Part 5: Delegated authorities
The financial freedoms and limits applying to colleges.
5.1. The college has autonomy over financial transactions arising in the normal course of business. However, some transactions have delegated authority limits beyond which colleges must obtain prior approval, regardless of the source of funds. A schedule of delegated authorities is included within this handbook at section 5.43. Colleges must ensure they are familiar with these requirements. DfE may take action in accordance with the College oversight: support and intervention framework, where colleges do not obtain the required approval in advance.
5.2. In the case of any proposed financial transaction requiring specific approval from a third party with regulatory powers (for example DfE, HM Treasury or the Charity Commission), such approval must be sought in writing in advance by the college.
5.3. Certain transactions require approval by either DfE, HM Treasury or the Charity Commission, or by more than one of these bodies. Should this be the case, a college should not make separate applications to DfE and the other bodies. DfE will arrange liaison between all the necessary parties.
Colleges should use the DfE college approvals form to request permission for any transactions beyond their delegated limits.
Disclosure
5.4. Irrespective of whether DfE approval is required, in accordance with the College accounts direction, the college must disclose aggregate figures for certain transactions in its audited annual report and accounts. Other than what is required under financial reporting standards, the Further and Higher Education Statement of Recommended Practice (SORP) and the College accounts direction, such disclosure can be anonymised.
5.5. Novel, contentious or repercussive transactions must always be referred to DfE for approval, and the request must be made to DfE before the transaction occurs. DfE may refer such transactions to HM Treasury for approval, so colleges should allow sufficient time for proposals to be considered.
- Novel transactions are those of which the college has no experience or are outside its range of normal business.
- Contentious transactions are those that might cause criticism of the college by Parliament, the public or the media.
- Repercussive transactions are those that may have wider financial implications for the sector, or which appear to create a precedent.
5.6. Certain transactions by public bodies may fall outside the usual planned range of activity and may exceed statutory and contractual obligations. These are referred to as special payments (see annex 4.13 of Managing public money), and they are subject to greater control than other payments. They include:
- staff severance payments
- compensation payments
- ex gratia, extra contractual, extra statutory and extra regulatory payments
Special staff severance payments
5.7. Special staff severance payments are paid to employees outside statutory or contractual requirements when leaving public employment. They are different to ex gratia payments and ex gratia payments that tend to arise in circumstances other than leaving employment.
5.8. If a college is considering a staff severance payment above statutory or contractual entitlements, it must consider the following issues before making a binding commitment.
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Consider whether the special staff severance payment is appropriate: A severance payment may not always be the right approach. For example, severance payments should not be made to staff with poor performance or in cases of misconduct as such cases may give rise to an impression of ‘rewards for failure’. DfE and HM Treasury are unlikely to approve such payments. Any payments should always be in the interest of the college, but especially in the interest of the learners.
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Take and document legal and HR advice: Appraise any course of action with the associated costs and the likelihood of successfully defending the case at tribunal or through arbitration. If there is a good chance of the college successfully defending any claim, the college must demonstrate why this route is not being proposed and instead, a payment to the employee is being recommended. If there is a significant prospect of losing the case, a settlement may be justified, especially if the costs of a defence are likely to be high. However, where a legal assessment suggests the college is likely to be successful, a settlement should not be offered.
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Clearly document the management and approval process: This must take account of the college’s own internal processes and employment law.
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Consider the appropriate level of payment: Following any legal advice, consider if a change from the settlement value can be justified. A severance payment is made from the public purse and therefore value for money must be demonstrated.
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Ensure you can support any non-financial considerations with evidence: For example, that learner performance has been affected by a lack of continuity of tuition due to absence or teaching by temporary staff.
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Confidentiality clauses: Colleges must ensure that the use of confidentiality clauses associated with staff severance payments do not prevent an individual’s right to make disclosures in the public interest (whistleblowing) under the Public Interest Disclosure Act 1998.
5.9. Where the college is considering a staff severance payment including a non-statutory or non-contractual element of £50,000 or more (gross, before income tax or other deductions), or when the proposed special staff severance payment is equivalent to 3 months’ salary or more (gross, before income tax or other deductions), DfE’s approval must be obtained before making any binding offer to staff. DfE may refer such transactions to HM Treasury, so colleges should allow sufficient time for proposals to be considered.
