Consolidated statement on the use of EU funds in the UK · Cash Flow Statement 19 Notes 20 Consolidated statement on the use of EU funds in the UK: for the year ended 31 March 2008

Consolidated statement on the use of EU funds in the UK:

for the year ended 31 March 2008

HC 439 October 2009



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Contents Page

Commentary 1

Statement of responsibilities 7

Audit Opinion 8

Report by the Comptroller and Auditor General 10

Expenditure Account 16

Balance Sheet 17

Cash Flow Statement 19

Notes 20

Consolidated statement on the use of EU funds in the UK: for the year ended 31 March 2008

Commentary

The background to this Consolidated Statement

1. The Economic Secretary to the Treasury announced to the House of Commons on 20 November 2006 that, as part of ongoing work to improve the accountability of European Community (EC) funds, HM Treasury would prepare a Consolidated Statement on the use of EC funds in the United Kingdom (the Statement). The UK’s first Consolidated Statement was published on 17 July 2008 and covered the financial year ending 31 March 2007. This is the second Consolidated Statement and covers the financial year 1 April 2007 – 31 March 2008.

2. The audit and publication of these statements strengthens Parliamentary scrutiny of the UK’s management of EC funds and helps to detect weaknesses in control systems, which can then be tackled more quickly and effectively. The Government hopes that the European Court of Auditors and the European Commission will be able to take into account the UK’s Statement and the Comptroller and Auditor General’s (C&AG) audit opinion and Report when performing their own audit and control work. Similar initiatives are underway in other Member States.

Respective responsibilities of the UK Parliament and Devolved Administrations

3. In accordance with the devolution settlement, relations with the European Union are the responsibility of the Parliament and Government of the United Kingdom, as Member State. Responsibility for implementing EU obligations, which concern devolved matters, lies with the relevant devolved administration. The proper administration of European Funds in Wales, Scotland and Northern Ireland is a matter for them and this Consolidated Statement of the use of EU funds is prepared without prejudice to this devolution of responsibilities.

Preparation of the Statement

4. HM Treasury has taken responsibility for performing the consolidation underlying this Statement on the basis of figures provided by the Managing Authorities1, which remain accountable for the propriety of the reported spending. It is therefore not the intention that the Consolidated Statement replaces the reporting of the receipts, payments and balance sheet impact of EU funding by UK Central Government bodies. Such bodies will continue to report the impact of EU funding following the principles laid down in the Government’s Financial Reporting Manual (FReM) for the relevant period.

5. This is the second UK Consolidated Statement, and along with the accompanying Comptroller and Auditor General’s Report, it honours the Government’s commitment to present an annual consolidated statement of UK Central Government receipts and use of EC funds. The purpose of the Statement is to bring together the payments and receipts, in respect of EU sponsored projects in the UK, into a single set of financial statements. It also offers greater scrutiny of the UK’s management of EU funds and of the financial relationship between the UK and the EU.

1 For the purposes of this Statement, the Managing Authorities comprise the Devolved Administrations and Westminster Departments managing EU funds.

Consolidated statement on the use of EU funds in the UK: for the year ended 31 March 2008 1

6. The announcement in November 2006 referred to the preparation of a consolidated statement in accordance with International Financial Reporting Standards (IFRS)2 adopted by the European Union (EU), in so far as they are applicable. The UK Government has announced that it will move to reporting on an IFRS basis from 2009-103 and hence the financial reporting of EU funds in the Managing Authorities’ individual financial statements will not move to an IFRS basis until that year. Until then, UK Government financial statements will be prepared under UK generally accepted accounting practice (UK GAAP).

7. The format of the 2007-08 UK Consolidated Statement is essentially the same as in the first year but HM Treasury is continuing work with the UK Managing Authorities to develop the format and content with the aim of improving reporting and disclosure of EC funds in future UK Statements.

The Comptroller and Auditor General’s Audit of the 2007-08 Consolidated Statement

8. The Comptroller and Auditor General has audited HM Treasury’s work on the 2007-08 Consolidated Statement. His Report is published with the Statement.

Internal Audit of Structural Funds

9. All systems are regularly audited by the internal audit sections of the Government departments or devolved administrations responsible for the control of structural fund expenditure. In addition, these internal audit sections ensure that at least 5% of expenditure at project level is subjected to the controls required by Article 10 of Commission Regulation 438/2001.

10. The results of those audits are used by management to strengthen procedures during the programmes implementation and also at closure to obtain reasonable assurance that the expenditure certified to the Commission is correct.

11. The latest available audits by the internal audit sections in departments and devolved administrations generally reported a positive picture with most management bodies having a satisfactory level of assurance that systems operate adequately. Where this was not the case, action plans were agreed to address any weaknesses.

Internal Audit of Agricultural Funds

12. As required by Regulation 885/06 each paying agency has an Internal Audit Service independent of the other arms of the entity that reports directly to the agency’s director. The Internal Audit Services are required to verify that the procedures adopted by the agency are adequate to ensure compliance with Community rules and that the accounts are accurate, complete and timely.

13. Verifications may be limited to selected measures and samples of transactions provided that an audit plan ensures that all significant areas, including the departments responsible for authorisation, are covered over a period not exceeding five years.

2 IFRS includes pronouncements by or endorsed by the International Accounting Standards Board (IASB), including the Framework for the Preparation and Presentation of Financial Statements, the accounting standards – international accounting statements (IAS) and international financial reporting standards (IFRS) – and interpretations thereof issued by the Standards Interpretations Committee (SIC) or its successor, the International Financial Reporting Interpretations Committee (IFRIC). 3 Budget 2008, C103


14. The Internal Audit Services’s work is performed in accordance with internationally accepted standards, recorded in working papers and result in reports and recommendations which are addressed to the agency’s top management.

15. The Certifying Body for the Agricultural Funds reports on whether the annual accounts of the Paying Agencies are in all material respects true, complete and accurate and that internal control procedures have operated satisfactorily. The Certifying Body reports have confirmed that the Internal Audit Services, in all the UK paying agencies, are operating to a high standard.

The UK’s Financial Relationship with the EU

16. Member States’ contributions to the Budget of the European Communities are made on the basis of the financing system set out in the Own Resources Decision which was agreed by all Member States and incorporated into UK law by virtue of the EC (Finance) Act 2008. The contributions relate to calendar years and are formula based using factors that are in many cases subject to periodic revision over a number of years as better information becomes available. UK contributions to the EC are not covered in the Statement; these are accounted for as part of the separately published Government’s Consolidated Fund accounts, and audited separately.

Fund flows from the EU to the UK Government and on to beneficiaries

17. Most EC receipts coming to the UK are paid from the European Commission’s account held in the UK, the EC No. 1 account. This account is administered on behalf of the Commission by the Exchequer Funds and Accounts Team in HM Treasury. Funds are transferred from the EC No. 1 account to the relevant Department via the HM Treasury No. 4 account. Managing Authorities make claims to the EU in Euros. These claims are settled by the Commission in Sterling using exchange rates provided by the Foreign Exchange Team at the Bank of England. The Structural Funds payments from the Commission, which are in euros, are converted into sterling using the applicable Bank of England rate.

18. Some claims are not settled through the EC No 1 account – for example, payments to Research Councils. The Commission makes these payments directly to the entity concerned using a commercial bank. The final level of receipts from the EC Budget will be affected by the closure process or by any disallowance, both of which may occur several years after funds have been paid out to recipients.

19. Twinning project4 receipts that are to be transferred to other Member States or to mandated bodies as EC funding for their part in the project are not income of the UK Managing Authority and are therefore excluded from this Statement.

20 Intervention stocks5 are purchased with UK funds and are not incorporated into this Statement but are accounted for in the financial statements of the Department for Environment, Food and Rural Affairs (DEFRA).

4 Twinning projects are EU funded projects that support the capacity building in new Member States or the Candidate Countries. They are delivered by the public sector, usually by central government. These are funded through pre-accession funds. 5 Intervention stocks are stocks held by paying agencies in the European Union as a result of intervention buying of commodities subject to market support. Intervention stocks may be released onto the internal markets if internal prices exceed intervention prices; otherwise, they may be sold on the world market.


Events since 31 March 2008

21. Since 31 March 2008, the following material events have occurred in respect of the programmes reported in this statement.

Common Agricultural Policy Funding

Environment, Food and Rural Affairs

AD HOC DECISION NO 28

22. The Commission published Ad Hoc Clearance Decision No 28 (2008/582/EC) on 15 July 2008. This contained corrections which, for the UK, related solely to the Rural Payments Agency (RPA). The total disallowance was around £55m, the vast majority of which concerned the use of remote sensing technology for Arable Crops. Improvements in the technology have reduced the risk of a further financial correction on this issue.

AD HOC DECISION NO 29

23 The Commission published Ad Hoc Clearance Decision No 29 (2008/960/EC) on 19 December 2008. The total financial impact relating to the UK was £28m. The correction is broken down as follows:

(i) £22.2m for perceived control failings in the administration of the fruit and vegetable operational programme regime by RPA. In response to the findings of the Commission auditors, RPA implemented a rigorous programme of remedial measures in relation to scheme administration with the aim of reducing exposure to further audit criticism. One element of the disallowance related to shared facilities is being contested at the European Court of Justice.

(ii) £4.87m for perceived failings with cross-compliance inspections in Scotland and England during 2005. The vast majority of this correction relates to RPA (£4.6m) for failure to meet prescribed levels of inspection during the first year of Single Payments System (SPS) (2005). For subsequent years the number of inspections has met the regulatory requirements.

(iii) £0.94m for insufficient controls regarding casualty animals entering into the scheme for cattle Over Thirty Months (OTMS). There is no further risk of disallowance as the scheme ended in 2006 when animals over thirty months were allowed to enter the food chain subject to passing the BSE tests.

The decision also ratified the disallowance of a further £57.78m for late payments of 2005 SPS claims paid during financial year 2007 (i.e.16/10/2006-15/10/2007). The sums concerned had already been withheld under budget discipline procedures.

AD HOC DECISION 30

24. In February 2009, the Commission formally presented proposals for Ad Hoc Clearance Decision 30 to the Agricultural Funds Committee and the Decision contained corrections which, for the UK, related solely to the RPA. The total disallowance proposed was slightly less than £9.3m and related to certain export refund payments made during 2003-2007. New IT links between systems have been introduced to reduce the risk of future disallowance.


Northern Ireland Executive

25. A potential financial correction of £28.5m relating to the Single Farm Payment Scheme and land-based Pillar II schemes has been notified by the European Commission for perceived deficiencies with on-the-spot inspections. This case was referred to the EC’s Conciliation Body, which considered the matter at its hearing on 1st April 2009 the outcome is still awaited.

Structural Funds

Scottish Executive

26. As a result of ongoing European Commission audit missions a further £19m has been provided to cover any potential irregular expenditure in the delivery of the of Structural Fund programmes. The Scottish Executive is working with Commission auditors and has supplied further information, which should reduce the level of potential irregularities.

Department for Communities and Local Government (DCLG)

27. Three audits of European Regional Development Fund (ERDF) programme expenditure have been closed and so far approximately £8.2m of irregular expenditure has been removed from the declaration to the Commission. Of this £5m has so far been recovered from grant recipients. In addition, as part of the 2000-06 programme closure arrangements across all Member States, a number of audits have been started by ECA and Commission auditors both before and after 31 March 2008. These continue to progress and final decisions are awaited.

28. DCLG works in conjunction with Government Offices to provide further evidence and legal argument to assist in resolving issues and follow up issues that arise with projects, as appropriate.

29. The Commission has announced a financial correction of approx £24.5m (€26m) relating to the 1994-99 Programmes.


30. £53m of potential financial corrections was announced by the European Commission at a press briefing in November 2008 and relates to the Northern Ireland Single Programme Document (NISPD) and Special Support Programme for Peace and Reconciliation in Northern Ireland and the Border Counties of Ireland (PEACE I) programmes. Negotiations on the closure audits of these programmes continue and recent revised closure proposals (July 2009) from the Commission has indicated a reduction in the proposed correction to £34m – discussions continue with Commission officials in an effort to reduce this new proposed financial correction even further. Therefore, at this time the final liabilities have not yet been determined.

The Format of these Financial Statements

31. Managing Authorities are required to account for their inward and outward flows on an accruals basis under UK GAAP (and, from 1 April 2009, IFRS), recognising expenditure to beneficiaries as it is incurred, with a matching debtor from the EU. That debtor will not be extinguished until such time as the EU approves the claims – or imposes a disallowance – which can be several years after the expenditure has been incurred. In the meantime, as a result of this time lag between inward and outward flows, the UK Exchequer bears the cost of the EU programme.


32. Such an arrangement does not easily lend itself to a ‘traditional’ presentation of the primary statements of an income and expenditure statement, a balance sheet and cash flow statement. Each of these might contain a combination of EU funds and expenditure supported, temporarily, by the UK Exchequer. Primary statements have nevertheless been developed supported by explanatory narrative to aid understanding of the figures in the statement. HM Treasury will continue to improve these primary statements through feedback from users and contributors to the Consolidated Statement.

Ongoing work to improve the quality of information provided by this statement.

33. For the 2007-08 Statement HM Treasury worked closely with Managing Authorities and the NAO to refine our understanding of the underlying transactions and how they should be reported in the Statement. This has led to the auditors (NAO, Audit Scotland, The Wales Audit Office and The Northern Ireland Audit Office) undertaking increased audit testing of EU funding transactions reported in the underlying accounts.

34. For the 2008-09 Statement, HM Treasury will continue to work closely with Managing Authorities and the NAO to further improve joint understanding of the underlying transactions and how they should be recorded in both the Statement and in the general ledger of Managing Authorities. In light of this work we will also review the form and content of the Statement. In addition HM Treasury and the NAO will undertake a joint exercise to examine in more detail what UK temporary funding represents and how it should be best reported in the Statement.

