Losses and special payments
1. This section gives guidance on when it may be appropriate to write-off losses and make special payments and on associated notification and accounting procedures. The guidance is aimed primarily at the core Scottish Government (SG), the Crown Office and Procurator Fiscal Service, SG Executive Agencies and non-ministerial departments. However, other organisations to which the Scottish Public Finance Manual (SPFM) is directly applicable, including bodies sponsored by the SG, should ensure compliance with any relevant provisions and follow procedures consistent with the guidance.
2. Losses should only be written off or special payments authorised after careful appraisal of the facts. All reasonable action must have been taken to effect the recovery of losses.
3. Delegated authority to individual core SG business areas to authorise write-offs or make special payments must be approved in writing by the relevant Finance Business Partner (or equivalent). Delegations to SG Executive Agencies, non-ministerial departments and sponsored bodies must also be agreed by the relevant Finance Business Partner and set out in the organisation's framework document. Any cases which exceed delegated authority limits must be submitted to the relevant Finance Business Partner for approval. For cases less than £300,000 approval can be sought from an appropriate Finance Manager with Financial Management and Reporting.
4. Total losses exceeding £300,000 and total special payments exceeding £300,000 should be brought to the attention of the Parliament through notes to the organisation's resource accounts. Individual losses and special payments of more than £300,000 should be noted separately.
5. Losses and special payments are in the nature of transactions which the Parliament cannot be supposed to have contemplated when approving the annual Budget Act and subsequent Amendment Orders. A formal approval procedure is therefore required in order to regularise such transactions. Losses should only be written off or special payments authorised after careful appraisal of the facts. All reasonable action must have been taken to effect the recovery of losses. In dealing with individual cases consideration must be given to the soundness of relevant control systems and the efficiency with which they have been operated and all necessary steps must be taken to put failings right.
Classification and delegated authority
6. Losses and special payments have been grouped into a number of different categories to assist with decisions on delegated authority arrangements and on notation of resource accounts. The Annex to this section sets out those categories. More detailed guidance on specific categories of losses and special payments is provided later in this section.
7. Delegated authority to individual core SG business areas to authorise and process write-offs or make special payments must be approved in writing by the relevant Finance Business Partner (or equivalent). General arrangements for SG Executive Agencies, non-ministerial departments and relevant sponsored bodies provide for delegation of authority to agree and process write-offs or make special payments. These delegations must also be agreed by the relevant Finance Business Partner and set out in the organisation's framework document.
Reference to finance business partners
8. Any cases which exceed delegated authority limits must be submitted to the relevant Finance Business Partner (or equivalent) for approval. For cases less than £300,000 approval can be sought from an appropriate Finance Manager within Financial Management and Reporting. Submissions to should explain:
- the nature of the case, the amount involved and the circumstances in which it arose;
- the legal advice, where appropriate;
- whether fraud (suspected or proven) is involved; and/or whether the case resulted from dereliction of duty; and whether failure of supervision is involved;
- whether the case in question could have a wider impact;
- the value for money case for the proposed action, where appropriate; and
- whether investigation has shown any defects in the existing systems of control and, if so, what corrective action is proposed.
9. Irrespective of any delegated authority limits the relevant Finance Business Partner should also be consulted on any cases which:
- are novel or contentious;
- involve important questions of principle;
- raise doubts about the effectiveness of existing systems;
- contain lessons which might be of wider interest; and
- arise because of obscure or ambiguous instructions issued centrally.
Record of losses and special payments
10. A record of all losses and special payments should be maintained centrally (e.g. by specialist finance staff) to inform the notes to the organisation's resource accounts.
Notification and accounting
11. Total losses exceeding £300,000 and total special payments exceeding £300,000 should be brought to the attention of the Parliament through notes to the organisation's resource accounts. Individual losses and special payments of more than £300,000 should be noted separately. Losses should be noted even if they may be reduced by subsequent recoveries. In the case of a serious loss or significant special payment consideration should be given to the need for an immediate report to the Finance Committee and relevant Subject Committee. When separate provision is made in Budget Documents there is no need to note the accounts.
12. Bad debts must be accounted for in the accounts by provision or write-off irrespective of whether they have completed the procedures for dealing with losses and special payments. Cash losses should initially be accounted for as debtors pending recovery or write-off.
Losses of pay, grants etc
13. Where a loss is wholly or partly recovered by non-issue of pay, grants, etc only the balance outstanding (if any) is treated as a loss for write-off purposes. Likewise, where the loss is wholly or partly met by voluntary payments or by a payment from an insurance company or other non-public source, only the net loss is written off. Where pay or pension subject to PAYE is withheld in settlement of a loss, tax must be deducted to arrive at the amount attributed to the debt repayment.
Losses of stores
14. Stores losses are in effect resources used without the authority of the Parliament. In establishing the amount of the loss, and hence whether the accounts should be noted, the net value of the loss after crediting any sums recovered will be the determining factor.
