provided by that parent/other organisation (but the parent organisation cannot show specific amounts attributable to the ESF project) these costs should be categorised as Indirect Costs and should be covered by either the 15% FRIC or 40% FRIC. ESF projects should pay the charge/cost from the 15% FRIC or 40% FRIC payment they receive.

Additional Costs

In the situation of an ESF project operating as a separate entity within a wider organisation (for example an ESF project within a Local Authority) and the ESF Project pays an additional direct cost to the wider organisation via internal cost transfer, there must be a process in place and a clear audit trail showing not only the transfer of funds between the ESF Project and the wider organisation receiving those funds, but also evidence of the same, actual costs being incurred i.e. defrayed by the wider organisation who is receiving payment from the ESF Project to a third party.

If the payment is made by an internal cost transfer and there is no supporting evidence outlined in 12 above the evidence of the internal cost transfer alone is not sufficient to support an amount included in an ESF claim.

For example, the audit trail could be as follows:

• Evidence of an invoice/request for payment from a parent organisation to the ESF project, setting out the specific, direct costs to be paid by the ESF Project and what services/goods have been provided by the parent organisation to the ESF Project;
• Evidence of the ESF Project transferring the relevant direct costs amount to the parent organisation e.g. financial journal entry, cost centre transfer record;
• Evidence of the direct, actual costs incurred by the parent organisation and evidence they have defrayed those costs, as a result of the goods/services provided to the ESF Project e.g. bank statement; BACS run.

The final bullet point is important to ensure that the ESF Project is only being charged for direct costs which have actually been incurred by the parent/other organisation (see example below). This list is not exhaustive and other documentation may be requested by the ESF Managing Authority depending on the complexity of the arrangements.

For example:

A Local Authority (LA) rents 2 floors of a building from a landlord who is independent of and has no connection with the Local Authority (other than the existing rental agreement). The LA is the lead Grant Recipient in an ESF Project and, as a direct result of the ESF Project, they extend their lease to also rent a 3rd floor of the same building. The ESF Project are the sole occupiers of that 3rd floor.

At a ‘parent organisation’ level, the LA pays the landlord a single rental payment covering all 3 floors. However, the LA then invoices the ESF Project for the direct, actual costs they have paid to the landlord for the 3rd floor space. The LA ESF Project reimburses the LA ‘parent organisation’ via internal cost transfer and then includes their portion of the rental costs as a direct cost in their ESF financial claim(s). The ESF Project retains evidence of the invoice from their parent organisation, the record of the funds being transferred from the ESF Project to the parent organisation by cost transfer and, in turn, the LA parent organisation and/or ESF Project retain evidence of the payment of costs to the landlord and the defrayal of those costs from the ‘parent organisation’ bank account. All of this evidence should then be provided to the ESF Managing Authority and/or auditors on request, as and when financial checks are being undertaken to confirm eligibility of these costs.

Projects should be aware that if the appropriate evidence and audit trail is not available for audit purposes, an auditor may be unable to quantify the expenditure as a direct cost. The cost would therefore be deemed ineligible and corrective action by the project would be required – this may include repayment of any direct costs claimed which are not eligible or a higher figure extrapolated from the sample where the ineligible costs are discovered.

In cases where an ESF Project is asked to pay costs to an organisation via internal cost transfer or a similar method, but that organisation has not incurred an actual, direct cost, the affected costs cannot be claimed from the ESF Managing Authority as a direct cost as there will be no supporting evidence of defrayal from the parent organisation.

For example:

A University owns a building. They are also a Delivery Partner in an ESF Project and that ESF Project is allowed to use meeting rooms in the University building. If the University chooses to charge the ESF Project for the use of the meeting rooms, this cannot be an eligible direct cost as the University will not incur any actual, direct costs or pay any direct costs to a third party as a result of the ESF Project usage. Whilst it is true that the University may incur indirect costs – such as heating, lighting or similar costs as part of the overall maintenance of that building, these cannot be attributed directly or solely to the ESF Project so cannot be billed or claimed as ESF direct costs. The ESF Project may choose to pay such costs from their Flat Rate Indirect Costs element of their ESF Project, but they should not include such charges as direct costs in any claim to the ESF Managing Authority.

Action

Grant Recipients should impact the clarifications set out in this Action Note against their ESF Project costs.

If a Grant Recipient identifies that costs may have been claimed which do not meet the criteria set out above, they should take action to calculate the value of those costs and submit a Self-Declared Adjustment to the ESF Managing Authority via ECLAIMS as soon as possible.

Grant Recipients must also ensure that costs which do not meet the criteria above are excluded from current financial claims which are still being processed by the ESF Managing Authority and any future financial claims yet to be submitted.

New applicants for ESF funding must ensure that direct costs which are to be paid via cost transfer are only included in financial profiles and granular budget documents if they meet the criteria set out in this Action Note.

Contact

If you have any questions about this Action Note please contact esf.2014-2020@dwp.gov.uk