35. Work is ongoing to develop better guidance on the accounting requirements for the Statement. HM Treasury will continue its work with Managing Authorities to develop clearer and more comprehensive guidance on the recognition and measurement of EU funding to be incorporated into the 2010-11 FReM. HM Treasury will also examine the scope for lower level guidance supporting that in the FreM, to ensure that underlying processes are consistent across Managing Authorities.

Sir Nicholas Macpherson Permanent Secretary HM Treasury 05 October 2009


Statement of responsibilities

Statement of the Responsibilities of HM Treasury’s Accounting Officer in relation to the Consolidated Statement on the Use of EU Funds in the UK

1. Following the announcement made by the then Economic Secretary to the House of Commons on 20 November 2006, HM Treasury has prepared a UK Consolidated Statement on the use of EU Funds for the financial year 2007-08. The Statement is prepared on an accruals basis and includes an expenditure statement, a balance sheet and a cash flow statement intended to give a true and fair view of the receipt and expenditure of EU Funds by UK central government sector entities.

2. HM Treasury’s Accounting Officer has overall responsibility for the preparation of the Statement, which consolidates the EU Funds accounted for by the individual central government sector entities detailed at Note 2. Responsibility for the recording and regularity of underlying transactions rests with the Accounting Officers of the individual entities that account for the receipt and payment of EU monies.

3. In preparing the Statement, HM Treasury’s Accounting Officer has, so far as is relevant to this Statement:

• observed the requirements of the Financial Reporting Manual (FReM);

• applied suitable accounting policies on a consistent basis;

• made judgements and estimates on a reasonable and consistent basis; and

• stated whether applicable accounting standards have been followed and disclosed and explained any material departures in the accounts.

4. Responsibility for the preparation of the returns of expenditure, receipts and other relevant accounting information for public sector entities accountable for the payment of EU Funds, rests with the Accounting Officers of the relevant entities. These Officers are responsible for preparing data capture returns for that body in accordance with the requirements set by the Treasury. In discharging his responsibilities for the preparation of the Statement, HM Treasury’s Accounting Officer relies upon the returns provided by those Officers.


Independent auditor’s report to the Economic Secretary to the Treasury I have audited the Consolidated Statement on the use of EU funds in the UK for the year ended 31 March 2008. These comprise the Expenditure Account, the Balance Sheet, the Cash Flow Statement and the related notes. These financial statements have been prepared under the accounting policies set out within them.

Respective responsibilities of the Treasury, other Accounting Officers and auditor

HM Treasury’s Accounting Officer has overall responsibility for the preparation of this Statement which consolidates the EU Funds accounted for by the individual central government entities detailed in note 2. Responsibility for the recording and regularity of underlying transactions rests with the Accounting Officers of the individual entities that account for the receipt and payment of EU monies. These responsibilities are set out in the Statement of Responsibilities.

My responsibility is to audit the financial statements in accordance with relevant legal and regulatory requirements, and with International Standards on Auditing (UK and Ireland).

I report to you my opinion as to whether the financial statements give a true and fair view and whether the financial statements have been properly prepared in accordance with the accounting policies outlined in them. I also report whether in all material respects the expenditure and income have been applied to the purposes intended by Parliament and the financial transactions conform to the authorities which govern them.

In addition, I report to you if I have not received all the information and explanations I require for my audit, or if information required by the Financial Reporting Manual, insofar as it is applicable, regarding other transactions is not disclosed.

I read the other information published with the Consolidated Statement and consider whether it is consistent with the audited financial statements. I consider the implications for my report if I become aware of any apparent misstatements or material inconsistencies with the financial statements. My responsibilities do not extend to any other information.

Basis of audit opinions

I conducted my audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. My audit includes examination, on a test basis, of evidence relevant to the amounts, disclosures and regularity of financial transactions included in the financial statements. It also includes an assessment of the significant estimates and judgements made by the Treasury and other Accounting Officers in the preparation of the financial statements, and of whether the accounting policies are most appropriate to the Statement, consistently applied and adequately disclosed.

I planned and performed my audit so as to obtain all the information and explanations which I considered necessary in order to provide me with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error, and that in all material respects the expenditure and income have been applied to the purposes intended by Parliament and the financial transactions conform to the authorities which govern them. In forming my opinion I also evaluated the overall adequacy of the presentation of information in the financial statements.


Qualified opinion arising from inconsistent application of accounting policies

As detailed in my accompanying report, the financial statements are not based upon bookkeeping in a single ledger that supports the production of a trial balance. The process of data capture is vulnerable to the risks of inconsistencies among the UK government bodies involved.

As a result, there is uncertainty over the completeness and reliability of data concerning transactions and balances relating to the use of EU funds in the UK. In my opinion, accounting policies have not been consistently applied across the component entities in relation to the identification of debtor and creditor balances and related transactions between entities, the treatment of EU funding, the compilation of cash balances and the recognition of provisions for financial corrections. Accordingly, these consolidated financial statements contain material misstatement, the quantification of which is dependent on professional judgement in the interpretation of those policies. As a direct consequence of the uncertainties surrounding the reliability of the balance sheet, I could not verify the figures for Temporary UK Funding (£182,839,000 in the balance sheet) or Other Receipts Direct from the EU (£108,530,000 in the cash flow statement).

Except for adjustments that would be required to the balance sheet, expenditure statement and cash flow statement as a result of the application of consistent accounting policies, in my opinion:

• the financial statements give a true and fair view of the state of affairs on the use of EU funding in the UK as at 31 March 2008, and of the expenditures and cash flows for the year then ended; and

• the financial statements have been properly prepared in accordance with the Financial Reporting Manual, insofar as it is applicable to the Consolidated Statement.

Opinion on Regularity

In my opinion, in all material respects, the expenditure and funding have been applied to the purposes intended by Parliament and the financial transactions conform to the authorities which govern them.

Report

Please see my attached report.

Amyas CE Morse

Comptroller and Auditor General

National Audit Office

151 Buckingham Palace Road

Victoria

London SW1W 9SS

12 October 2009


Report by the Comptroller and Auditor General

Consolidated Statement on the Use of EU Funds in the UK for the year ended 31 March 2008

Introduction

1. This report relates to the 2007-08 UK Consolidated Statement on the use of European Union (EU) funds, and is the second statement produced by the Government. As explained below HM Treasury’s Accounting Officer has overall responsibility for the preparation of this Statement. The arrangements for accounting for the use of EU funds are explained in the Commentary to the Statement. Funding from the EU and expenditure made from these funds are accounted for by the UK authorities who receive them and are included in their statutory audited accounts. The Accounting Officers of these authorities are responsible for the recording and regularity of the underlying transactions.

2. I have audited this Statement to give my opinion on whether it presents a true and fair view and whether the underlying transactions conform to the authorities which govern them. In forming my opinion I have considered, in accordance with International Standards on Auditing, the results of specified audit procedures carried out by auditors of the National Audit Office, Audit Scotland, the Wales Audit Office and the Northern Ireland Audit Office on the underlying statutory accounts.

3. The Treaty establishing the European Community (the Treaty) provides the basic legal framework for the Budget of the EU. The Budget includes a number of separate funds, including the European Agricultural Guarantee Fund (EAGF), the European Agricultural Fund for Rural Development (EAFRD), the European Regional Development Fund (ERDF) and the European Social Fund (ESF). These are governed by secondary legislation made by the Council of the EU (the Council) and the European Commission (the Commission) which has overall responsibility for implementing the budget. The Council regulations and decisions define the eligibility criteria which final beneficiaries have to meet to be entitled to EU funds. They also specify certain control processes which must be implemented by Member States. Within the Member States, national authorities are responsible for overseeing the implementation of EU funded schemes in accordance with EU legislation. This includes determining whether final beneficiaries have met the eligibility criteria before payment is made. The national authorities also have a financial reporting responsibility to the Commission.

4. My audit is designed to ensure that, in all material respects, correct amounts are paid to eligible beneficiaries who satisfy the criteria. Where the conditions are not met, I consider the element of the transaction which is not in compliance with the regulations to be ‘irregular’. Paragraphs 14 to 19 consider the results of my audit in this area.

5. The UK authorities, in common with other Member States, are also required to meet certain procedural and other requirements in EU regulations and decisions. If they do not, the Commission may determine that conditions have not been met and levy a financial correction on the Member State. Where this occurs, the Commission makes a reduction in EU funding made to the Member State for expenditure on programmes. While my audit provides an opinion on the regularity of payments of EU funds by UK government bodies to final beneficiaries, only the Commission is able to determine whether any financial correction is due. Any such shortfall in funding for UK expenditure is made good by the UK taxpayer. I consider


that any expenditure met by the UK taxpayer in these circumstances is outside the intentions of the legislative authorities and therefore irregular.

6. These financial corrections are normally made some considerable time after the payments to final beneficiaries under the relevant programme. They normally result from inspections and audit by the EU authorities, sometimes as part of the formal closure of a scheme or multi-year programme. Hence it can be several years before financial corrections are implemented.

Responsibilities for the preparation of the Consolidated Statement

7. HM Treasury’s Accounting Officer has overall responsibility for the preparation of this Statement, which consolidates the EU funds accounted for by the individual central government sector bodies detailed at note 2 to the statement.

Qualified True and Fair Opinion

8. Under International Standards on Auditing (UK & Ireland), I am required to give my opinion on whether the Consolidated Statement presents a true and fair view of the use of EU funds in the UK. I have qualified my opinion for the reasons set out below.

9. The accounting policies for EU funds are set out in the Financial Reporting Manual (FReM), which has been adopted by the UK government as the basis for producing its accounts. All UK entities with EU funding complied, in all material respects, with the FReM in producing their own financial statements and their interpretation of the guidance was within an acceptable range of professional judgement. For the purposes of this Consolidated Statement, however, transactions and balances have not always been recorded in a consistent manner. For example, the specific accounting policies and treatments for recognising EU funding and recognising provisions for financial corrections differ.

10. My audit included consideration of the accounting treatment for recognising provisions and disclosing contingent liabilities as a result of probable or possible financial corrections by the European Union. In my opinion the UK authorities in receipt of EU funds have not been consistent in their interpretations of Financial Reporting Standard 12 (“Provisions, Contingent Liabilities and Contingent Assets”) when submitting accounting data for the Consolidated Statement. As a result it is my opinion that the amounts provided for in note 12b do not include estimates for all of the cases where a financial correction is probable.

11. The financial statements are unusual in that they are not drawn up from a single ledger that supports the production of a trial balance, but from a series of returns made by component bodies. As some component bodies have not maintained separate or specific ledger accounts of EU related debtors, creditors and cash balances there is uncertainty over the completeness and reliability of Consolidated Statement data concerning these balances and the related transactions.

12. As a result of the inconsistent applications of accounting policies and incomplete records detailed above, I have been unable to confirm that the provisions, debtors, creditors and cash balances within the balance sheet and related expenditure entries have been compiled on a consistent basis and are materially accurate. As a direct consequence of the uncertainties surrounding the reliability of the balance sheet, my audit could not verify the figures for Temporary UK Funding (£182,839,000 in the balance sheet) or Other Receipts Direct from the EU (£108,530,000 in the cash flow statement).


13. I am content that, with the exception of adjustments which may have been required to the balance sheet, expenditure statement and cash flow statement as a result of these matters, the accounts present a true and fair view of the EU funded activities of the UK central government.

Regularity of payments to final beneficiaries

14. My audit included the examination, on a test basis, of evidence that payments by UK government bodies to final beneficiaries in 2007-08 were, in all material respects, in conformity with the authorities which govern them. As a result of the audit, I have been able to confirm that payments generally complied with these requirements and were, in all material respects, made at appropriate amounts to final beneficiaries who met the eligibility criteria. I noted a number of procedural and administrative matters which, whilst not providing evidence that payments to final beneficiaries were subject to material irregularity, give rise to the risk of the Commission imposing financial corrections in the future.

Regularity of other transactions

15. Where the Commission determines that certain procedural and legislative requirements have not been complied with, it may propose a financial correction. The Commission makes an initial assessment of the consequences of the weakness. It then discusses this with the UK authorities before deciding on the level of the financial correction to be applied. This correction is then made by restricting the level of future funding made available to the UK, with the resulting cost being met by the UK taxpayer.

16. When the UK authorities become aware that a financial correction may be necessary, either from their own knowledge or from notification by the Commission, they provide for these amounts in their statutory accounts. Provisions for potential financial corrections of £441.8 million have been included in the Consolidated Statement. These provisions, relating predominantly to the Commission’s findings on expenditure and control systems in prior periods, represent a probable outflow of economic benefit but I do not consider these transactions to be irregular at this point. Once the Commission has determined the final correction, this represents a crystallised loss to UK funds which I consider to be irregular.

17. During the financial year 2007-08, financial corrections totalling £23.9 million crystallised, as set out in Table 1 below. I consider that there are no material EC financial corrections within the Statement for 2007-08 and I have therefore not qualified my regularity opinion in this respect.


Table 1 : UK financial corrections confirmed by the Commission in 2007-08

Department Amount £m Funds affected Department for Communities and Local Government

19.8 European Regional Development Fund

Scottish Executive 3.5 European Regional Development Fund Department for Environment, Food and Rural Affairs

0.6 Agriculture and Natural Resources

23.9

18. In addition, since the balance sheet date, disallowances totalling £116.8 million have crystallised, as set out in Table 2 below. HM Treasury has provided further information in the Commentary on the Consolidated Statement.

Table 2 : UK financial corrections confirmed by the Commission since 31 March 2008

Department Amount £m Funds affected Department for Environment, Food and Rural Affairs

55 Agriculture and Natural Resources

Department for Environment, Food and Rural Affairs


Department for Communities and Local Government

24.5 European Regional Development Fund


9.3 Agriculture and Natural Resources

116.8

19. As these decisions occurred after the balance sheet date, I have not considered them irregular in respect of my opinion on this Consolidated Statement for 2007-08.

Impacts of European Commission inspections in the UK

20. European Union expenditure managed by Member States on behalf of the Commission is subject to the Commission’s own control inspections, which are usually carried out under the authority of the regulations and decisions that govern the funding scheme.

