Guidance

Secretary of State’s Guidance under section 42A of the National Health Service Act 2006

Updated 20 January 2023

Introduction

Under Section 40 of the NHS Act 2006, the Secretary of State may give financial assistance to any NHS foundation trust (FT) including public dividend capital (PDC), loans, grants or other payments. The Secretary of State may also guarantee the payment of any amount payable by an FT under an externally financed development agreement. He has similar powers to provide financial assistance to NHS trusts under Schedule 5 of the NHS Act 2006.

As required by section 42A of the NHS Act 2006 (as inserted by section 163 of the Health and Social Care Act 2012), this document provides guidance on how the Secretary of State may exercise his powers to provide financial assistance to NHS trusts and FTs (“providers”).

This guidance document provides details on how financial support can be accessed by providers from the Department of Health and Social Care (DHSC). It should be read in conjunction with the NHS guidance on capital, revenue and operational planning published by NHS England (NHSE).

Cash support for revenue requirements

Cash support for revenue requirements and cashflow needs is available for necessary and essential expenditure to protect continuity of patient services. Providers will have to demonstrate their revenue cash requirements to NHSE. This support will take the form of PDC where there is no set repayment schedule but there is a dividend payable at the current dividend rate.

Where cash support for revenue and cashflow requirements is drawn, the value of the support will be added to providers’ net-asset position in the year it is drawn to cover the opportunity cost of unplanned cash diverted to support the provider in that year. No adjustment is needed in subsequent years.

Due to the uplift in revenue funding, the need for cash support for revenue requirements has become increasingly rare and is only expected to arise where providers have cash difficulties.

Applying for revenue cash support

The current monthly process for accessing revenue support will continue. Providers should contact the NHSE group accounting and systems team to discuss their requirements and submit revenue support requests at nhsenglandcash.providerrevenuesupport@nhs.net.

This means submitting requests and supporting information to NHSE. The deadline for submitting requests is 4 to 5 weeks before the monthly payment date and will be confirmed on a monthly basis. Once NHSE has validated the requests, they will be submitted to DHSC for approval and issuance of PDC on the Monday before the 18th of each month. Providers will be required to sign a memorandum of understanding (MoU).

Alongside financial support, DHSC and NHSE will consider what other financial or non-financial interventions are appropriate to improve the provider’s financial situation under the circumstances. If providers apply for revenue cash support, they must work with NHSE to improve their financial position. DHSC reserves the right to attach additional conditions to any financing issued.

Working capital facilities

The primary route for revenue cash support for providers facing exceptional financial difficulties should be the monthly PDC process. However, we may consider specific requests from solvent providers for short-term working capital facilities. This will take the form of a repayable working capital facility with an interest charge. Providers should speak to their NHSE regional team who will liaise with the NHSE Group Accounting and Systems team if they require a facility.

As a pre-requisite, a provider must provide evidence of the short-term nature of the cash requirement and a specific repayment date of the loan principal and interest within one year. If there are any concerns over the ability of the provider to repay the principal and interest due, DHSC reserves the right to convert the application into a request for cash support for revenue requirements. In the event of default, any such facility will be converted into PDC as cash support for revenue requirements.

Cash support for capital requirements

System capital support complements the NHS capital regime under which integrated care systems (ICSs) have been given affordable capital departmental expenditure limit (CDEL) envelopes for system driven operational capital. All capital expenditure must be managed within the CDEL allocations given to ICSs. DHSC and NHSE cannot approve requests for financial support beyond what is affordable in ICS CDEL envelopes.

This means any capital support request must have written confirmation it has been prioritised by the relevant ICS in agreement with the NHSE regional team and that it remains affordable within the systems capital allocation before it will be considered for approval.

System capital support is for cash only, which will be provided by DHSC as PDC. This capital support is for providers with operational requirements where the expenditure is unaffordable (in cash terms) to individual organisations. (See criteria and evidence requirement for further details.)

Providers’ ability to finance the expenditure from own cash reserves or depreciation will be assessed. If appropriate, providers may be given a loan instead of PDC or asked to finance the expenditure from their own cash balances.

Criteria and evidence requirement for system capital support

A broad outline is set out below of areas of spend for which funding has been historically issued for. This is not an exhaustive list. We do not expect providers to incur disproportionate cost to evidence applications.