15. Where there is an identifiable claim against some person the loss need not be noted. However, if it is subsequently decided to waive the claim, or the claim cannot be presented or enforced, the loss should be treated as an abandoned claim and noted accordingly. Repairable damage to buildings, stores, etc, should not be noted unless it is known to arise from a culpable cause. Any loss recoverable from a third party, but in respect of which recovery is waived because of a "knock for knock" agreement with an insurance company, should be noted as a stores loss.
16. Where stores are to be written off they should be valued in accordance with the Government Financial Reporting Manual, unless circumstances justify exceptional treatment.
Fruitless payments and constructive losses
17. A payment which cannot be avoided because the recipient is entitled to it even though nothing of use will be received in return should be classified either as a fruitless payment or as a constructive loss. The latter category should be used where the loss was "constructively incurred".
18. A fruitless payment is a payment for which liability ought not to have been incurred, or where the demand for the goods and services in question could have been cancelled in time to avoid liability, for example:
- forfeitures under contracts as a result of some error or negligence by the payee;
- payment for travel tickets or hotel accommodation wrongly booked; or for goods wrongly ordered or accepted;
- the cost of rectifying design faults caused by to lack of diligence or defective professional practices; and
- extra costs arising from failure to allow for foreseeable changes in circumstances.
19. There are many degrees of error which might be involved in making a fruitless payment; the criterion is not whether the error is considered serious enough to warrant disciplinary action but simply whether the payee was at fault in incurring or not avoiding the liability to make the payment. Because fruitless payments will be legally due to the recipient they are not regarded as special payments. As due benefit will not have been received in return, however, they should be regarded as losses, and brought to the attention of the Parliament in the same way as stores losses.
20. A constructive loss is similar to a fruitless payment, but one where procurement action itself caused the loss. For example, stores or services might be correctly ordered, delivered or provided, then paid for as being in conformity with the order; but later, perhaps owing to a change of policy, they might prove not to be needed or to be less useful than when the order was placed. A constructive loss need not be noted in the losses statement in the resource accounts, but should be recorded under "other notes" if significant.
Waiver and abandonment of claims
21. Waiver or abandonment of a claim occurs if it is decided not to present or to pursue a claim which could be or has been properly made. Examples are:
- a decision to reduce the rate of interest on a loan, and therefore to waive the right to receive the amount of the reduction;
- claims actually made and then reduced in negotiations or for policy reasons;
- claims intended to be made, but which could not be enforced, or were never presented;
- failure to make claims or to pursue them to finality, e.g. owing to procedural delays allowing the Limitations Acts to become applicable;
- claims arising from actual or believed contractual or other legal obligations which are not met (whether or not pursued) e.g. under default or liquidated damages clauses of contracts;
- the amounts by which claims are reduced by compositions in insolvency cases, or in out-of-court settlements, other than reductions arising from corrections of facts; and
- claims dropped on legal advice, or because the amounts of liabilities could not be determined.
22. If a claim has been presented in error or otherwise proves be ill-founded, the claim should be withdrawn (whether or not it has actually been presented) and need not be noted. A claim should not, however, be regarded as withdrawn where there is doubt as to whether it would succeed if pursued in a court of law, or if the liability of the debtor has not or cannot be accurately assessed. A claim for refund of an overpayment which fails or is waived should be regarded as a cash loss.
23. An extra-contractual payment is one which, although not legally due under the original contract or subsequent amendments, appears to place an obligation on a public sector organisation which the courts might uphold. Such obligations will usually arise from administrative action or inaction in relation to the contract. A payment is regarded as extra-contractual even where there is doubt whether or not the organisation is liable to make it, e.g. where the contract provided for arbitration but a settlement is reached without recourse to arbitration. A payment made as a result of an arbitration award is contractual.
24. A compensation payment is one made in respect of unfair dismissal or in respect of personal injuries (except payments under section 11 of the Principal Civil Service Pension Scheme), traffic accidents, damage to property etc, suffered by civil servants or by others. When separate provision is made in Budget Documents there is no need to note the accounts.
25. Extra-statutory and extra-regulatory payments are payments considered to be within the broad intention of the statute or statutory regulation but which go beyond a strict interpretation of its terms. Where a payment is of a continuing nature, but does not form part of a general concession of sufficient importance to justify separate Budget Act authority, the payment should be noted in the resource accounts for all years in which it falls. The need for amending legislation should be considered in all cases that arise
26. Special severance payments are paid to employees beyond and above normal statutory or contractual requirements when leaving employment in public service whether they resign, are dismissed or reach an agreed termination of contract. See the section of the SPFM on Severance, Early Retirement and Redundancy Terms.
27. Ex gratia payments are payments made where there is no legal obligation to pay. There must always, however, be good public policy grounds for making such payments. Into this category will fall some out of court settlements, such as cases where the pursuer has no legal case but the government wants to stop the litigation because it is costly in time and resources. It would not however include cases where the settlement is a negotiated price to settle a potentially higher legal liability. Other examples of ex gratia payments would be payments as compensation for distress or loss arising from a perceived failure of the government but where there was no legal obligation to pay or awarding a dismissed office holder a gratuity that went beyond any legal entitlement by virtue of their employment as a type of reward for going with good grace and minimum disruption of services.
Updated: January 2019