21. The Commission carried out audit checks in England in 2004 and 2005 which highlighted problems with the UK's management of Structural Fund measures. This led the Commission to suspend payments to six of the English regions in April 2007 until it could be confirmed that control systems were working effectively. The suspension has since been lifted across all the regions and the Commission has subsequently praised the decisive action taken by the Department for Communities and Local Government and indicated that it was satisfied that its earlier concerns had been addressed. However, In March 2008, the Commission confirmed a decision to levy a financial correction of ¤25 million (£19.8m) in respect of the North West region Objective 2 and Urban programmes. The correction was imposed because the Commission considered that there had been some shortcomings in the Government Office


North West's exercising of its supervisory role as managing authority which had led to some failures among certain of its delivery partners to comply fully with Article 4 of EC Regulation 438/2001.

The Role of the European Court of Auditors

22. The European Court of Auditors (the Court) is responsible for the external audit of the EU Budget. Under the Treaty, the Court is required to examine whether all revenue has been received and all expenditure has been incurred in a lawful and regular manner, and whether financial management has been sound. The Court is also required to provide the European Parliament and the Council (as the budgetary discharge authority) with a ‘Statement of Assurance’ as to the reliability of the accounts and the legality and regularity of the underlying transactions.

23. I have considered the Court’s report for the financial year ending on 31 December 2007, which overlaps with the first nine months of the financial year covered by this report. The Court reaches an overall conclusion for the EU and for each broad area of EU spending. It is neither required to give, nor has it given, an opinion on the UK or any other individual Member State.

24. With regard to the Agricultural and Natural Resources programme area, the Court’s report raised a number of concerns about the application of the Single Payment Scheme within England. It assessed that, taken as a whole, England’s Integrated Administration and Control System monitoring was "not effective", although inspections were effective. Such weaknesses could lead to the Commission recovering expenditure which it judges does not conform to the appropriate legislation. In November 2007, the Rural Payments Agency completed a redefinition exercise to correct the entitlements of final beneficiaries in England. The Commission has commented that after the redefinition process, the remaining risk for the Fund is low.

25. The Court noted that the reimbursement to Member States of expenditure on Cohesion policies (previously known as Structural Measures) was subject to material error and that the supervisory and controls systems in the Member States and the Commission were only “partially effective”. It reported that 54 per cent of the 180 reimbursements tested were affected by legality and regularity errors and that at least 11 per cent of the total amount reimbursed to Cohesion projects across the EU Member States should not have been.

26. The underlying cause of incorrect reimbursements varied between the funds. The most frequent causes of incorrect reimbursements from the European Regional Development Fund were eligibility errors arising from inclusion of costs which should not have been reimbursed due to their nature and serious failures to respect procurement rules. For the European Social Fund, the most common errors were lack of evidence that the overheads or staff costs were relevant to the project; overestimation of staff costs or overheads; and the inclusion of ineligible costs (eligibility errors).

27. When such errors are found by the Court, the Commission considers recovering expenditure where it does not conform to the appropriate legislation. The Consolidated Statement reflects an assessment of the potential impact of errors made by the UK through disclosures on the provision for disallowances (note 12) and contingent liabilities (note 13).

28. The Court also noted that, at the end of 2007, some €138.6 billion (£94.9 billion) of commitments outstanding from the 2000-2006 Financial Framework were yet to be paid (an increase of 5.2 per cent on 2006). Some €84 billion (£57.5 billion) of this related to the


Structural Funds (over 2.3 years’ of payments at the 2007 rate), and some €18.1 billion (£12.4 billion) concerned the Cohesion Fund.

29. Final beneficiaries had until 31 December 2008 to spend the 2000-2006 Financial Framework funds allocated to them under the Structural Measures and Cohesion funds but the Commission gave Member States the opportunity to apply for a six month extension. Expenditure incurred after 31 December 2008, or after 30 June 2009, with an extension, is not eligible for European Union co-financing. Member States will continue to make reimbursements to final beneficiaries for eligible expenditure until 2009 for Structural Funds and 2010 for the Cohesion Fund. Member States subsequently have until 31 March 2010 to claim reimbursements from the Commission, or 30 September 2010 with an approved extension. The Commission will not reimburse claims submitted after this date, and costs will be met by the Member State.

Improving the Consolidated Statement

30. This Statement represents the second annual Consolidated Statement of the use of EU funds in the UK, compiled from pre-existing audited accounts for the 2007-08 financial year. In producing the Statement, HM Treasury has made a number of significant adjustments to the data received from UK authorities.

31. HM Treasury continues to improve its processes for capturing data and preparing the Consolidated Statement and is working closely with the UK authorities to address the data quality and consistency issues highlighted in this report. In partnership with those authorities, the Treasury is also developing accounting guidance which will help to simplify the underlying accounting processes and improve the consistency of reporting of EU funding transactions across Central Government. This work has resulted in improvements in the quality of the data provided to HM Treasury for the production of the 2007-08 Consolidated Statement and should lead to continued improvements for future years.

32. The Statements covering 2006-07 and 2007-08 have already led to increased audit and scrutiny of the use of EU funds in the UK. The annual publication of this Statement will help to ensure that this continues. The audit of the annual Consolidated Statement should help to detect weaknesses in the UK’s management of EU funds so that they may be rapidly addressed and so that management control systems may be improved.

Conclusion

33. My audit work has identified a number of accounting and other issues which need to be addressed in order to ensure that the annual Consolidated Statement represents a true and fair view of the use of EU funds in the UK. HM Treasury has made improvements to its processes for preparing the annual Consolidated Statement and, with the agreement of the other UK authorities, is addressing the remaining issues through further work to align the detailed accounting policies and other related accounting matters.

Amyas CE Morse

Comptroller and Auditor General, National Audit Office

151 Buckingham Palace Road, Victoria

London SW1W 9SS

12 October 2009


Expenditure Account

For the year ended 31 March 2008

2007-08 2006-07

Restated

Note £000 £000

Gross expenditure on EU supported projects 2 4,381,516 4,873,624

Provisions created in year 12 (108,280) (228,411)

Expenditure net of provisions 4,273,236 4,645,213

Realised foreign exchange gains/(losses) 3 75,187 (16,857) made/met by the UK

Withdrawn from EU claim 3 (31,437) -

Net EU expenditure 3 4,316,986 4,628,356

Statement of Recognised Gains and Losses


2007-08 2006-07

Restated

Note £000 £000

Unrealised foreign exchange gains/(losses) 10 (50,787) (7,036) made/met by the UK

Total recognised gains and (losses) (50,787) (7,036)

Explanatory Note

The Expenditure Statement shows the EU funded element of amounts paid out by UK Central Government bodies on projects supported wholly or partially by the EU on which the UK anticipates EU funding at the point the payment is made.

Gross expenditure on EU supported projects is recognised in the period in which it becomes payable by UK Central Government to the recipient under the rules of the applicable scheme. The amount shown in the Account represents the amount paid and payable in sterling during the period to bodies outside the Central Government boundary.

Net EU Expenditure represents the amount receivable from the EU (converted into sterling after disallowances and foreign exchange gains or losses) in respect of amounts paid or payable by the UK on EU supported projects.


Balance sheet

As at 31 March 2008

Assets

Advances to service providers

EU funds receivable

Note

5

6

2007-08

£000

242,591

2,412,861

2,655,452

2006-07

Restated

£000

291,397

3,424,851

3,716,248

Liabilities

EU funds received in advance

Amounts payable to beneficiaries

Repayable to EU

Disallowances Provision

7

8

9

12

946,027

1,490,293

36,293

441,757

2,914,370

771,445

1,822,531

94,526

400,601

3,089,103

Net Assets/(Liabilities) (258,918) 627,145

Financed By

Temporary UK funding

Less Possible permanent UK funding:

Disallowances Provision

11

12

182,839

(441,757)

(258,918)

1,027,746

(400,601)

627,145

Sir Nicholas Macpherson Permanent Secretary HM Treasury 05 October 2009

Explanatory Note

The consolidated statement shows the flow of funds into the UK from the EU and out of UK Government to beneficiaries. The balance sheet shows those assets and liabilities that stem from such cash flows, e.g. where the UK has issued funds to the final recipient and is awaiting settlement of a claim. The exception being the disallowances provision, which are amounts paid


out by the UK for which the UK now believes it is probable that the EU will apply financial corrections, disallowing certain claims.

Temporary UK funding is the cash paid out by the UK Exchequer that will in due course be funded by the EU. Possible permanent UK funding is the element of temporary UK funding for which it is probable that the EU will apply financial corrections. Possible permanent UK Funding represents the funding that will be met by the UK Exchequer if provisions in respect of disallowances crystallise. Possible permanent UK funding will always equal provisions.

As the Consolidated Statement shows funding flows there are no reserves, as there is no trading gain or loss, and there is no taxpayers equity.


Cash flow statement


2007-08 2006-07

Restated

Note £000 £000

Gross EU expenditure 2 (4,381,516) (4,873,624)

Movement in working capital

(Increase)/decrease in advances to service 48,806 (31,334) providers

Increase/(decrease) in amounts payable to (332,238) (646,684) beneficiaries

Increase/(decrease) in amounts repayable to (58,233) 42,232 the EU

Net Cash Outflows (4,723,181) (5,509,410)

Receipts Via Treasury No 4 Account 5,534,745 4,547,589

Increase/(decrease) in temporary UK funding 11 (844,907) (3,053)

Permanent UK funding:

Realised Foreign exchange (gains)/losses 3 (75,187) 16,857

Other receipts (direct from EU) 108,530 948,017

Net Cash Inflows 4,723,181 5,509,410

Explanatory Note

The cash flow statement balances the cash paid out by the UK government against the cash received from the EU.

The cash outflows only include that cash paid out on which the UK anticipates EU receipts and is therefore shown net of disallowance provisions and foreign exchange losses.

The EU makes the majority of its payments to the Treasury No 4 account, which the Treasury then pays over to the relevant UK body. However, in some instances the EU will make directpayments to a UK Central Government body as in the case of grants to the Research Council.


Notes to the United Kingdom Consolidated Statement

1. Accounting policies

1.1 The principal accounting policies adopted in the preparation of the Consolidated Statement are set out below.

Basis of preparation

1.2. This statement has been prepared so as to give a true and fair view by consolidating the relevant transactions and balances as recorded by the Managing Authorities in their resource accounts prepared in accordance with the Financial Reporting Manual (FReM). The consolidated statement is prepared under the historical cost convention.

Boundary of the Statement

1.3 The Consolidated Statement on the use of EU Funds in the UK shows the cash paid out by the UK on EU sponsored projects and the cash recoverable from the EU in respect of such projects. It also shows the timing differences on these cash flows. As such it will show expenditure incurred which is expected to be reclaimed in full and the resulting debtor/creditor balances. The boundary of the Statement excludes the following:

• receipts and payments stemming from commercial contracts awarded to UK central government bodies by the EU.

• details of twinning funds held by UK central government bodies for the benefit of other member states.

• amounts recorded in the Expenditure Statement as withdrawn from EU claim or subject to a disallowance are funded by the UK Exchequer. Where the EU propose a financial correction against the UK the UK will have submitted a claim in respect of the project subject to the potential correction. As such, the proposed correction will be recognised as a contingent liability or a provision as per the accounting policy in this Statement. Where possible the UK Exchequer will endeavour to recover withdrawn or disallowed expenditure from the final beneficiary but the recovery of such amounts and any outstanding balances will not be recorded in the Statement as they fall outside the boundary.

Expenditure recognition

1.4. Gross expenditure on EU supported projects is recognised in the period in which it becomes payable by UK Central Government to the recipient under the rules of the applicable scheme. The amount shown in these accounts represents the amount paid and payable in sterling during the period to bodies outside the Central Government boundary. Net EU Expenditure represents the amount receivable from the EU (converted into sterling after disallowances and foreign exchange gains or losses) in respect of amounts paid or payable by the UK on EU supported projects.

Income Recognition

1.5. Income is recognised by the UK for funding it expects to receive from the EU in respect of expenditure incurred on EU supported projects. For the purposes of this statement income has not been separately recorded as it will always equal the expenditure incurred. Where


disallowance provisions have been recognised they reduce the level of expenditure reclaimable from the EU and thus the level of EU income.

Foreign currency translation

1.6. The Commission makes payments in Euros, with the Managing Authority recognising the receivable in Sterling. Foreign exchange gains and losses occur where the Managing Authority recognises the receivable from the EU at the spot rate and receives the payment from the EU at a different rate. Such gains and losses are recognised in the Expenditure Statement. Any hedging mechanisms used by departments and devolved administrations to mitigate the impact of foreign exchange losses are not included in this statement as they do not impact on the amounts paid out by departments and devolved administrations on EU projects or the funding provided by the EU.

Disallowances provision and contingent liabilities

1.7. Probable disallowances arising from financial corrections are recognised, and contingent liabilities disclosed, following the requirements of Financial Reporting Standard (FRS) 12, Provisions, Contingent Liabilities and Assets.

A provision for a financial correction is recognised where there is a past event (for example, an ineligible payment or a failure to comply with EU scheme regulations) which creates a present obligation and a probable disallowance leading to repayments to the EU. In practice, managing authorities might only know that there has been a past event through inspections or audits and they may therefore raise provisions retrospectively, in a future financial period. The amounts provided for are estimated by the appropriate managing authority.

A contingent liability is recognised in where there is a past event leading to a possible disallowance and subsequent repayment to the EU. Where they are quantifiable, the amounts of contingent liabilities are estimated by the appropriate managing authority.

EU Funding Withdrawn

1.8 Managing Authorities can apply self corrections which result in amounts being withdrawn from an EU claim. Self corrections occur where, due to an irregularity in a claim, the Managing Authority chooses not to claim the expenditure from the EU. This is a member state function and such self corrections are not provisions for the purposes of this statement. The withdrawal of the claim removes the relevant amount from the boundary of this statement through the Expenditure Account as the self correction is funded by the UK Exchequer pending recovery from the UK beneficiary.