Specific purpose:

• equipment replacement
• fire safety
• estates and/or infrastructure works
• backlog maintenance
• IT failure
• any other ICS prioritised works

Evidenced by:

• Care Quality Commission (CQC) reports
• current or impending breaches to health and safety regulations and/or statutory requirements
• reports from external safety or advisory bodies
• asset life exceeding accepted industry standards where this is giving rise to significant and immediate patient, staff and visitor safety risks
• description of consequences if support was not provided
• letter of support from ICS

Applying for system capital support

Where a provider has prioritised capital expenditure within the system capital allocation, which is affordable in CDEL terms, and where the provider considers it has insufficient cash to finance the expenditure from its own cash reserves, then the provider will be able to submit an application to NHSE for consideration at england.capitalcashqueries@nhs.net. Application templates and further guidance will be distributed by NHSE to all providers who have a capital requirement prioritised in their ICS capital plans. However, providers should consider the level of cash held before applying for capital cash support to assess whether the expenditure can be financed internally through existing cash reserves. Escalation routes are available where there is an immediate need.

Before applications for capital support are submitted, providers should work with the NHSE regional team to establish ICS level affordability of the required support. Capital support consumes CDEL resource and will, therefore, score against the ICS capital envelope in the normal way. Multi-year schemes will be considered where there is confirmation from the ICS that these are affordable and will be prioritised within future year ICS allocations.

NHSE will evaluate applications considering factors which include but are not limited to:

• ICS and regional affordability
• ICS prioritisation
• statement of need
• deliverability
• providers financial and cash position
• a capital source and application of funding statement

Providers receiving capital support must monitor the delivery and success of the schemes to ensure that the purpose of the award is being met. NHSE and DHSC will request information on the delivery of the schemes, such as evidence of spend. Providers will be notified of the specific requirements in the MoU.

Once an ICS has prioritised a request and NHSE has confirmed the provider cannot afford to self-finance, PDC may be available for successful applications subject to DHSC approval.

Loan financing

DHSC may consider making loans available in the normal course of business on a case-by-case basis. Providers must demonstrate:

• the affordability of loan and interest repayments
• inability to self-finance the expenditure from own cash reserves
• that the CDEL requirement is clearly affordable within the ICS envelope

Some common purposes that capital loans may be requested for are set out below. This is not an exhaustive list. Providers should contact the NHSE regional team in the first instance regarding any requirement for a capital loan and no applications should be submitted to NHSE capital and cash team without establishing regional ICS level capital affordability.

Capital loans may be repayable over any period up to 25 years, subject to the term not exceeding the useful economic life of any underlying asset or investment. Loans will be provided at national loan fund rates of interest which are below market rates. Interest rates are applied on the date of signing the loan agreement.

Specific purpose:

• smaller scale operational capital investment including bridging loans

Further details

This is non-strategic spend to help supplement self-financed investment. This allows providers to bring forward spend and finance repayments from depreciation.

Bridging loans allow providers to start capital investment before surplus land is sold. The proceeds are used to repay the loan.

Depending on the timing of the disposal, the loan may enable providers to manage the CDEL impact of spend for large capital schemes across more than one financial year and any credit generated as a result of the disposal may be retained centrally.

Availability of capital and bridging loans are subject to ICS CDEL affordability and will be considered on a case-by-case basis.

Bridging loans can also be accessed for strategic capital purposes - for example, as enablers to STP capital or New Hospital Programme schemes.

Specific purpose:

• merger and acquisition support

Further details

There is no central capital budget to support merger and acquisition activity. This will be funded from ICS capital envelopes where prioritised.

Where the success of a merger is contingent on extra capital funding, providers must request or secure this funding before proceeding with the merger. Further details can be found in the NHS guidance on mergers.

Intra ICS cash transfers through DHSC

DHSC can facilitate cash transfers between providers within an ICS. This is when a provider repays PDC for DHSC to re-issue that PDC to another provider. Requests must be made to DHSC via NHSE and should include:

• details on the purpose of the transaction
• approval from both finance directors
• support from the system and region

Note that cash transfers should not be made directly between providers and must be transacted via the PDC route outlined above.

Late drawing of PDC and loans

Providers should draw any approved PDC and loan financing at the time of need and not delay drawing until the final months of the financial year, especially if the spend has already happened. This will help reduce the huge number of draws currently processed at year-end and improve the service DHSC and NHSE can provide by reducing missed, incorrect and duplicate payments during this busy period.

Reprofiling capital draws into future years

Providers should not assume or plan for an automatic right to reprofile spend. Any decision by DHSC to approve such requests will be subject to national CDEL affordability. Requests for reprofiling should be submitted as soon as possible to the NHSE capital and cash team once providers have worked with the NHSE regional team to establish ICS level affordability. Delayed requests may not be approved and providers risk losing the CDEL cover and financing available for their scheme.

Financing from outside the DHSC group

Capital investment financed from outside the DHSC group consumes CDEL resource and will, therefore, score against the ICS capital envelope in the normal way. Providers should seek advice from NHSE and DHSC before agreeing to off-balance sheet proposals.

