SECTION : 1 CAPITAL PROJECTS & THE FUNDING OF VEHICLES & EQUIPMENT PURCHASES 1.1 Introduction This section aims to assist those schools wishing to undertake capital projects or to acquire vehicles or large items of equipment. Due to government controls over local authority capital expenditure, of necessity the arrangements are complicated. The section describes the procedures relating to: Capital Projects funded from local sources; the acquisition of vehicles and equipment and the various methods of funding. In particular where schools may wish to make use of lease finance and the conditions of such leases are fully described. The procedures to obtain approval for capital projects and the acquisition of vehicles and equipment. Although the arrangements may appear to be complicated it is important that schools both understand and follow funding and approval procedures. Staff within Finance Services are pleased to assist and answer queries. 1.2 The need to distinguish between capital and revenue Accounting Standards and government legislation require local authorities to account separately for revenue and capital expenditure. In broad terms expenditure is regarded as capital if the asset purchased has a useful life of more than one year (eg. premises) and revenue if the goods are consumed within the year. These broad principles have been used in the Local Authorities (Capital Finance and Accounting) Regulations 2003, to define capital spending. This includes the following the acquisition of land and buildings irrespective of the price paid; the construction of new buildings or improvements to existing buildings; the acquisition of furniture, equipment, plant and vehicles (costing more than 12,000 excluding VAT in agregate ); To meet national codes of practice the County council must carefully identify and monitor all its capital expenditure. In order to fulfil this requirement member approval is required to establish all capital budgets before any expenditure can be incurred. 1.3 Formula Capital Devolved formula capital (DFC) is funded by government grant and managed by the EAL Capital Strategy team. Schools receive an annual allocation calculated by reference to school size pupil numbers and mix. These factors are determined by DfES. The purpose of the grant is to support premises related capital projects. These are agreed with schools and funding released to schools by Capital Strategy team on the basis of planned work in the school asset management plan. Schools may choose to augment the funds available with money from other sources. The DFC funds must be spent within certain time frames however schools may by agreement draw upon future years allocations. Devon Financial Services Page 1:1 September 2004
1.4 Locally Funded Capital Projects (Land & Buildings) Locally funded capital projects are those building projects put forward by the Governing Body which are not centrally funded. If the works fall within the definition of capital approval will be required even though all of the funds to be used are within the control of the Governing Body. For example the Governing Body may decide to allocate funds within its control to meet the cost of adaptations or improvements to the premises. The source of funds may be one or a mixture of school budget share Devolved formula capital (DFC) private contributions externally generated funding National Lottery Government Grants Sponsorship Governors will need to take account of the competing demand for revenue resources before such an allocation is determined and ensure that such expenditure is consistent with the management plan. Once the Governors have determined to give priority to a capital scheme it is necessary to seek approval. This must be requested from Capital Strategy team. The Capital Strategy team will initiate the approval process. For schemes costing less than 25,000 agreement delegated powers exist but schemes costing more than this require member approval. Procedures for obtaining approval are set out in paragraph 8.10 This will enable the Authority s capital programme to be increased and to account for the revenue funds to finance the project. There are information requirements to enable members to consider such projects. Staff from the County Council will provide assistance to the school to enable the information requirements to be met. 1.5 Funding Arrangements for the acquisition of Vehicles & Equipment Schools may fund the acquisition of vehicles from the following sources:- Purchase from the revenue budget or private contributions Hire (with no option to purchase) Operating Lease ( but not Finance Lease) Vehicle & Equipment Loans Pool Given the complicated nature by which the Government controls local authority expenditure each option needs to be considered separately and are explained in the following paragraphs. 1.6 Purchase from Revenue Budget or Private Contributions Where the cost of equipment acquisition exceeds 12,000 the same procedure as for Locally Funded Capital Projects need to be followed. Spending cannot take place until approval is given. (see paragraph 8.10) The transaction must be reflected in both the school accounts and the Authorities Capital Account. To enable the statutory accounting requirements to be met advice should be Devon Financial Services Page 1:2 September 2004
sought on its coding from either the Premises Section of the Education Directorate or from Financial Services. 1.7 Hire This is the equivalent of renting an item for a short term and there is no option to purchase the item. The item constitutes a charge against the school s revenue budget and no approval is required from members. 