Restatements

1.9 The work completed since publication of the 2006-07 Statement on defining the boundary of the Statement has shown that some balances originally included in the 2006-07 Statement were incorrect. Where necessary, such balances have been restated in the main schedules and notes.



2.

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23

4. Other Projects

The following projects are included in the ‘Other’ category in Note 2.

Department or Devolved Project 2007-08 2006-07 Administration Restated

£000 £000

Culture, Media and Sport Director General Research 588 -Framework

Technology Projects 269 -

Environment, Food and Rural Transmissible Spongiform 13,066 2,927Affairs Encephalopathy (TSE)

Monitoring

Scrapie Eradication 1,783 4,531

Bovine Spongiform - 781Encephalopathy (BSE) Eradication

EU Aid 73 -

EU Data Collection 41 43

Government Equalities Office Equal Opportunities For All 341 -

Home Office EU Solidarity Mechanism 7,200 -

Innovation, Universities and Science Programmes - 3,244 Skills1

EU Marie Curie 206 -

EU Euratools 243 -

Other 16 -

Justice European Refugee Fund - 4,929

(AGIS) Fight Against Crime 163 -

National Archive Planets 132 2

Asset Recovery Agency Camden Asset Recovery Inter- 83 -Agency Network (CARIN)

Transport Trans European Network 14,075 16,866 (TENS)

Northern Ireland Executive Other Projects - 1,133

Total 38,279 34,456

1 The 2006-07 figure for Innovation, Universities and Skills includes £3,244 previously reported against Trade and Industry.


5. Advances to Service Providers These are amounts paid out by the UK in respect of EU supported projects to non Central Government bodies delivering the project (service providers) in advance of claims from such bodies.

2007-08 2006-07

Restated

£000 £000

Communities and Local Government - 21

Innovation, Universities and Skills 72,267 54,353

Environment, Food and Rural Affairs 26,835 53,763

National Archive 44 -

Work and Pensions 83,528 118,750

Scottish Executive 19,592 18,547

Welsh Assembly Government 21,345 24,474

Northern Ireland Executive 18,980 21,489

Total 242,591 291,397


6. EU funds receivable by Department and Devolved Administration

These are amounts paid or payable to service providers against formal claims for which the UK has yet to be reimbursed by the EU.

2007-08 2006-07

Restated

£000 £000

Communities and Local Government 356,366 504,623

Culture, Media and Sport 1 1,689


Environment, Food and Rural Affairs 1,099,187 1,902,425

Forestry Commission 2,572 1,952

Government Equalities Office 60 -

Home Office 2,800 2,800

Justice - 4,251

Transport 20 20





Total 2,412,861 3,424,851


7. EU Funds Received in Advance

These are amounts paid by the EU in advance of formal claims from the UK. The contractual terms of EU funding for projects and programmes often provide for such advanced payments to allow projects to commence.

2007-08 2006-07

Restated

£000 £000

Asset Recovery Agency - 83


Culture, Media and Sport 1,055 1,192



National Archive - 88



Welsh Assembly Government 13,153 717

Northern Ireland Executive 2,383 -

Total 946,027 771,445


8. Amounts Payable to Beneficiaries

These are amounts payable to UK service providers and are recognised when claims are received but not yet settled.

2007-08 2006-07

Restated

£000 £000



Environment, Food and Rural Affairs 776,964 1,121,191

Transport 151 62





Total 1,490,293 1,822,531

9. Repayable to EU

These are amounts to be returned to the EU resulting from direct action taken by the UK to identify overpayments against programmes.

2007-08 2006-07

Restated

£000 £000

Forestry Commission 2 16



Northern Ireland Executive - 60,280

Total 36,293 94,526


10. Analysis of unrealised foreign exchange gains/losses made/met by the UK by Department and Devolved Administration

2007-08 2006-07

£000 £000

Communities and Local Government (11,364) -

Work and Pensions (34,308) (7,036)

Welsh Assembly Government (4,077) -

Northern Ireland Executive (1,038) -

Total unrealised foreign exchange (50,787) (7,036) gains/(losses) made/met by the UK


11. Analysis of Temporary UK Funding

2007-08 2006-07 Movement

Restated

£000 £000 £000

Communities and Local (123,708) 95,404 (219,112) Government

Culture, Media and Sport (1,054) 497 (1,551)

Innovation, Universities and Skills 47,362 27,760 19,602

Environment, Food and Rural 309,058 824,320 (515,262) Affairs

Forestry Commission 2,570 1,936 634

Government Equalities Office 60 - 60

Home Office 2,800 2,717 83

Justice 4,251 (4,251)

Transport (131) (42) (89)

National Archive 44 (88) 132

Work and Pensions (90,748) (14,429) (76,319)

Scottish Executive (39,367) (55,990) 16,623

Welsh Assembly Government (30,146) 1,520 (31,666)

Northern Ireland Executive 106,099 139,890 (33,791)

182,839 1,027,746 (844,907)


12a Provision – Future Financial Corrections (Disallowances) as at 31 March 2008

The EU will disallow claims by imposing financial corrections where the service provider fails to meet the conditions of the applicable scheme. In such circumstances the EU will reduce future payment to the UK.

£000

As at 1 April 2007 (restated) 400,601

Created during the year 108,280

Cancelled (43,198)

Utilised (23,926)

As at 31 March 2008 441,757

12b Analysis of provisions for disallowances by Department and Devolved Administration

2007-08 2006-07

Restated

£000 £000

Department or Devolved Administration

Communities and Local Government 72,915 -


Home Office 642 -


Welsh Assembly Government - 7,598

Totals 441,757 400,601

Establishing the boundary between EU and UK funded expenditure can be a difficult process. The UK Exchequer provides funding to projects in anticipation of such projects being fully funded by the EU. However, failure to meet certain EU rules attaching to EU funding can result in the EU disallowing claims. Although it is standard procedure to recover grants that are found ineligible, this is not always possible and can lead to the UK Exchequer bearing the full or partial cost of a project to which a disallowance has been applied.

Provisional conclusions of the Commission are subject to negotiation and conciliation processes, through which the UK Member State seeks to mitigate the risk of incurring losses.

The disallowance provisions consolidated in this Statement are those recognised by the relevant Departments and Devolved Administrations in their own financial statements.

The resource accounts of the above Department and Devolved Administration provided the following narrative for these provisions.


Communities and Local Government

Following consideration of potential ineligible grant payments in respect of European Regional Development Fund (ERDF) programme expenditure, the Department has raised provisions on the following basis:

• £25.7m in relation to the 1997-99 closure audits in the North East and North West of England. The Commission had concerns relating to specific projects and they extrapolated the amount of irregular expenditure across the whole programme to reach a total potential disallowance.

• £41m in relation to the alleged irregularities identified by audits on the 2000-2006 round.

• A provision of just over £6m has been raised in relation to projects undertaken by Business Links or under programmes in the 2000-06 round.

These amounts are for expenditure considered to be at risk but not yet finalised, and the sums represent best estimates of the amounts involved at the time the accounts were prepared.

Provision for a disallowance of £19.8m was recognised in 2007/08 in respect of grants under the 2000-2006 ERDF Programme in the North West (England). The provision also crystallised during the year and therefore in included in Note 12a as being ‘create during the year’ and ‘crystallised’.


In response to the difficulties in implementing the Single Payment System (SPS), the Departmentreviewed its recognition point for financial corrections in 2005-06.

As a result, a provision was recognised on the following basis:

• Covering all cases where the EC has notified that a financial correction is being considered.

• Representing for SPS an appraisal of what the Commission is likely to assess as an appropriate correction based on indications previously provided by the EC around partial payments and on perceived weaknesses in complying with EC regulations on control requirements.

Scottish Executive

The Scottish Executive has raised provisions of £10.5m (ESF) and £11.9m (ERDF). The provisions relate to ongoing Commission and European Court of Auditor audit missions which have identified potential irregularities in the delivery of the Structural Fund programmes.

All disallowances are subject to the contradictory procedure. Council Regulation 1083/2006 Article 100 provides further details.

13 Contingent Liabilities

Contingent liabilities are disclosed following the requirements of Financial Reporting Standard (FRS)12 and are those disclosed in the resource accounts of the relevant department and devolved administration.

Contingent liabilities disclosed under FRS 12 as recorded in the Department for Communities and Local Government’s (DCLG) 2007-08 Resource Accounts


DCLG has the following contingent liabilities in respect of possible financial corrections arising from potential irregularities of European Regional Development Fund (ERDF) programme expenditure:

• For the 2000-06 round, possible administrative irregularities (Article 4 and 10 checks) where approximately 50% (based on the historical trend of the programme) of the total irregularities value would not be recovered due to insolvency, estimated at £25m.

• Possible obligations to repay European Communities funds in respect of the 1994-1999 ERDF programmes for projects, which were formally closed by 31 March 2003, estimated at £76m.

• Possible financial corrections for irregularities with EC funds in respect of the administration of the 2000-2006 ERDF programmes, estimated at £62m.

• Possible financial corrections in relation to the Interreg programme and for ERDF projects undertaken by Business Links, for programmes in the 2000-06 round, estimated at £11m.

The amounts involved are estimates and subject to uncertainty and reflect judgements based on a reasonable assessment, at the time, of the amounts involved.


A potential disallowance liability in respect of late payments attributed to the SPS, estimated at £4m.

Scottish Executive

Closure of the European Structural Fund Programmes may result in the reduction in the funds recoverable from the European Commission, the financial effects of which, are currently unquantifiable.


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Contents Page

Section 1 Commentary 3

Section 2 Statement of the Responsibilities of HM Treasury’s Accounting Officer

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Section 3 Independent auditor’s report to the Economic Secretary to the Treasury

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Section 4 Report by the Comptroller and Auditor General 15

Section 5 Financial accounts 23

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Background 1.1 As part of ongoing work to improve the accountability of European Union (EU) funds, the then Economic Secretary to the Treasury announced to the House of Commons on 20 November 2006 that HM Treasury would prepare an annual Consolidated Statement on the use of EU funds in the United Kingdom (the Statement) and invited the Comptroller and Auditor General to undertake the external audit of this Statement. This Statement covers the period 1 April 2008 to 31 March 2009.

1.2 The preparation, audit and publication of the Statement helps promote the sound management of EU funds by strengthening Parliamentary scrutiny of the UK’s management of those funds and by assisting in the detection of any weaknesses in control systems, which can then be tackled more quickly and effectively. The Government hopes that in conducting their audit work the European Commission and the European Court of Auditors will be able to take the Statement into account as well as the assurance provided by the Comptroller and Auditor General in the audit opinion and Report. Similar initiatives are underway in other Member States, such as Denmark and Sweden.

Respective responsibilities of the UK Parliament and Devolved Administrations

1.3 In accordance with the devolution settlement, relations with the European Union are the responsibility of the Parliament and Government of the United Kingdom, as a Member State. Responsibility for implementing EU obligations relating to devolved matters lies with the Devolved Administrations. The proper administration of EU Funds in Northern Ireland, Scotland and Wales is a matter for the relevant Devolved Administration. This Statement is prepared without prejudice to the devolution of responsibilities.

Preparation of the Statement

1.4 HM Treasury has assumed responsibility for developing the format of the Statement and for collating the financial data provided by Managing Authorities1

1.5 This is the third such Statement and, along with the accompanying Report of the Comptroller and Auditor General, it honours the Government’s commitment to present an annual statement of the UK’s receipt and use of EU funds. The purpose of the Statement is to bring together financial information in respect of EU sponsored projects in the UK. It supports greater scrutiny of the UK’s management of EU funds and of the financial relationship between the UK and the EU.

included in the Statement. Managing Authorities, however, remain accountable for the propriety of the reported spending, which is disclosed in their annual financial statements and is subject to external audit. The Statement therefore brings together financial information relating to the use of EU funds by the UK but does not replace individual accountabilities.

1 For the purposes of this Statement, the Managing Authorities comprise the Westminster Departments managing EU funds and the Devolved Administrations.

1 Commentary

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1.6 The format of this third Statement builds on earlier Statements. HM Treasury is continuing work with Managing Authorities to develop the format and content with the aim of improving the reporting and disclosure of the use of EU funds.

1.7 The Economic Secretary to the Treasury’s announcement in November 2006 referred to the preparation of a Statement in accordance with International Financial Reporting Standards (IFRS).2


The UK Government moved its financial reporting on to an IFRS basis on 1 April 2009. In future, therefore, this Statement will be prepared on an IFRS basis.

EU funding of UK expenditure

1.8 The Statement shows expenditure on co-managed EU schemes in the UK and the corresponding income from the EU. The main schemes in which the EU and UK share management responsibility include the disbursement of Common Agricultural Policy Funds and the Structural Funds, where the UK pays beneficiaries on behalf of the EU.

1.9 The Statement excludes

• amounts received from the EU where UK central government is the beneficiary;

:

• amounts in respect of commercial contracts awarded to UK central government bodies by the EU;

• financial support for twinning projects3

• the purchase of Intervention stocks

where EU funding is transferred to other Member States or to mandated bodies for their part in the project. The transactions are not reported as income and expenditure of the relevant Managing Authority; and

4

Member States’ contributions to the EU

with UK funds which are accounted for in the financial statements of the Department for Environment, Food and Rural Affairs (DEFRA).

1.10 Member States’ contributions to the Budget of the European Communities are made on the basis of the financing system set out in the Own Resources Decision which was agreed by all Member States and incorporated into UK law by virtue of the EC (Finance) Act 2001. The contributions relate to calendar years and are formula based using factors that are in many cases subject to periodic revision over a number of years as better information becomes available. UK contributions to the EU are included in the Government’s Consolidated Fund Account, which is published separately (HC929, 2008-09). These contributions are not, therefore, included in this Statement.