FTs in distress and, in exceptional circumstances, NHS trusts, may borrow from private sector sources or other governmental bodies or departments only if the transaction delivers better value for money than financing through DHSC. FTs in distress and NHS trusts must seek prior approval from DHSC via NHSE. Similarly, DHSC has the power to provide guarantees to providers’ external borrowing.

However, in all these cases, because non-government lenders face higher costs, it is unlikely that there will be a value for money case for borrowing outside of the DHSC group. The interest rates applied by DHSC which are below market rates are National Loan Fund (NLF) rates. Details of NLF rates are published by the Debt Management Office. Therefore, borrowing from DHSC is the cheaper option for providers.

External borrowing is also lower value for money for taxpayers as providers are funded for finance costs (interest and dividends) by DHSC. This means interest payments on external loans represent a leakage from the DHSC group and a loss for taxpayers.

External borrowing arrangements that are deemed novel, contentious or repercussive will require HM Treasury approval.

PDC dividend policy

Public dividend capital

Public dividend capital (PDC) is a unique form of government financing provided to public sector organisations. PDC is recorded on the Statement of Financial Position (SoFP) of providers and is an asset of the Consolidated Fund.

Following a review of the dividend rate, it will remain fixed at 3.5% and providers should continue to plan on this basis until advised otherwise.

The rules governing PDC for NHS trust and NHS FTs are provided in the NHS Act 2006. This allows for the use of PDC as originating capital for NHS trusts, and initial PDC for NHS FTs. The Act also sets out the Secretary of State’s powers in determining the conditions under which PDC can be issued. Consequently, with the consent of the Treasury, the Secretary of State may determine, in respect of an NHS trust:

• the dividend which is payable at any time on any PDC issued, or treated as issued to an NHS trust or NHS FT under the 2006 Act
• the amount of any such PDC which must be repaid at any time
• any other terms on which any PDC is issued, or treated as issued

PDC is the DHSC investment in each provider that, although repayable, does not have a defined repayment schedule, so often is not repaid. Therefore, new issuances of PDC especially for nationally directed schemes are often referred to as “grants”. But for accounting purposes, it appears in the provider’s taxpayer’s equity section of the Statement of Financial Position. As PDC has a broad definition in legislation, DHSC, with the agreement of HM Treasury, can decide how it should be treated and managed.

PDC dividend charge

DHSC group accounting manual (GAM) will have the latest calculation and in-year updates of the PDC dividend charge.

The Secretary of State requires that providers pay a PDC dividend based on a charge of 3.5% on actual average relevant net assets, including subsidiaries (but not consolidated NHS charities), during the financial year as determined in the draft and/or unaudited accounts submitted to NHSE. Any difference between the amount of PDC dividend paid (in September based on month 3 (M3) and March based on month 9 (M9)), and final dividend expense (draft accounts), for the financial year must be recorded as a receivable or payable in the SoFP.

Once determined for the draft accounts, the PDC dividend expense is not recalculated to take account of any changes in net assets that may be recognised as a result of the audit of the accounts, or due to calculation errors subsequently identified in respect of prior years.

The PDC dividend payable (or receivable) is only adjusted in audited accounts to correct for errors in the calculation of the PDC dividend itself made in the draft accounts for that reporting year.

Following the implementation of IFRS 16 from 1 April 2022, relevant lease assets and liabilities should be included within the dividend calculation. Peppercorn leases will be treated akin to donated assets. Therefore, the PDC dividend impact of peppercorn arrangements will align to the treatment of donated assets.

The relevant net assets include and excludes the following:

Relevant net asset calculation	Value
Total public dividend capital and reserves (including GBS and NLF balances)	X
Less: Net book value of donated (including peppercorn leases) and grant funded assets	(X)
Less: Charitable funds (before any consolidation adjustments for charitable funds)	(X)
Less: Average daily cleared balances in GBS or NLF accounts	(X)
Less: Assets under construction relief for nationally directed schemes	(X)
Add: Cash support for revenue requirements PDC drawn in-year	X
Total relevant net assets	X

Explanatory notes

Average cash balances

The adjustment to net relevant assets calculation in respect of the Government Banking Service (GBS) must be calculated on the basis of average daily cleared balances. In practice therefore, GBS values are not deducted from 1 April and 31 March net relevant assets calculations as spot values at those dates. Rather, average net relevant assets including GBS for the year is calculated, and then the average daily cleared GBS balances deducted from that figure to arrive at the relevant net assets amount for the calculation of the dividend.

National Loans Fund deposits are considered to be analogous to GBS balances for the calculation of relevant net assets and must also be calculated on an average daily basis.