5.10. Colleges should demonstrate value for money by applying the same scrutiny to a payment under £50,000 (or under 3 months’ salary) as those over these limits and have a justified business case. Settlements must not be accepted unless they satisfy the conditions in this handbook.
5.11. Additionally, in accordance with HM Treasury’s Guidance on Public Sector Exit Payments, colleges must obtain prior DfE approval before making a special staff severance payment where:
- an exit package which includes a special severance payment is at, or above, £100,000; or
- the employee earns over £150,000
5.12. DfE approval requirements if non-statutory/non-contractual severance payment is greater than £0 but under £50,000, and/or is at least 3 months’ salary:
| Payment value | Member of staff earns up to and including £150,000 | Member of staff earns over £150,000 |
|---|---|---|
| Non-statutory or non-contractual severance payment of £50,000 or more | Yes | Yes |
| Non-statutory or non-contractual severance payment equivalent to at least 3 months’ salary | Yes | Yes |
DfE approval requirements if non-statutory/non-contractual severance payment is greater than £0 but under £50,000, and/or is under 3 months’ salary:
| Payment value | Member of staff earns up to and including £150,000 | Member of staff earns over £150,000 |
|---|---|---|
| Total severance payment (sum total of statutory or contractual and non-statutory or non-contractual elements) is under £100,000 | No | Yes |
| Total severance payment (sum total of statutory or contractual and non-statutory or non-contractual elements) is £100,000 or more | Yes | Yes |
Compensation payments
5.13. Compensation payments provide redress for loss or injury, for example personal injuries, traffic accidents or damage to property. If a college is considering a compensation payment, it must base its decision on a careful appraisal, including legal advice where relevant, and ensure value for money.
5.14. Colleges have delegated authority to approve individual compensation payments, provided any non-statutory or non-contractual element is under £50,000. Where the college is considering a non-statutory or non-contractual payment of £50,000 or more, DfE’s prior approval must be obtained. DfE may refer such transactions to HM Treasury.
5.15. Colleges should consider whether cases reveal concerns about the effectiveness of internal control systems and take steps to correct failings.
Ex gratia, extra-contractual, extra-statutory and extra-regulatory payments
5.16. Ex gratia payments are another type of transaction going beyond statutory or contractual cover, or administrative rules. Such payments are essentially voluntary and are sometimes made as a gesture of goodwill rather than from any formal obligation. Annex 4.13 of Managing public money provides examples, including payments to:
- meet hardship caused by official failure or delay
- avoid legal action due to official inadequacy
Section 106 of the Charities Act 2011 also requires that Charity Commission approval be sought for any proposed ex gratia payments, though colleges need not approach the Charity Commission directly as DfE will arrange any necessary liaison.
5.17. Extra-contractual payments are those which, though not legally due under contract, appear to place an obligation on a public sector organisation which the courts might uphold. Typically, these arise from the organisation’s action or inaction in relation to a contract. Payments may be extra-contractual, even where there is some doubt about the organisation’s liability to pay, for example where the contract provides for arbitration, but a settlement is reached without it. A payment made as a result of an arbitration award is contractual.
5.18. Extra-statutory and extra-regulatory payments are within the broad intention of the statute or regulation, respectively, but go beyond a strict interpretation of its terms.
5.19. Ex gratia, extra-contractual, extra-statutory and extra-regulatory payments must always be referred to DfE for prior approval, irrespective of the amount. HM Treasury or Charity Commission approval may also be needed. If colleges are in doubt about a proposed transaction, they should seek DfE advice.
5.20. The college must obtain DfE’s prior approval for the following transactions beyond the delegated limits described below:
- writing-off debts and losses
- entering into guarantees or letters of comfort
- entering into indemnities which are not in the normal course of business
5.21. It is important to note that the requirement to obtain such permission by a college extends to any such write-off, guarantee, letter of comfort or indemnity offered to or by any of the college’s subsidiaries.
5.22. The delegated limits are exceeded when:
- the write-off exceeds 1% of annual income or £45,000 individually (whichever is smaller)
- the write-off takes the college’s cumulative total write-offs for the academic year beyond 5% of its annual income or £250,000 (whichever is the smaller)
For these purposes, annual income is defined as the forecast total income for the current year as approved by the college board. The delegated limits are gross, that is before the impact of any insurance claim that could mitigate the impact of a loss.