Timing of expenditure and the related EU funding

1.11 Managing Authorities are required to account for expenditure on EU-funded schemes and the related funding from the EU on an accruals basis under UK GAAP (International Financial

2 IFRS includes pronouncements by or endorsed by the International Accounting Standards Board (IASB), including the Framework for the Preparation and Presentation of Financial Statements, the accounting standards – international accounting statements (IAS) and international financial reporting standards (IFRS) – and interpretations thereof issued by the Standards Interpretations Committee (SIC) or its successor, the International Financial Reporting Interpretations Committee (IFRIC). 3 Twinning projects are EU funded projects that support the capacity building in new Member States or the Candidate Countries. They are delivered by the public sector, usually by central government. These are funded through pre-accession funds. 4 Intervention stocks are stocks held by paying agencies in the European Union as a result of intervention buying of commodities subject to market support. Intervention stocks may be released onto the internal markets if internal prices exceed intervention prices; otherwise, they may be sold on the world market.

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Reporting Standards from 1 April 2009). There is normally a time lag between payment to beneficiaries and settlement of claims by the EU. The UK Exchequer therefore has to bear the cost of the programme until EU funding is received. Expenditure is recognised as it is incurred, with a matching debtor from the EU. The debtor is extinguished when the EU approves the subsequent claim and the release of funds to the UK.

1.12 The final settlement of claims by the EU may give rise to adjustments following the closure process or disallowances (see paragraphs 18 to 21 below). The European Commission may make such adjustments several years after funds have been paid out by Managing Authorities to recipients. The Statement includes provision for possible future adjustments and discloses contingent liabilities where the position is less certain.

1.13 Such an arrangement does not easily lend itself to a ‘traditional’ presentation of the primary statements of an income and expenditure statement, a balance sheet and cash flow statement. Each of these might contain a combination of EU funds and expenditure supported, temporarily, by the UK Exchequer. Primary statements have nevertheless been developed supported by notes to aid understanding of the figures. HM Treasury will continue to improve these primary statements through feedback from users and contributors to the Statement.

Expenditure on EU funded schemes in 2008-09

1.14 The Statement shows that gross expenditure on EU-supported Schemes in 2008-09 was £4.18 billion, a reduction of some £0.2 billion compared with the previous year. This reduction was mainly due to lower expenditure on schemes supported by the European Regional Development Fund and the European Social Fund. After allowing for foreign exchange variations and adjustments to claims, the amount reimbursable by the EU is £3.83 billion, the balance being met by the UK Exchequer.

1.15 There was a reduction in temporary funding of EU-supported schemes by the UK Exchequer. At the year end, temporary funding amounted to £218 million, compared with £231 million at the end of the previous year.

1.16 In recognition of likely future funding adjustments, Managing Authorities made net new provisions totalling £288 million against claims for reimbursement from the EU, including substantial provisions against disallowances of payments under the Common Agricultural Policy and European Regional Development Fund. These include provisions made by Managing Authorities in their financial statements for 2009-10, which have been recognised as adjusting post balance sheet events in this Statement. After allowing for the use of £142 million provisions following the crystallisation of adjustments, total provisions at 31 March 2009 amounted to £601 million, some £147 million higher than the corresponding figure at the end of the previous financial year.

Financial corrections announced since 31 March 2009

1.17 Since the end of the reporting period, the EU has announced a number of planned financial corrections and revisions to previous proposals. Material corrections and revisions are set out below.

Common Agricultural Policy Funds


1.18 On 30 September 2009, the Commission issued a report imposing financial corrections totalling £3.3 million, primarily in respect of expenditure incurred between 28 August 2005 and 28 August 2007 on the England Rural Development Programme. The disallowance, representing 5 per cent of expenditure claimed, was imposed because of deficiencies in the system for

6

checking beneficiaries’ entitlement to subsidy, in particular, cross checks on the declared number of animals.

1.19 On 5 January 2010, the Commission issued a report proposing a £28 million correction in respect of expenditure on the Fruit and Vegetable Scheme incurred by the Department between 8 November 2005 and 15 October 2008. A provision has been made in the Statement for the proposed correction, which is subject to conciliation.

1.20 On 15 July 2010, The Commission issued a decision confirming disallowances totalling £158 million in respect of the Single Farm Payment Scheme between 2005 and 2008. The Department had previously made provision for these disallowances. European Commission recovery of sums due will be reflected in future Statements.


1.21 On 5 January 2010, the Commission notified the Executive of a proposed 5 per cent financial correction amounting to £31 million in respect of expenditure incurred in 2004, 2005 and 2006 on the Single Farm Payment Scheme and land-based Pillar II schemes. The proposed financial correction was confirmed in the Commission’s decision of 15 July 2010. The Commission also notified the Executive on 5 January 2010 of a similar flat rate correction amounting to £31 million in relation to expenditure incurred in 2007 and 2008. This proposal is subject to conciliation. The proposed disallowances flow from perceived deficiencies in controls over the expenditure, for example with farm maps and on-the-spot inspections. A provision has been made in the Statement for the proposed corrections.

Other Funds


1.22 In 2008 the Commission announced a potential financial correction against the Northern Ireland Single Programme Document (NISPD) and the Special Support Programme for Peace and Reconciliation in Northern Ireland and the Border Counties of Ireland (PEACE I) Programmes (1995-99). Negotiations progressed during 2009 to bring the matter to a conclusion. Initial discussions reduced the correction to £34 million and subsequent negotiations led to revised closure proposals in December 2009 reducing the correction to £25 million. A provision has been made in the Statement for this amount. In March 2010, the Department of Finance and Personnel paid £9.9 million to the EU, in relation to the £25 million financial corrections. The amount paid was the total financial corrections less £15.1 million that had been due from the Commission in respect of the PEACE and NI Single Programmes.

Management of EU funded schemes

(a) Common Agricultural Policy Funds

1.23 As required by Regulation 885/06 each paying agency has an internal audit service independent of the other arms of the entity that reports directly to the agency’s director. The Internal Audit Services are required to verify that the procedures adopted by the agency are adequate to ensure compliance with Community rules and that accounts are accurate, complete and timely.

1.24 Verifications may be limited to selected measures and samples of transactions provided that an audit plan ensures that all significant areas, including the departments responsible for authorisation, are covered over a period not exceeding five years.

1.25 The work of internal audit is performed in accordance with internationally accepted standards, recorded in working papers and result in reports and recommendations, which are addressed to the agency’s senior management.

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1.26 The Certifying Body for the Agricultural Funds reports on whether the annual accounts of the Paying Agencies are in all material respects true, complete and accurate and that internal control procedures have operated satisfactorily. The Certifying Body reports have confirmed that internal audit in all the UK paying agencies is operating to a high standard.

(b) Structural Funds

1.27 The Managing Authorities responsible for the control of structural fund expenditure ensure that all systems are subject to regular examination by internal audit.

1.28 Management use internal audit results to strengthen procedures during the implementation of programmes. At the closure of programmes, internal audit provide reasonable assurance as to the accuracy, completeness and regularity of expenditure certified to the Commission.

1.29 Recent internal audit work within Managing Authorities has generally reported a positive picture with most having a satisfactory level of assurance that systems operate adequately. Where this was not the case, action plans were agreed to address weaknesses.

Future developments

1.30 For the 2008-09 Statement HM Treasury has continued to work closely with Managing Authorities and the National Audit Office to agree how underlying transactions should be reported in the Statement. This has improved the quality of the data used to produce the Statement.

1.31 These initiatives will continue for the 2009-10 Statement. The priorities are to agree a consistent approach to recognising underlying transactions and how these should be recorded in the accounts of Managing Authorities and in the Statement. HM Treasury will also review the form and content of the Statement on the adoption of International Financial Reporting Standards. It will also work on refining the governance structures for the Statement and the provision of data.

1.32 The on-going work to develop better guidance on the accounting requirements for the Statement continues. HM Treasury has also developed clearer and more comprehensive guidance on the recognition and measurement of EU funding and is examining the scope for lower level guidance to ensure that underlying processes are consistent across Managing Authorities.

External audit

1.33 The Statement is subject to external audit by the Comptroller and Auditor General. His audit opinion and report to the House of Commons is published with the Statement.

Sir Nicholas Macpherson Permanent Secretary HM Treasury 12 January 2011

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2 Statement of the Responsibilities of HM Treasury’s Accounting Officer

Statement of the Responsibilities of HM Treasury’s Accounting Officer in relation to the Consolidated Statement on the Use of EU Funds in the UK 2.1 Following the announcement made by the then Economic Secretary to the House of Commons on 20 November 2006, HM Treasury has prepared a Consolidated Statement on the use of EU Funds in the UK for the financial year 2008-09. The Statement is prepared on an accruals basis and includes an expenditure statement, a balance sheet and a cash flow statement intended to give a true and fair view of expenditure on EU supported programmes by UK central government sector entities and the related funding due from the EU.

2.2 HM Treasury’s Accounting Officer has overall responsibility for the preparation of the Statement, which consolidates the EU Funds accounted for by the individual central government sector entities disclosed at Note 2. Responsibility for the recording and regularity of underlying transactions rests with the Accounting Officers of the individual entities that account for the receipt and payment of EU monies.

2.3 In preparing the Statement, HM Treasury’s Accounting Officer has, so far as is relevant to this Statement:

• observed the requirements of the Government Financial Reporting Manual (FReM);

• applied suitable accounting policies on a consistent basis;

• made judgements and estimates on a reasonable and consistent basis; and

• stated whether applicable accounting standards have been followed and disclosed and explained any material departures in the accounts.

2.4 Responsibility for the preparation of the returns of expenditure, receipts and other relevant accounting information for the public sector entity accountable for the payment of EU Funds rests with the Accounting Officers of the relevant entity. These Officers are responsible for preparing data capture returns for that body in accordance with the requirements set by the Treasury. In discharging his responsibilities for the preparation of the Statement, HM Treasury’s Accounting Officer relies upon the returns provided by those Officers.

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3 Independent auditor’s report to the Economic Secretary to the Treasury

I have audited the Consolidated Statement on the use of EU funds in the UK for the year ended 31 March 2009. These comprise the Expenditure Account, the Balance Sheet, the Cash Flow Statement and the related Notes. These financial statements have been prepared under the accounting policies set out within them.

Respective responsibilities of the Treasury, other Accounting Officers and auditor

HM Treasury’s Accounting Officer has overall responsibility for the preparation of this Statement which consolidates the EU Funds accounted for by the individual central government entities detailed in Note 2. Responsibility for the recording and regularity of underlying transactions rests with the Accounting Officers of the individual entities that account for the receipt and payment of EU monies. These responsibilities are set out in the Statement of Responsibilities.

My responsibility is to audit the financial statements in accordance with relevant legal and regulatory requirements, and with International Standards on Auditing (UK and Ireland).

I report to you my opinion as to whether the financial statements give a true and fair view and whether the financial statements have been properly prepared in accordance with the accounting policies outlined in them. I also report whether in all material respects the expenditure and income have been applied to the purposes intended by Parliament and the financial transactions conform to the authorities which govern them.

In addition, I report to you if I have not received all the information and explanations I require for my audit, or if information required by HM Treasury’s Financial Reporting Manual, insofar as it is applicable, is not disclosed.

I read the Commentary, published with the Consolidated Statement, and consider whether it is consistent with the audited financial statements. I consider the implications for my report if I become aware of any apparent misstatements or material inconsistencies with the financial statements. My responsibilities do not extend to any other information.

Basis of audit opinions

I conducted my audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. My audit includes examination, on a test basis, of evidence relevant to the amounts, disclosures and regularity of financial transactions included in the financial statements. It also includes an assessment of the significant estimates and judgements made by HM Treasury and other Accounting Officers in the preparation of the financial statements, and of whether the accounting policies are most appropriate to the Statement, consistently applied and adequately disclosed.

I planned my audit so as to obtain all the information and explanations which I considered necessary in order to provide me with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error, and that in all material respects the expenditure and income have been applied to the purposes intended by Parliament and the financial transactions conform to the authorities which govern them. However, the evidence available to me was limited due to a failure to maintain adequate

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accounting records and supporting evidence for Temporary UK Funding of £217,994,000 in the Balance Sheet and Receipts from the EU (£361,182,000 of the £4,687,084,000 balance included in the Cash Flow Statement) and the corresponding 2007-08 figures.

In forming my opinion I also evaluated the overall adequacy of the presentation of information in the financial statements.

Qualified Opinion Arising from Disagreement on Consistency of Application of Accounting Policies, Disagreement on Accounting Policies for Foreign Currency Transactions and Limitations in Audit Scope

• The financial statements do not comply with the Financial Reporting Framework as:

• accounting policies have not been applied consistently to similar transactions and events across all UK Managing Authorities; and

• the statements do not account for foreign currency transactions carried out by the Rural Payments Agency in accordance with Financial Reporting Standard (FRS) 23 The Effects of Changes in Foreign Exchange Rates.

• This has led to consequential material misstatement of:

• debtors, creditors and related transactions between entities, including the corresponding 2007-08 figures;

• the 2007-08 figures for EU funding, cash balances and provisions for financial corrections; and

• recognised exchange gains and losses in scheme expenditure and gains arising on the revaluation of the European Commission debtor.

I am unable to quantify the impacts on the financial statements because the Managing Authorities have not maintained the records or obtained the information required to comply with the financial reporting framework in these respects. My audit opinion has been modified because of the effects of the misstated 2007-08 figures on the comparability of the current period's figures and the corresponding figures.

Except for the financial effects arising as a result of the failure to apply consistent accounting policies or to properly apply FRS 23 and any adjustments which might have been determined to be necessary had I been able to obtain sufficient appropriate audit evidence over Temporary UK Funding and Receipts from the EU and the corresponding 2007-08 figures, in my opinion:

• the financial statements give a true and fair view of the state of affairs of the use of EU funding in the UK as at 31 March 2009, and of the expenditures and cash flows for the year then ended; and

• the financial statements have been properly prepared in accordance with HM Treasury’s Financial Reporting Manual, insofar as it is applicable to the Consolidated Statement.

• In respect of the limitation on my work relating to Temporary UK Funding and reported Receipts from the EU:

• I have not obtained all the information and explanations that I considered necessary for the purposes of my audit; and

• proper accounting records have not been maintained.