1.8 Operating Lease The Government has from the 1 st April 2004 changed the test which a lease agreement must pass in order to qualify as an "operating" lease as opposed to a finance lease, and this is a much more stringent test than that which was previously in place. Under Statement of Standard Accounting Practice 21 (SSAP21) the legislation specifies the following conditions, all of which must be met; Property in the asset must not pass to the authority. Ownership of the asset always remains with the lessor. Schools cannot purchase the asset at the end of the lease period. Any renewal or continuation of the agreement must be at open market rentals once the primary period (the period for which the lease was signed) has expired. (The renewal period is known as the "secondary period".) The value of the asset must not accrue directly or indirectly to the Authority or school. The Authority or school can never own the asset or receive any of the sale proceeds. The discounted value of committed lease rental payments must be no more than 90% of the value of the asset at the commencement of the lease. This may be difficult to determine and advice should be sought from the Finance Strategy Unit. This last condition is quite complex and is the main change in the regulations. It is unlikely that many of the operating lease agreements entered into prior to 1 st April 2004 would have qualified as operating leases under the new arrangements. The Finance Strategy Unit which previously had arranged centrally negotiated operating leases will not be entering into any more such leases. (For a replacement facility, please see the section headed Vehicle and Equipment Loans Pool). Operating leases may be arranged directly by schools with finance companies or the companies providing the equipment. However it is essential that schools check that the above criteria are met within the terms of a prospective lease as failure to do so will result in the agreement being deemed to be a finance lease. Under the legislation finance leases are defined as borrowing. Governors are precluded by law from borrowing and may not therefore enter into any such arrangements. It is therefore important that professional advice is obtained from Finance Services staff before the leasing option is examined. Likewise Hire/Lease purchase arrangements provide an agreement to purchase the item. Under such an arrangement because ownership will ultimately rest with the school, it may be deemed to have acquired a capital asset. Such agreements are credit agreements and are thus borrowing. Governors are precluded by law from borrowing and may not therefore enter into any such arrangement. 1.9 Vehicle and Equipment Loans Pool This is administered by the Finance Strategy Unit within Finance Services, and was Devon Financial Services Page 1:3 September 2004
introduced with effect from 1 st April 2004 as a replacement for operating leasing and will enable schools to spread the cost of purchasing certain equipment over a number of years. Loans can only be taken in respect of easily identifiable equipment of a capital nature (i.e. with an expected useful life of more than one year) such as vehicles, computer equipment, free standing gymnasium and kitchen equipment. As the loans pool is an internal arrangement within the County, it will be possible to include associated costs such as software and cabling within the loan amount, provided that the costs can reasonably be described as being of a capital nature. Schools will be able to choose the appropriate loan period for the equipment in question, although it is strongly recommended that the period chosen should reflect the expected useful life of the asset. This is to ensure that equipment is effectively being paid for over the same period as it is in use, and that repayments are not being charged in respect of equipment which is no longer in use. The loan repayments will be payable annually in arrears, so for example if the equipment is purchased in 2004/05 and the loan is for four years the repayments will be charged from 2005/06 2008/09. Further details may be found via http://www.devon.gov.uk/resources/fseal/vehicleandequipmentloanspool-notesforschools.doc 1.10 Approvals required for capital expenditure Increases in the capital programme exceeding 25,000:- All such increases, whether relating to land purchase, building works or acquisition of vehicles and equipment, however funded will require the approval of the Executive Member for Resources. Schools may apply for approval by completing the appropriate application form which may be found by following the attached link:- http://www.devon.gov.uk/eal/capitalstrategy/docs/cp_approval_form.doc Schools will subsequently be notified if their application is successful. Increases in the capital programme less than 25,000:- Land and building works costing up to 2,000 may be approved by the Director of Education Arts & Libraries (Capital Strategy) upon receipt of the above application form. Land and building works costing between 2,000 and 25,000 may be approved by the Executive Member for Schools, the Director of Education Arts & Libraries and the Director of Finance and I.T. upon receipt of the above application form. Vehicles and equipment costing up to 12,000 if being funded by sources other than the Vehicle and Equipment Loans Pool may be treated as de minimis and do not require approval. Purchases costing in excess of 12,000 will require approval via the above application form. Vehicles and equipment costing up to 25,000 if being funded by the Vehicle and Equipment Loans Pool may be approved by the Director of Finance and I.T. Where this is the case a letter to the Director requesting approval is required. Advice should be sought from Finance Services staff prior to writing in order to ensure that the letter contains all of the information upon which an approval may be based. A letter from the Director confirming approval is usually sent to the school within a few working days. Vehicles and equipment costing in excess of 25,000 if being funded by the Vehicle and Equipment Loans Pool will require approval via the above application form. 1.11 Renting and leasing of premises Where additional premises are required it is important that the tenancy arrangements are properly made. The case for the premises will need to be made and there will need to be ongoing budget Devon Financial Services Page 1:4 September 2004
provision before any commitment can be entered into. Budget provision must exist for the rental and any running costs such as rates energy and service charges. Other than casual hirings and use of school and other education premises under existing agreements staff may not rent premises without reference to Devon Property Practice who will be responsible for arranging a tenancy on appropriate term. Devon Financial Services Page 1:5 September 2004