5.23. In relation to these limits:
- the college should always pursue recovery of amounts owed to it, including overpayments, or erroneous payments – in practice, however, there will be practical and legal limits to how cases should be handled
- the college should only consider writing-off losses after careful appraisal, including whether all reasonable recovery action has been taken with the debtor
- if the loss or write-off is covered by insurance, the college should first assure itself that the insurers are content that there is no feasible alternative to ceasing recovery action
5.24. In dealing with individual cases, the college must always consider the soundness of their internal control systems, the efficiency with which they have been operated, and take any necessary steps to prevent any failings recurring.
5.25. The college must keep an accurate record of all amounts lost or written off regardless of value.
5.26. Before considering accepting liabilities by issuing guarantees, a letter of comfort or indemnity, the college should secure value for money by appraising the proposal through assessment of the costs and benefits of relevant options. Boards of governors also need to consider the legal and regulatory requirements of issuing a guarantee or letter of comfort to support a loss-making subsidiary company.
Find out more about the advice from the Institute of Chartered Accountants for England and Wales’s (ICAEW) to charities on loss-making subsidiaries, guarantees and letters of comfort.
The Charity Commission has also provided guidance on how charities can engage in trading to raise funds and how to apply income on trading profits in Trustees trading and tax: how charities may lawfully trade (CC35).
5.27. Colleges can dispose of fixed assets without DfE’s approval subject to the proposed disposal not being novel, contentious or repercussive.
5.28. Except when the college transfers any assets to another charity with the same or similar purposes, it must achieve the best price that can reasonably be obtained, while maintaining the principles of regularity, propriety and value for money. However, there are restrictions regarding how a college may use the proceeds of any fixed asset disposal, depending upon the type of asset.
5.29. In the case of moveable fixed assets (for example, non land and buildings, such as vehicles and IT equipment) the college must consider:
- whether the asset or assets concerned may have been acquired with the assistance of a grant or donation from a third party, including (but not limited to) DfE and whether the conditions of any such grant or donation set terms relating to disposal or the proceeds of disposal, or when an overage arrangement is in place
- whether disposal of such assets is consistent with its asset management policy and that there are plans in place to ensure that:
- investment in moveable fixed assets is sufficient to ensure the ongoing ability of the college to deliver appropriate provision for learners is not depleted
- moveable fixed assets can be replaced or upgraded when they reach the end of their economic life
5.30. Subject to addressing the above, the college may apply the proceeds of disposal (if any) at its own discretion subject to the usual considerations as set out in paragraph 5.28.
5.31. In the case of land and buildings, the college must consider the Charity Commission guidance on Sales, leases, transfers or mortgages: what trustees need to know about disposing of charity land (CC28). The college should also have an estates strategy that underpins the long-term sustainability of the operation. However, it is recognised that over time certain elements of the estate may become redundant, and it may make business sense to disinvest in certain elements of the estate and thereby unlock funds to invest in more relevant capital provision. For that reason, in the case of land and buildings (whether freehold or leasehold), the proceeds of disposal must be used for capital reinvestment in further fixed assets or to:
- repay loans to DfE and to banks
- repay any overpayments of ESFA or DfE grants, or satisfy grant conditions where a repayment to ESFA or DfE is due (for example, overage)
- exceptionally, provide working capital for colleges to avoid the risk of insolvency
5.32. If a college wishes to use the proceeds from the disposal of land and buildings for the purposes of avoiding insolvency (for example, to fund a restructuring programme), then it must first seek the approval of DfE. In accordance with the framework for College oversight: support and intervention, colleges should engage with DfE at the earliest practical opportunity to consider available options. However, given that sale of land and buildings can be particularly protracted, colleges should seek permission to use the proceeds in this way in good time and well in advance of the disposal itself.
5.33. In the case of any fixed assets that form part of an endowment fund, the college may be under an obligation to re-invest disposal proceeds in another endowment asset. In such cases the college should take professional advice.