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• In my opinion, information which comprises the Commentary, published with the Consolidated Statement, is consistent with the financial statements.

Qualified opinion on Regularity

Where the European Commission determines that its scheme regulations have not been complied with, it may impose a disallowance penalty. In the year to 31 March 2009 and in the period prior to the Accounting Officer signing the Consolidated Statement, £398million of disallowance penalties were confirmed. I have concluded that this expenditure has not been applied to the purposes intended by Parliament because it represents a crystallised loss to UK funds.

In my opinion, except for £398 million of confirmed disallowance penalties, in all material respects, the expenditure and funding have been applied to the purposes intended by Parliament and the financial transactions conform to the authorities which govern them.

Report

Further details are set out in my report on pages 15 to 22.

Amyas CE Morse Comptroller and Auditor General 14 January 2011

National Audit Office 157-197 Buckingham Palace Road

Victoria London SW1W 9SP

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4 Report by the Comptroller and Auditor General

Introduction

1. This report relates to the 2008-09 UK Consolidated Statement on the use of European Union (EU) Funds, and is the third annual statement produced by the Government. There is no statutory requirement to produce such a Consolidated Statement and it is therefore prepared on a voluntary basis, to help to detect weaknesses in controls and to promote sound management of EU funds. HM Treasury’s Accounting Officer has overall responsibility for the preparation of this Statement. The arrangements for accounting for the use of EU funds are explained in the Commentary to the Statement. Funding from the EU and expenditure made from these funds are accounted for by the UK authorities who receive and include them in their audited statutory accounts. The Accounting Officers of these authorities are responsible for the recording and regularity of the underlying transactions.

2. I have audited this Statement to give my opinion on whether it presents a true and fair view and whether the underlying transactions conform to the authorities which govern them. In forming my opinion I have considered, in accordance with International Standards on Auditing, the results of specified audit procedures carried out by the auditors of the underlying statutory accounts. This report summarises the results of my audit.

The European legislative framework

3. The Treaty establishing the European Community provides the basic legal framework for the Budget of the EU. The Budget includes a number of separate funds, including the European Agricultural Guarantee Fund (EAGF), the European Agricultural Fund for Rural Development (EAFRD), the European Regional Development Fund (ERDF) and the European Social Fund (ESF). These are governed by secondary legislation made by the Council of the EU (the Council) and the European Commission (the Commission) which has overall responsibility for implementing the budget. The Council regulations and decisions define the eligibility criteria which final beneficiaries have to meet to be entitled to EU funds. They also specify certain control processes which must be implemented by Member States. Within the Member States, national authorities are responsible for overseeing the implementation of EU funded schemes in accordance with EU legislation. This includes determining whether final beneficiaries have met the eligibility criteria before payment is made. The national authorities also have a financial reporting responsibility to the Commission.

4. If the UK authorities, in common with other Member States, fail to meet certain procedural and other requirements in EU regulations and decisions, the Commission may determine that conditions have not been met and levy a financial correction on the Member State. Where this occurs, the Commission makes a reduction in EU funding made to the Member State for expenditure on programmes. While my audit provides an opinion on the regularity of payments of EU funds by UK authorities to final beneficiaries, only the Commission is able to determine whether any financial correction is due. Any such shortfall in funding for UK expenditure is made good by the UK taxpayer. I consider that any expenditure met by the UK taxpayer in these circumstances is outside the intentions of Parliament and therefore irregular in the context of that part of my audit opinion.

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5. These financial corrections are normally made some considerable time after the payments to final beneficiaries under the relevant programme. They normally result from inspections and audits by the EU authorities, sometimes as part of the formal closure of a scheme or multi-year programme. Hence, it can be several years before financial corrections are implemented. Paragraphs 28 to 33 set out the results of my audit of regularity.

The purpose of the Consolidated Statement

6. The purpose of the Consolidated Statement is clearly defined in the then Economic Secretary’s announcement to the House of Commons on 20 November 2006, where he stated that “the Government intend…to prepare and lay before Parliament an annual consolidated statement on the UK’s use of EU funds…which would be audited by the National Audit Office… These arrangements would enhance audit and Parliamentary scrutiny of our own use of EU funds, help detect any irregularities and thus improve financial management.” The Consolidated Statement adds transparency by providing a single perspective on how the UK is managing EU funds and the liabilities that arise as a consequence – principally the probable future financial corrections that the UK expects the Commission to impose on the UK.

Responsibilities for the preparation of the Consolidated Statement and audit

7. HM Treasury’s Accounting Officer has overall responsibility for the preparation of this Statement, which consolidates the EU funds accounted for by the individual central government authorities detailed at Note 2 to the Statement.

8. HM Treasury has taken steps in the production of this, the third annual Consolidated Statement, to further refine the definition of what is included in the Statement and what is not. As set out in the accounting policy in Note 1.3 to the accounts, the 2008-09 Statement now excludes transactions and balances from EU schemes where the UK authority is the final beneficiary, as these are managed by the Commission, not the UK government. The Statement should therefore only recognise transactions and balances from EU schemes where the UK government is in effect the managing authority on behalf of the EU and distributes the funds to others. This has required HM Treasury to restate some of the figures previously presented in the 2007-08 Consolidated Statement, following this refinement of its accounting policy.

9. HM Treasury has asked me to provide an audit opinion on this Consolidated Statement. My audit is designed to form a view on the truth and fairness of the financial statements and to conclude whether, in all material respects, the expenditure and funding have been applied to the purposes intended by Parliament and the financial transactions conform to the authorities which govern them. This includes checks on whether payments are for the correct amounts and paid to eligible beneficiaries who satisfy the scheme criteria. Where the conditions are not met, I consider the element of the transaction which is not in compliance with the regulations to be ‘irregular’

Progress in the preparation and audit of the Consolidated Statement

10. Significant progress has been made in the preparation and audit of this annual statement since 2006. There is now a clearer sense of what funds are classed as managed by the UK Government, as opposed to being managed by the Commission. Some good progress has been made in securing improved consistency of accounting policies across the component authorities. This has been most notable in relation to provisions for future liabilities, where there is now much greater commonality in determining when to raise a provision for potential future financial corrections and when to recognise that the provisions have crystallised into actual losses to the UK Exchequer.

11. The Consolidated Statement now reflects more fully the objectives originally envisaged. Nonetheless, there are material issues at the core of producing the Statement that HM Treasury

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and the UK authorities have still to resolve. I have therefore qualified my audit opinion on the 2008-09 Consolidated Statement. My comments on the potential for further improvements to the Consolidated Statement are discussed at paragraphs 34 to 38.

Qualified True and Fair Opinion arising from Disagreement on Consistency of Application of Accounting Policies, Disagreement on Accounting Policies for Foreign Currency Transactions and Limitations in Audit Scope

12. Under International Standards on Auditing (UK & Ireland), I am required to give my opinion on whether the Consolidated Statement presents a true and fair view of the use of EU funds in the UK. I have qualified my opinion for the reasons set out below.

Application of Accounting Policies

13. The accounting policies for EU funds are set out in HM Treasury’s Financial Reporting Manual (FReM), which has been adopted by the UK government as the basis for producing its accounts. With the exception of Financial Reporting Standard 23 ‘The effects of changes in foreign exchange rate’ (see paragraphs 15 to 18 below), authorities which received EU funding complied, in all material respects, with the FReM in producing their own financial statements and their interpretation of the guidance was within an acceptable range of professional judgement. For the purposes of this Consolidated Statement, however, accounting treatments and estimates have not always been consistent between Managing Authorities.

14. As a result of the inconsistent applications of accounting treatments and estimates, I have been unable to confirm that the debtors, creditors and related expenditure entries have been compiled on a consistent basis and are materially accurate.

Accounting Policy for foreign currency transactions

15. I qualified my “true and fair” opinion on the 2008-09 financial statements of the Department for Environment, Food and Rural Affairs (DEFRA) and the Rural Payments Agency (RPA) over a disagreement about the accounting treatment for foreign exchange rate gains and losses.

16. Both DEFRA and the RPA are required to produce accounts in accordance with the FReM, which interprets UK General Accepted Accounting Practice for use in the public sector. The FReM requires entities to apply Financial Reporting Standard 23 ‘The effects of changes in foreign exchange rate’ and Financial Reporting Standards 25, 26 and 29 relating to financial instruments in full from 2008-09 onwards.

17. The RPA has significant exposure to exchange rate risk as it pays out European Commission scheme funds (the most significant of which is the Single Payment Scheme) to English farmers in Sterling – but is reimbursed in Euros. To manage this risk, RPA uses a forward exchange contract to hedge its Single Payment Scheme-related Euro income.

18. I do not consider that the RPA’s application of FRS 23 conformed to the Standard. In particular, the RPA did not apply the spot exchange rate on recognition of foreign currency transactions in respect of reimbursement from the Commission. The approach adopted by the RPA did not reflect the full volatility of exchange rates experienced in 2009. The effect of the RPA’s treatment was to omit material gains/losses arising on retranslation of claims during the year. The full application of FRS 23 as stipulated in the Standard would have had a material impact on the valuation of the European Commission debtor, recognised foreign exchange gains in losses in scheme expenditure, and gains arising on the revaluation of the European Commission debtor. DEFRA and the RPA acknowledge that their 2008-09 accounts (and their figures included in this Consolidated Statement) did not comply in full with FRS 23.

18

Limitation in Audit Scope arising from unauditable balancing figures

19. The Consolidated Statement relies upon two balancing figures to complete the Balance Sheet (‘Temporary UK Finding’) and the Cash Flow Statement (‘Receipts from the EU’).

20. The Consolidated Statement is unusual in that it is not drawn up from a single ledger that supports the production of a trial balance, but from a series of returns made by component authorities. The Managing Authority returns are comprised of summary EU-related financial data extracted from the ledgers which support their statutory accounts.

21. Most Managing Authorities do not maintain EU-related debit and credit entries in a ledger separate from other activity. This introduces an inherent risk that the figures extracted from their accounting data are incomplete. To ensure that the Managing Authority returns balance, there is a built-in balancing figure in each one – Temporary UK Funding.

22. Temporary UK Funding in the Balance Sheet is intended to represent the amount of UK funds given to Managing Authorities to finance EU Scheme activities ahead of claiming and receiving funds from the European Commission. The underlying accounts and accounting records of the UK Managing Authorities do not, however, record the level of Temporary UK Funding. It is therefore not a figure for which I can draw specific assurance from the audits of the underlying statutory accounts.

23. If I could be assured that all of the other components of the Balance Sheet were materially correct, I could make the same judgement about Temporary UK Funding. I have not, however, been able to gain full assurance concerning the identification of debtor and creditor balances and related transactions between entities. I could therefore not verify the figure for Temporary UK Funding (£217,994,000 in the Balance Sheet).

24. Receipts from the EU is a figure that should be easily identifiable from the underlying statutory accounting data of the Managing Authorities, but the absence of a specific ledger for EU transactions means that HM Treasury has adjusted the receipts figure to make the Cash Flow Statement work. I have no assurance that this adjustment is a valid correction and I could therefore not verify £361,182,000 of the reported Receipts from the EU (£4,687,084,000 in the Cash Flow Statement).

25. I am content that, with the exception of adjustments which may have been required to the balance sheet, expenditure statement and cash flow statement as a result of the matters in paragraphs 13 to 24 above, the accounts present a true and fair view of the EU-funded activities of the UK central government.

Qualified True and Fair Opinion on 2007-08 figures

26. My audit opinion on the 2007-08 Consolidated Statement was qualified for reasons similar to, but not confined to, the reasons I have set out in respect of my opinion on the 2008-09 Statement. My opinion on the 2007-08 Statement highlighted that:

19

The financial statements are not based upon bookkeeping in a single ledger that supports the production of a trial balance. The process of data capture is vulnerable to the risks of inconsistencies among the UK government bodies involved.

As a result, there is uncertainty over the completeness and reliability of data concerning transactions and balances relating to the use of EU funds in the UK. In my opinion, accounting policies have not been consistently applied across the component entities in relation to the identification of debtor and creditor balances and related transactions between entities, the treatment of EU funding, the compilation of cash balances and the recognition of provisions for financial corrections.

Accordingly, these consolidated financial statements contain material misstatement, the quantification of which is dependent on professional judgement in the interpretation of those policies. As a direct consequence of the uncertainties surrounding the reliability of the balance sheet, I could not verify the figures for Temporary UK Funding (£182,839,000 in the balance sheet) or Other Receipts Direct from the EU (£108,530,000 in the cash flow statement).

27. The qualification of my opinion due to the inconsistent application of accounting policies was broader in 2007-08, since it also included the treatment of EU funding; the compilation of cash balances; and provisions for financial corrections. These qualification matters are unresolved, in that HM Treasury’s subsequent restatements of the 2007-08 figures do not remove my concerns about the comparative figures - which are also disclosed as part of the 2008-09 Statement – being materially misstated. I am required by International Standard on Auditing (ISA) 710 to draw this matter to attention because it limits the understanding that can be gained by comparing the figures presented for the financial years 2008-09 and 2007-08.

Regularity of payments to final beneficiaries

28. My audit included the examination, on a test basis, of evidence that payments by UK government bodies to final beneficiaries in 2008-09, in all material respects, conformed with the authorities which govern them. As a result of the audit, I have been able to confirm that payments generally complied with these requirements. I noted a number of procedural and administrative matters which, whilst not providing evidence that payments to final beneficiaries were subject to material irregularity, give rise to the risk of the Commission imposing financial corrections in the future if it believes that its scheme regulations have not been followed.

Qualified Regularity Opinion

29. Where the Commission determines that its scheme regulations have not been complied with, it may propose a financial correction. The Commission makes an initial assessment of the consequences of the weaknesses found. It then discusses its findings with the UK authorities before deciding on the actual level of the correction to be applied. The correction is then made by restricting the level of future funding made available to the UK, with the resulting cost being met by the UK taxpayer.

