Local government finance circular 10/2025: accounting for general capital grant – reinforced autoclaved aerated concrete remediation

The Scottish Ministers have agreed to a temporary amendment to the current statutory accounting requirements for capital grant, set out in local government finance circular 3/2018. The amendment will allow local authorities to replace revenue reserves held in the Capital Fund with 2025-26 General Capital Grant, in order to allow those reserves to be used to fund RAAC affected buildings.

This flexibility only applies to the 2025/26 financial year and, in order to utilise this flexibility, a letter from the Scottish Ministers providing a variation to the terms and conditional of the general capital grant, the value to which this variation applies and the use of the capital grant will also be required. 

This circular is also available through the local government section of the Scottish Government website.

If you have any questions, please do not hesitate to contact me.

Yours faithfully,

Elanor Davies
Head of Local Authority Accounting
Local Government and Analytical Services Division, Scottish Government

Temporary statutory accounting flexibility - Capital Grant

Contents

Part 1 – Background
Part 2 – Guidance on proper accounting practices – capital grants

Part 1 of this document gives informal advice only and is not part of the guidance itself, which is contained in Part 2.

Background

1. The Scottish Ministers have agreed to allow local authorities to replace revenue reserves held in the Capital Fund with 2025-26 general capital grant in order that those reserves can be used to fund RAAC remediation costs. This flexibility is only available when accompanied by a letter of consent from the Scottish Ministers to a local authority, setting out an accompanying variation to the terms and conditions of the 2025/26 general capital grant, the value of the capital grant to which this amendment may be applied and how the grant may be used.
2. This finance circular provides a variation to the statutory accounting requirements of Finance Circular 3/2018 to permit a local authority to transfer general capital grant to the Capital Fund. This amendment is only available in 2025-26 and is solely applicable to amounts agreed in writing by the Scottish Ministers and for the purpose of releasing revenue reserves to fund RAAC remediation costs.

Finance circular 3/2018 – accounting for capital grants, contributions and donated assets

Capital grants and capital contributions where no conditions remain outstanding – capital expenditure has been incurred

3. Paragraph 13 of Part 2 of Finance Circular 3/2018 requires that “All capital grant and capital contributions received in any financial year which have been used to fund capital expenditure of the local authority are to be recognised in the Taxation and non-specific grant income line of the Comprehensive Income and Expenditure Statement. The grant or contribution is not income that may be credited to the General Fund and therefore the grant or contribution is to be transferred from the General Fund (DR) to the Capital Adjustment Account (CR). This transfer shall be reported in the Adjustments between Accounting Basis and Funding Basis section of the Movement in Reserves Statement.

Capital grant used to fund capital expenditure of the local authority where no conditions remain outstanding – capital expenditure has not been incurred

4. Paragraph 14 of Part 2 of Finance Circular 3/2018 requires that “Where grant conditions are met but the grant has not yet been applied the grant shall be recognised in the Taxation and non-specific grant income line in the Comprehensive Income and Expenditure Statement. As the expenditure to be funded from that grant or contribution has not been incurred at the Balance sheet date, the grant or contribution shall be transferred from the General Fund (DR) to the Capital Grants Unapplied Account (CR). This transfer shall be reported in the Adjustments between Accounting Basis and Funding Basis line in the Movement in Reserves Statement.

Capital grant used to fund capital expenditure of the local authority where no conditions remain outstanding – capital expenditure subsequently incurred

5. Paragraph 16 of Part 2 of Finance Circular 3/2018 requires that “Where the grant or contribution (or part thereof) funds the capital expenditure of the local authority the grant or contribution shall be transferred from the Capital Grants Unapplied Account (DR) to the Capital Adjustment Account (CR).  This transfer shall be reported in the Adjustments between Accounting Basis and Funding Basis line in the Movement in Reserves Statement.

Temporary amendment to finance circular 3/2018 – transfer of Capital Grant to the Capital Fund

6. The statutory guidance in Part 2 provides a temporary exception to paragraphs 13, 14 and 16 of Part 2 of Finance Circular 3/2018 to allow the capital grant to be transferred to the Capital Fund rather than to the Capital Adjustment Account. This amendment only applies where it is accompanied by a letter of Ministerial consent to a local authority, setting out the amount of capital grant to which this applies and how the grant may be used.

Variation to accounting requirements - Use of the Capital Fund for principal loan repayments (General Fund and HRA)

7. Paragraph 22(1)(a) of Schedule 3 of the Local Government (Scotland) Act 1975 permits a local authority to establish a Capital Fund “to be used for defraying any expenditure of the authority to which capital is properly applicable, or in providing money for repayment of the principal of loans (but not any payment of interest on loans)”.  There are no restrictions within the 1975 Act on the use of this fund to meet HRA loans fund repayments.  The Housing (Scotland) Act 1978, whilst specifically excluding contributions from the General Fund to the HRA, unless Ministerial consent is provided, contains no similar provisions in relation to the Capital Fund and therefore does not preclude the use of the Capital Fund to meet HRA capital costs.

8. Paragraph 14 of Finance Circular 7/2016 states that “A Capital Fund may be used to provide money for the repayment of the principal of loans (but not any payment of interest on loans). Where the Capital Fund is used to fund the annual statutory repayment of debt this is to be treated as a separate transaction. This means that the statutory repayment of debt must still be charged, in full, to the General Fund or HRA (debit General Fund/HRA, credit Capital Adjustment Account). The transfer from the Capital Fund (debit) to the General Fund or Housing Revenue Account (HRA) (credit) is a separate transaction to be reported as a transfer to or from other statutory reserves in the Movement in Reserves Statement.”
9. Only the capital grant referred to in this guidance and utilised to fund principal loan repayments may be transferred to the Capital Fund.

Capital grant used for other purposes/unused capital grant

10. The terms and conditions of the general capital grant require it to be utilised within the financial year provided. The grant may not be retained within General Fund reserves or transferred to the Capital Grants Unapplied Account for future use.  Any capital grant which is not utilised in accordance with this circular and accompanying Ministerial consent must be accounted for in accordance with Finance Circular 3/2018 which requires that, once utilised, the grant is transferred to the Capital Adjustment Account. 

Disclosure of statutory adjustments

11. All statutory adjustments are to be reported in the Adjustment between Accounting Basis and Funding Basis section of the Movement in Reserves Statement. The Accounting Code requires an analysis of statutory adjustments either in the Movement in Reserves Statement itself or in a note. The analysis of the statutory adjustments shall clearly identify each of the statutory adjustments made.

Scottish Government, Local Government and Analytical Services Division
15 December 2025