5.34. Colleges must consider whether any particular disposal could be considered novel, contentious or repercussive. ESFA’s guidance College requirements for novel, contentious and repercussive transactions stresses that it is not practical to set out an exhaustive list of examples. But, in the case of asset disposals, such instances could include (but are not limited to):
- sale and lease-back arrangements
- disposal of sites that are considered a community amenity and are not intended to be replaced
- disposals to a related party
- gifts
- disposals that are below market value
The perception of the transaction may be as important as its substance, and, in such cases, the college must ask DfE for permission for the disposal itself, as well as for the application of the proceeds.
5.35. For the avoidance of doubt, by disposal we mean any process whereby an asset passes to a third party such as sale, the granting of a long lease, scrappage, gifting or other means. By proceeds we mean net proceeds, that is after the costs of sale (for example, professional fees and, when relevant, the settlement of any finance secured on the asset), have been deducted.
5.36. Colleges do not require DfE’s prior approval for entering into either finance or operating leases, though colleges must ensure any lease maintains the principles of regularity, propriety and value for money.
5.37. Colleges must have a policy and register covering the acceptance of gifts, hospitality, awards, prizes or other benefits that might compromise their judgment or integrity and should ensure all staff are aware of the requirements. As a charity, there are limited circumstances in which a college can make gifts which are not in direct furtherance of its charitable purposes. When making any such gifts, the college must ensure the:
- value is modest, is within its financial regulations and scheme of financial delegation
- decision is documented and achieves propriety and regularity in the use of public funds
If the college is contemplating making a gift to a member of staff, then it should consider potential tax implications. If a college intends to make a gift to a governor, it must comply with the guidance set out at paragraph 5.8 of the Charity Commission publication Trustee expenses and payments (CC11).
5.38. Colleges and their subsidiaries must obtain ESFA’s prior approval, regardless of the interest rate chargeable, for:
- new borrowing from the private sector
- amendments to existing private sector borrowing
5.39. Such borrowing will only be approved in exceptional circumstances. Borrowing which increases private sector interest costs is unlikely to be approved, as private sector lenders face higher financing costs than government which would be passed on to lenders.
5.40. Private sector borrowing refers to any borrowing from commercial lenders and also loans from local authorities or any non-public sector organisations. Existing and future lending from DfE to colleges is excluded.
5.41. Amendments to existing borrowing which may be considered include, but are not limited to:
- changes relating to the term of a loan
- requests to change the length of time to repay the loan
- interest rate change outside the existing agreement terms (including any move between a variable and a fixed interest rate)
- providing additional security
- any other changes to the terms of existing facilities, including covenant changes, which incur a fee by the lender
If the college is in doubt as to whether any proposed change is within scope or not, it should submit a consent request.
5.42. Amendments which do not require DfE consent include:
- providing periodic standard written representations to lenders
- any other changes to the terms of existing facilities, including covenant changes, which do not incur a fee by the lender and are not amendments within the scope of Managing public money as defined above.
Credit cards must only be used for business expenditure, and balances cleared before interest accrues.
5.43 This summary is not a substitute for the full handbook.
Novel, contentious and repercussive
DfE agreement is required for all novel, contentious and repercussive transactions.
Special payments
For staff severance and compensation DfE agreement is required:
- if the non-statutory and non-contractual element is £50,000 or more, or more than 3 months salary before tax
- for an exit package which:
- includes a special severance payment that is at, or above, £100,000
- is for an employee who earns over £150,000
For ex gratia, extra-contractual, extra-statutory and extra-regulatory payments DfE agreement is required.
Write-offs and liabilities
DfE consent is required when writing-off debts and losses or entering into indemnities (arising beyond the normal course of business), guarantees or letters of comfort if they exceed either:
- 1% of annual income or £45,000 individually
- 5% of annual income or £250,000 cumulatively
Disposal of fixed assets
When disposing of land or buildings, the proceeds must be used for capital reinvestment or to pay off debts. DfE agreement required if proceeds are intended to be used to support working capital.
When disposing of moveable assets proceeds may be used at the college’s discretion, subject to the usual requirements of regularity, propriety and value for money.
Leasing
DfE agreement is not needed for finance and operating leases.
Surpluses
DfE agreement is not needed to carry surplus balances forward.
Borrowing
DfE agreement is needed to take out loans or overdrafts.
Colleges have full discretion to use credit cards (for business use) provided that interest is not incurred.