30. When the UK authorities become aware that a financial correction may be necessary, either from their own knowledge or from notification by the Commission, they provide for these amounts in their statutory accounts. Provisions for potential financial corrections of £601 million have been included in the 2008-09 Consolidated Statement. These provisions, relating predominantly to likely corrections by the Commission relating to expenditure and control systems up to 31 March 2009, represent a probable outflow of economic benefit but I do not consider these transactions to be irregular at that point. Once the Commission has determined

20

the final correction, this represents a crystallised loss to UK funds which I then consider to be irregular.

31. During the financial year 2008-09, financial corrections relating to prior years totalling £137 million crystallised (Table 1), as a result of decisions confirmed by the Commission. Most of the £137 million disallowance that was confirmed in 2008-09 was incurred by DEFRA. I consider that these amounts are material in the context of the Consolidated Statement for 2008-09. I have qualified my regularity opinion on the Statement on the grounds that the loss to UK funds from these corrections falls outside of Parliament’s intentions in relation to the proper administration of European funding.

32. A further £261 million of corrections has crystallised since the end of 2008-09 and prior to the Accounting Officer signing the Consolidated Statement (Table 2). Although these decisions occurred after the balance sheet date, they relate to conditions existing at that date and I consider these losses are also irregular in respect of my opinion on the Consolidated Statement for 2008-09. HM Treasury has provided further information on these corrections in the Commentary on the Consolidated Statement. The total of crystallised disallowances in 2008-09 and since that relate to events up to 31 March 2009 is therefore £398 million.

33. I also qualified my “regularity” opinion on the 2008-09 and 2009-10 DEFRA accounts because of the payment of material disallowance penalties imposed by the Commission.

Table 1: UK financial corrections confirmed by the Commission in 2008-09



Department for Communities and Local Government

24 European Regional Development Fund

Wales 12 European Regional Development Fund Scotland 9 European Regional Development Fund 137

Table 2: UK financial corrections confirmed by the Commission since 31 March 2009


161 Agriculture and Natural Resources (Single Payment Scheme)


32 Agriculture and Natural Resources (Other)

Northern Ireland 431 Agriculture and Natural Resources (Single Payment Scheme)

Northern Ireland 25 European Regional Development Fund 261

Improving the Consolidated Statement

34. This Statement represents the third annual Consolidated Statement of the use of EU funds in the UK, compiled from pre-existing audited accounts for the 2008-09 financial year. In producing the Statement, HM Treasury has again made a number of significant adjustments to the data received from UK authorities.

35. HM Treasury continues to improve its processes for capturing data and preparing the Consolidated Statement and is working closely with the UK authorities to address the data quality and consistency issues highlighted in this report. In partnership with those authorities, 1 Plus an additional £11 million accounted for in DEFRA’s Resource Accounts, dating back to SPS 2005, included in DEFRA figures shown.

21

HM Treasury is also developing its accounting guidance to help to improve the consistency of reporting of EU funding transactions across Central Government. This work should lead to continued improvements for future years.

36. The first two annual Statements have already led to increased scrutiny of the use of EU funds in the UK. The annual publication of this Statement will help to ensure that this continues. The audit of the Consolidated Statement should help to detect weaknesses in the UK’s management of EU funds so that they may be addressed and so that management control systems may be improved.

37. The preparation of the 2008-09 Consolidated Statement has been subject to delay. Competing priorities meant that the Statement was not ready for certification and laying by the parliamentary summer recess, which led to further unavoidable post balance sheet events. Material financial corrections either proposed or confirmed by the Commission after the certification of the statutory accounts of Managing Authorities have been a major factor. When these announcements occur, they are significant post-balance sheet events that require adjustments to be made to the Consolidated Statement. In such circumstances, HM Treasury’s Accounting Officer needs to have processes in place for the Accounting Officers of Managing Authorities to give their consent for HM Treasury to adjust figures that have been presented in the underlying statutory accounts and in the data returns to HM Treasury for the Statement.

38. The situation described gives rise to a risk of HM Treasury reporting matters to Parliament in the Consolidated Statement before the Managing Authorities do – for example, recognising disallowance provisions in the Statement that a Managing Authority would not report before publishing its statutory accounts for the following financial year. Securing agreement on the treatment of post-balance sheet events for the 2008-09 Consolidated Statement was not possible until the 2009-10 accounts of a key Managing Authority were completed and certified in August 2010. In my view, the resolution of this issue, enabling the HM Treasury Accounting Officer to make material adjustments to the figures within the Statement, is key to securing timelier completion and publication of the Consolidated Statement.

Conclusion

39. My report has identified a number of significant accounting and other issues which need to be addressed in order to ensure that the annual Consolidated Statement represents a true and fair view of the use of EU funds in the UK. HM Treasury has made further incremental improvements to its processes for preparing the annual Consolidated Statement and, with the agreement of the other UK authorities, is addressing the remaining issues through further work to align the detailed accounting policies and related accounting treatments across government.

40. The most important gain from the production of the Consolidated Statement has been the overview that it presents of the level of financial corrections imposed by the Commission. The confirmed losses totalling £398 million set out in this report and the provisions for further losses of £601 million detailed in Note 15 to the Statement represent huge past costs and potential future costs to the taxpayer of implementing EU schemes in the UK. The Agriculture and Natural Resources schemes currently account for the bulk of the losses and provisions. In October 2009, I published “A Second Progress Update on the Administration of the Single Payment Scheme by the Rural Payments Agency” (HC 880, 2008-2009). That report set out my recommendations for addressing the major underlying problems leading to the costly administration of the scheme and the mounting financial corrections proposed by the Commission.

41. Note 15 to this 2008-09 Consolidated Statement shows that there is also a total of £221 million of provisions for other EU schemes – principally the European Regional Development Fund. This represents an increase of £113 million on the equivalent figure at 31 March 2008

22

and indicates that the issue of needing to improve controls over EU funds is one that extends beyond the administration of the Single Payment Scheme.

Amyas CE Morse Comptroller and Auditor General 14 January 2011

National Audit Office 157-197 Buckingham Palace Road

Victoria London SW1W 9SP

23

5 Financial accounts Expenditure Account For the year ended 31 March 2009

2008-09 2007-08 Restated

(Note 6) Note £000 £000 Gross expenditure on EU supported projects 2 4,178,769 4,365,853 Provisions created in year 3 (442,112) (108,280) Provisions released in year 3 154,069 43,198 Expenditure net of provisions 3,890,726 4,300,771 Foreign exchange gains/(losses) 3, 5 (41,167) 24,400 Withdrawn from EU claim 3 (40,929) (31,437) Net expenditure reimbursable by the EU 3 3,808,630 4,293,734

Explanatory Note

The Expenditure Statement shows the EU funded element of amounts paid out by UK Central Government bodies on projects supported wholly or partially by the EU on which the UK anticipates EU funding at the point the payment is made.

Gross expenditure on EU supported projects is recognised in the period in which it becomes payable by UK Central Government to the recipient under the rules of the relevant scheme. The amount shown in the Account represents the amount paid and payable in sterling during the period to beneficiaries.

Net expenditure represents the amount receivable from the EU in respect of amounts paid or payable by the UK on EU supported projects, after taking account of provisions for disallowances and foreign exchange gains or losses.

24

Balance Sheet As at 31 March 2009

2008-09 2007-08 Restated (Note 16) Note £000 £000 Assets Advances to beneficiaries 7 203,439 230,462 EU funds receivable 8 2,258,505 2,378,620 Other assets 9 20,025 8,833 2,481,969 2,617,915 Liabilities EU funds paid on account 10 1,231,811 866,960 Amounts payable to beneficiaries 11 1,009,718 1,483,802 Repayable to EU 12 13,455 36,414 Provision for disallowances 15 600,527 454,140 Other liabilities 13 8,991 - 2,864,502 2,841,316 Net Assets/(Liabilities) (382,533) (223,401) Financed By Temporary UK funding 14 217,994 230,739 Less Possible permanent UK funding: Disallowances Provision 15 (600,527) (454,140) (382,533) (223,401)

Sir Nicholas Macpherson Permanent Secretary HM Treasury 12 January 2011

Explanatory Note

The Consolidated Statement shows the flow of funds from the EU to the UK and from UK Government to beneficiaries. The balance sheet shows those assets and liabilities that stem from such cash flows, e.g. where the UK has paid a claim from a beneficiary and is awaiting reimbursement from the EU. The disallowances provision relates to amounts paid out by the UK for which it believes it probable that the EU will apply financial corrections and not fully reimburse the UK.

Temporary UK funding is the working capital provided by the UK Exchequer that will in due course be funded by the EU. Possible permanent UK funding is the element of temporary UK funding for which it is probable that the EU will apply financial corrections. Possible permanent UK Funding represents the funding that will be met by the UK Exchequer if provisions in respect of EU disallowances crystallise. Possible permanent UK funding will always equal provisions.

As the Consolidated Statement shows funding flows there are no reserves, as there is no trading gain or loss, and there is no taxpayers’ equity.

25

Cash flow statement For the year ended 31 March 2009

2008-09 2007-08 Restated Note £000 £000 Gross EU expenditure 2 (4,178,769) (4,365,853) Movement in working capital (Increase)/decrease in advances to

beneficiaries 27,023 60,891

Increase/(decrease) in amounts payable to beneficiaries

(474,084) (338,729)

Increase/(decrease) in amounts repayable to the EU

(22,959) (58,112)

Net cash outflows (4,648,789) (4,701,803) Receipts from EU 4,687,084 5,574,085 Increase/(decrease) in temporary UK funding

14 (12,745) (797,095)

Permanent UK funding Realised foreign exchange gains 5a (25,550) (75,187) Net cash inflows 4,648,789 4,701,803

Explanatory Note

The cash flow statement balances the cash outflows from the UK government with cash inflows from the EU.

The cash outflows only include that cash paid out on which the UK anticipates EU receipts and is therefore shown net of disallowance provisions and foreign exchange losses.

26

Notes to the Statement

1. Accounting policies

1.1 The principal accounting policies adopted in the preparation of the Consolidated Statement (the Statement) are set out below.

Basis of preparation

1.2 The Statement has been prepared so as to give a true and fair view by consolidating the relevant transactions and balances as recorded by the Managing Authorities in their financial statements prepared in accordance with the Financial Reporting Manual (FReM). The Statement is prepared under the historical cost convention.


1.3 The Statement shows the expenditure incurred by the UK on EU sponsored projects and the income due from the EU in respect of such projects, where the UK acts as an agent in distributing funds in respect of EU supported projects and programmes to the final beneficiary. The boundary of the Statement excludes:

• amounts received from the EU where UK central government is the final beneficiary;

• income and expenditure stemming from commercial contracts awarded to UK central government bodies by the EU;

• twinning funds held by UK central government bodies for the benefit of other member states; and

• amounts recorded in the Expenditure Statement as withdrawn from EU claim or subject to a disallowance, which fall outside the boundary of this Statement as the expenditure will be funded by the UK Exchequer. Where the EU propose a financial correction against the UK, the UK will have submitted a claim in respect of the project subject to the potential correction. As such, the proposed correction will be recognised as a contingent liability or a provision as per the accounting policy in this Statement. Where possible the UK Exchequer will endeavour to recover withdrawn or disallowed expenditure from the final beneficiary but the recovery of such amounts and any outstanding balances will not be recorded in the Statement as they fall outside the boundary.

Expenditure recognition

1.4 Gross expenditure on EU supported projects is recognised in the period in which it becomes payable by UK Central Government to the recipient under the rules of the relevant scheme. The amount shown in these accounts represents the amount paid and payable in sterling during the period to bodies outside the Central Government boundary. Net EU Expenditure represents the amount receivable from the EU (converted into sterling after disallowances and foreign exchange gains or losses) in respect of amounts paid or payable by the UK on EU supported projects.

Income Recognition

1.5 Income is recognised by the UK for funding it expects to receive from the EU in respect of expenditure incurred on EU supported projects. Income has not been separately recorded in the Statement as it will always equal the expenditure incurred. Where provisions for disallowances have been made they reduce the level of expenditure reclaimable from the EU and thus the level of EU income.

27

Foreign currency translation

1.6 The Commission makes payments in Euros, with the Managing Authority recognising the receivable in Sterling in line with the requirements of FRS23 The Effects of Changes in Foreign Exchange Rates. Foreign exchange gains and losses are realised where there are variations in exchange rates between the date EU income is recognised by the Managing Authority and the date payment is received from the EU. Such gains and losses are recognised in the Expenditure Statement. Unrealised gains and losses arising from the revaluation of assets and liabilities at the exchange rate current at the balance sheet date are reported in the Statement of Recognised Gains and Losses. Any hedging mechanisms used to mitigate the impact of foreign exchange losses are not included in this statement as they do not impact on the amounts paid out on EU projects or the funding provided by the EU.

Disallowances provision and contingent liabilities

1.7 Probable disallowances arising from financial corrections are recognised, and contingent liabilities disclosed, in accordance with the requirements of Financial Reporting Standard (FRS) 12, Provisions, Contingent Liabilities and Assets. A provision is recognised where there is a past event – for example an ineligible payment or a failure to comply with the regulations governing a scheme – which will probably lead to the EU disallowing expenditure and not reimbursing the UK. Managing Authorities are responsible for estimating the value of any provisions required. Contingent liabilities are disclosed where there is a past event but it is not probable that it will lead to the EU disallowing expenditure.

EU Funding Withdrawn

1.8 Managing Authorities can apply self corrections which result in amounts being withdrawn from an EU claim. Self corrections occur where, due to an irregularity in a claim, the Managing Authority chooses not to claim the expenditure from the EU. This is a member state function and such self corrections are not provisions for the purposes of this statement. The withdrawal of the claim removes the relevant amount from the boundary of this statement through the Expenditure Account as the self correction is funded by the UK Exchequer pending recovery from the UK beneficiary.