Assets under constriction (AUC) relief

The relief is solely at the discretion of DHSC, in consultation with NHSE, but is targeted at large nationally directed schemes which create material revenue impacts for providers. Those providers that receive this relief will be informed directly and eligible schemes will be notified directly in writing and will need to make adjustments to their PDC dividend calculation as set out in the example in this guidance. Providers should not assume AUC PDC dividend relief in plans unless they have been notified in writing that their scheme is eligible.

AUC relief can be claimed prior to full business case (FBC) approval on early enabling works (either self or PDC financed) or on fees funding that build up the asset. However, continuation of the relief is subject to providers obtaining relevant business case approvals in good time and complying with approval conditions set by NHSE and DHSC.

While this will provide temporary relief for providers engaged in large nationally directed infrastructure projects, it is essential that recipients make provision in plans to start making PDC dividend payments on the value of the assets from the point they are brought into use for the purposes intended and are reclassified from assets under construction. There will be no further relief from PDC dividend payments at this point and any provider that fails to make appropriate provision will not be considered for relief on any future projects. DHSC reserves the right to collect any under payments of dividends in future years.

The DHSC Capital Delivery PMO and the New Hospital Programme will capture and monitor progress on all schemes in receipt of AUC PDC dividend relief. In the event of significant delays to either (a) planned completion of projects (b) obtaining FBC approval if claiming AUC pre-FBC, DHSC will raise enquiries with the scheme and this could have implications for PDC relief available to the scheme in future.

If any specified AUC were on the balance sheet prior to DHSC awarding the relief, providers should make an opening adjustment within the PDC dividend calculation to remove it as at the beginning of the financial year. This is the effective date that the relief applies from.

Revenue PDC dividend

Where cash support for revenue and cashflow requirements is drawn, the value of the support must be added to providers’ net-asset position to cover the opportunity cost of unplanned cash diverted to support the provider in that year.

PDC dividends continue to be collected in the same way in September and March. Each time a provider draws revenue support PDC, the gross value of revenue support PDC drawn is added immediately to the provider’s net assets. This will increase the overall dividend payment due, to recoup the opportunity cost which will be collected in the next PDC dividend payment which covers the date of the draw. The additional dividend applies to the financial year that the revenue cash support is drawn and an adjustment should only be made once for each draw.

If a provider draws cash support again in subsequent years, the revenue PDC drawn for that year only should be added to net-assets. Providers should not make any adjustments to current year opening net asset position in respect of revenue PDC drawn in the prior year.

Example calculation of overall dividend payment

Example calculation	£’000
Opening capital and reserves (including GBS and NLF balances and prior to consolidation of charitable funds)	123,000
Less: Opening donated and granted assets net book value	3,000
Less: Opening adjustment to remove all relevant assets under construction (NBV) in receipt of AUC relief	5,000
Total Opening relevant net assets [A]	115,000
Closing capital and reserves (including GBS and NLF balances and prior to consolidation of charitable funds)	130,000
Less: Closing donated and granted assets NBV	8,000
Less: Closing adjustment to remove all relevant assets under construction (NBV) in receipt of AUC relief	5,000
Add: Cash support for revenue requirements PDC drawn in-year	5,000
Total Closing relevant net assets [B]	122,000
Average relevant net assets (including GBS and NLF) [(A+B)/2]=[C]	118,500
Less: Average daily cleared/available GBS balances and NLF deposits over the year [D]	20,000
Average relevant net assets for PDC dividend calculation [C-D]=[E]	98,500
Total PDC dividend expense [E*3.5%]	3,448

Other technical information

Where a provider exists for only part of the financial year, the final calculated PDC dividend should be pro-rated to reflect the number of months the provider was in existence. Where a provider is formed on or after 1 April, opening net relevant assets should be calculated after the transfer in of assets and liabilities from any predecessor bodies. For providers ceasing to exist on or before 31 March, closing net relevant assets should be calculated before the transfer of assets and liabilities to any successor bodies.

Where an existing provider acquires the services and accompanying net assets and/or liabilities of a demising provider towards the start or end of a financial year, this may have a distorting effect on the PDC dividend calculation. In such circumstances, closing net relevant assets should exclude the transferred net assets and/or liabilities to initially compute average relevant net assets for the continuing provider without the effect of the acquisition. The part year effect of the acquired net assets and/or liabilities should then be added to the average relevant net assets, before calculating the 3.5% charge. For example, where an acquisition occurred on 1 July, 9/12 of the net relevant assets acquired would be included. In the subsequent financial year, opening net relevant assets should relate to the full asset base of the enlarged provider.