Restatements

1.9 There have been a number of reasons for the restating of balances for 2007-08 within this 2008-09 Consolidated Statement. First, the accounting policy covering the accounting boundary has been modified to exclude amounts related to activities where the government is the final beneficiary of the funds from the EU. This has resulted in a restatement of comparatives for 2007-08 where the expenditure has decreased by £20.7 million. Second, a change to the format of the Expenditure Account has meant that released provisions have resulted in an increase in the Net Expenditure of £43.2 million. Finally, there have been restatements by various managing authorities as they have identified corrections and adjustments to prior year figures. More detail on the impact on the Expenditure Accounts is disclosed in Note 6 and the impact on the Balance Sheet in Note 16.

28

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- 1,

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- -

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1,48

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720

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2,16

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209

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- (1

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- (8

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223

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84

360,

236

521,

297

34,4

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8,63

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293,

734

30

4. Other Projects

The following projects are included in the ‘Other’ category in Note 2.

Department or Devolved Administration

Project 2008-09 2007-08 Restated

£000 £000

Culture, Media and Sport Director General Research Framework 588 Technology Projects 269 Environment, Food and Rural Affairs

Transmissible Spongiform Encephalopathy (TSE) Monitoring and

Bovine Spongiform Encephalopathy (BSE) Eradication

3,560 13,066

Scrapie Eradication 600 1,783 EU Aid 30 73 Bee Health 83 Other Fund disease 794 European Fisheries Fund 1,247 EU Data Collection 3,022 41 Home Office EU Solidarity Mechanism 19,328 7,200 Innovation, Universities and Skills (now Department for Business Innovation and Skills)

Science Programmes Marie Curie Actions 206

EURATools 243 Other 16 Asset Recovery Agency Camden Asset Recovery Inter-Agency

Network 83

Transport Trans European Network 24,603 14,075 Northern Ireland Executive Trans European Network 12,113 - Total 65,380 37,643

5. Analysis of foreign exchange gains and losses

2008-09 2007-08 (a) realised gains / (losses) £000 £000 Environment, Food and Rural Affairs (28,435) 9,416 Communities and Local Government 18,222 27,352 Work and Pensions 36,216 35,859 Northern Ireland Executive (453) 2,491 Transport - 69 25,550 75,187 (b) unrealised gains / (losses) Environment, Food and Rural Affairs (12,146) - Communities and Local Government (22,242) (11,364) Work and Pensions (34,473) (34,308) Welsh Assembly Government 1,482 (4,077) Northern Ireland Executive 662 (1,038) (66,717) (50,787) Total foreign exchange rate gains / (losses) (41,167) 24,400

31

6. Expenditure Account – restated amounts

Original Restated Difference £000 £000 £000 Gross expenditure incurred by the Ministry of Justice, Government Equality Office and The National Archives determined to be outside the scope of the Statement

20,717 - (20,717)

Release of provisions reported in Note 12a but omitted from the Expenditure Account

- 43,198 43,198

Gross expenditure incurred by the Department for Innovation, Universities and Skills – correction of understatement

296,587 301,641 5,054

Other expenditure 3,948,895 3,948,895 - Net expenditure reimbursable by EU 4,266,199 4,293,734 27,535

7. Advances to beneficiaries

These are amounts paid out by the UK to non Central Government bodies responsible for delivering EU supported programmes and projects in advance of claims.

2008-09 2007-08 Restated

£000 £000 Communities and Local Government 125,430 - Innovation, Universities and Skills 36,366 72,267 Environment, Food and Rural Affairs 11,570 26,835 Work and Pensions 27,133 88,237 Scottish Executive 382 21,603 Welsh Assembly Government - 21,345 Northern Ireland Executive 2,558 175 Total 203,439 230,462

8. Analysis of EU funds receivable

These are amounts reimbursable by the EU in respect of expenditure incurred by the UK following the receipt of claims from beneficiaries.

2008-09 2007-08 Restated

£000 £000 Communities and Local Government 397,812 356,366 Innovation, Universities and Skills 99,445 80,078 Environment, Food and Rural Affairs 894,416 1,044,708 Forestry Commission 549 1,359 Home Office 9,653 4,644 Transport - 20 Work and Pensions 461,918 606,693 Scottish Executive 131,542 113,707 Welsh Assembly Government 96,870 30,661 Northern Ireland Executive 166,300 140,384 Total 2,258,505 2,378,620

9. Other assets

2008-09 2007-08

Restated

£000 £000


20,025 8,833

32

10. EU funds paid on account

These are amounts paid by the EU in advance of formal claims from the UK. The contractual terms of EU funding for projects and programmes often provide for such payments on account to allow projects to proceed.

2008-09 2007-08 Restated

£000 £000 Communities and Local Government 496,428 346,972 Innovation, Universities and Skills 16,637 53,422 Environment, Food and Rural Affairs 107,084 40,075 Home Office 9,091 2,509 Work and Pensions 524,999 375,825 Scottish Executive 15,100 42,898 Welsh Assembly Government 53,454 2,875 Northern Ireland Executive 9,018 2,384 Total 1,231,811 866,960

11. Amounts payable to beneficiaries

These are amounts payable to organisations and individuals in respect of EU programmes and projects and are recognised when valid claims are approved but not yet settled.

2008-09 2007-08 Restated

£000 £000 Communities and Local Government 23,635 122,963 Innovation, Universities and Skills 16,633 56,165 Environment, Food and Rural Affairs 547,928 754,671 Home Office 4,281 - Transport 7,499 151 Work and Pensions 247,845 400,518 Scottish Executive 39,988 50,143 Welsh Assembly Government 92,419 68,372 Northern Ireland Executive 29,490 30,819 Total 1,009,718 1,483,802

12. Amounts repayable to EU

These include amounts to be repaid to the EU resulting from direct action taken by the UK to identify overpayments on programmes.

2008-09 2007-08 Restated

£000 £000 Innovation, Universities and Skills - 121 Forestry Commission 7 2 Work and Pensions - 34,571 Welsh Assembly Government 13,448 1,720 Total 13,455 36,414

13. Other liabilities

2008-09 2007-08

£000 £000

Welsh Assembly Government 2,311 - Northern Ireland Executive 6,680 -

8,991 -

33

14. Analysis of temporary UK funding

2008-09 2007-08 Restated

Movement

£000 £000 £000 Communities and Local Government (3,179) 113,569 (116,748) Innovation, Universities and Skills (102,541) (42,637) (59,904) Environment, Food and Rural Affairs (250,974) (276,797) 25,823 Forestry Commission (542) (1,357) 815 Home Office 3,719 (2,135) 5,854 Transport 7,499 131 7,368 Work and Pensions 283,793 115,984 167,809 Scottish Executive (76,836) (42,269) (34,567) Welsh Assembly Government 44,737 12,128 32,609 Northern Ireland Executive (123,670) (107,356) (16,314) (217,994) (230,739) 12,745

15. Provision – future financial corrections (disallowances)

The EU may disallow claims for reimbursement by imposing financial corrections where the conditions of the relevant scheme have not been met. In such circumstances the EU reduces the amount paid to the UK.

2008-09 2007-08 Restated

£000 £000 As at 1 April 2008 (restated) 454,140 401,067 Created during the year 442,112 120,197 Released in year (154,069) (43,198) Utilised (141,656) (23,926) As at 31 March 2009 600,527 454,140

15a Analysis of provisions for disallowances

2008-09 2007-08 Restated £000 £000 Department or Devolved Administration Communities and Local Government 113,365 72,915 Environment, Food and Rural Affairs 379,209 345,831 Home Office 1,988 642 Scottish Executive 29,500 22,370 Welsh Assembly Government - 11,917 Northern Ireland Executive 76,465 465 Totals 600,527 454,140

15.1 Establishing the boundary between EU and UK funded expenditure can be a difficult process. The UK Exchequer provides funding to projects in anticipation of such projects being fully funded by the EU. However, failure to meet certain EU rules attaching to EU funding can result in the EU disallowing claims. Although it is standard procedure to recover grants that are found ineligible, this is not always possible and can lead to the UK Exchequer bearing the full or partial cost of a project to which a disallowance has been applied.

15.2 The disallowance provisions consolidated in this Statement include those recognised by the relevant Departments and Devolved Administrations in their own financial statements. The amounts include adjustments made after the end of the reporting period and included in Departments’ financial statements for 2009-10 as set out in Note 18.

34


15.3 Following consideration of potential ineligible grant payments in respect of European Regional Development Fund (ERDF) programme expenditure, CLG have reported additional net new provisions amounting to £64 million. After allowing for the use of existing provisions, there was a net increase of £40 million in the balance at the year end. This included a post balance sheet adjustment of £39 million (see Note 18).


15.4 The Department for Environment, Food and Rural Affairs reported provisions for 2008-09 amounting to £250 million in financial statements, relating to CAP funding (£246 million) and Financial Instrument for Fisheries Guidance (FIFG) funding (£4 million). Following consideration of likely future disallowances, additional net provisions amounting to £129 million were made in the Department’s 2009-10 financial statements. These have been reflected in this Statement as a post balance-sheet adjustment. After allowing for the use of existing provisions, there was a net increase of £34 million in the position at 31 March 2009 in the EU Statement.

Home Office

15.5 The Home Office provisions, which amounted to £2 million, relate to three funds forming part of the European Solidarity Mechanism, the European Refugee Fund, the European Integration Fund, and the European Returns Fund. Following a comprehensive review of potential liabilities, the Department made new provisions amounting to £2.4 million (net) in 2008-09.

Scottish Executive

15.6 The Scottish Executive made new provisions of £16.7 million (ESF) and £2.3 million (ERDF). The provisions relate to ongoing Commission and European Court of Auditor audit missions which have identified potential irregularities in the delivery of the Structural Fund programmes. Proposed disallowances are subject to the contradictory procedure. Council Regulation 1083/2006 Article 100 provides further details.


15.7 The Northern Ireland Department of Agriculture and Rural Development reported in its financial statements for 2008-09 that the EU was proposing financial corrections in respect of 2004, 2005 and 2006. The disallowance was put on hold pending completion of the conciliation process. The Commission has since announced that the disallowance for those years was £31 million and that a further £31 million disallowances are proposed for 2007 and 2008. As some £11 million had already been provided, the Department expensed £51 million in its financial statements for 2009-10, and a corresponding provision has been recognised in this Statement.

15.8 The Northern Ireland Department of Finance and Personnel disclosed no contingent liabilities relating to EU funding in its financial statements for 2008-09. Since those accounts were issued, the Executive has accepted European Commission proposals to disallow £25 million expenditure in relation to the Northern Ireland Single Programme Document and the Special Support Programme for Peace and Reconciliation in Northern Ireland and the Border Counties of Ireland. In the Department’s financial statements for 2009-10, this amount has been recorded as an expense, with £9.9 million paid to the EU. This amount paid was the total financial corrections less £15.1 million that had been due from the Commission in respect of the PEACE and NI Single Programmes.

35

16. Balance Sheet: restated amounts

Original Restated Difference £000 £000 £000 Advances to beneficiaries – correction of overstatement and elimination of intra-government balances

242,591 230,462 (12,129)

EU funds receivable – elimination of intra-government balances and restatement due to revaluation at year end exchange rate

2,412,861 2,378,620 (34,241)

Other assets – correction of omission - 8,833 8,833 Total assets 2,655,452 2,617,915 (37,537) EU funds paid on account – mainly correction of amounts paid on account

(946,027) (866,960) 79,067

Amounts payable to beneficiaries – elimination of intra-government balances, correction of overstatement and revaluation at year end exchange rate

(1,490,293) (1,483,802) 6,491

Repayable to EU –restatement of amounts previously netted off asset balances and reclassification of creditor as a provision

(36,293) (36,414) (121)

Provision for disallowances – adjustment reflects use of provision in 2007-08 which was not reflected in the Statement and reclassification of creditor as a provision

(441,757) (454,140) (12,383)

Total liabilities (2,914,370) (2,841,316) 73,054 Net liabilities (258,918) (223,401) 35,517 Financed by Temporary UK funding (182,839) (230,739) (47,900) Disallowances provision 441,757 454,140 12,383 258,918 223,401 (35,517)

17. Contingent Liabilities

17.1 Contingent liabilities are disclosed following the requirements of Financial Reporting Standard 12. The disclosures below reflect those disclosed in the resource accounts of the relevant department and devolved administration, updated as necessary for subsequent developments.


17.2 The Department reported contingent liabilities totalling £215 million in respect of the 2000-06 European Regional Development Fund programme in its financial statements for 2008-09. It subsequently carried out a full review of the programme and, after making provision for potential disallowances, it has reduced contingent liabilities to £36 million.


17.3 DEFRA is in ongoing discussions with the Commission regarding perceived non-compliance with EAFRD and EAGF regulations. Any future disallowance stemming from these discussions will depend on the assessed severity of any breach and on subsequent clarification negotiations with the Commission in accordance its clearance accounts procedures. The Department has made full provision for potential disallowances and is currently reporting no contingent liabilities.

Work and Pensions

17.4 DWP has a potential liability in respect of ineligible claims for ESF programmes operated during 2000-06 as a result of adverse opinions on the closure statements produced by the ESF Audit Authority. The Department’s accounts reported an estimated liability of £38 million and its latest estimate of the potential liability is £35 million.

36

Scottish Executive

17.5 Closure of the European Structural Fund Programmes may result in the reduction in the funds recoverable from the European Commission, the financial effects of which are unquantifiable.

Possible disallowance arising from Commission audits of agricultural funding for the period 2005-07. The disallowance is not quantifiable.

18. Post balance sheet events

18.1 The Statement was authorised for issue by the Accounting Officer on 12 January 2011.

18.2 The Statement has been adjusted to take account of events after the end of the reporting period affecting the recovery of income from the European Commission. The principal adjustments include additional net provisions of £129 million for the Department for Environment, Food and Rural Affairs, £76 million for the Northern Ireland Executive and £39 million for Communities and Local Government. These additional provisions were reflected in the organisations’ financial statements for 2009-10.

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Documents

Consolidated statement on the use of EU funds in the UK · Cash Flow Statement 19 Notes 20 Consolidated statement on the use of EU funds in the UK: for the year ended 31 March 2008