Grant and Grant in Aid

1. This section gives guidance on grant and grant in aid and the conditions that might be attached to the different forms of funding. It is aimed primarily at the constituent parts of the Scottish Administration (including the core Scottish Government and Executive Agencies). However, other organisations to which the Scottish Public Finance Manual (SPFM) is directly applicable, including sponsored bodies, should ensure compliance with any relevant provisions and arrange for appropriate procedures consistent with the guidance to be put in place.

Key Points

2. Grant is appropriate where Scottish Government wishes to maintain detailed control over expenditure. Grant in aid is appropriate where the Scottish Government has decided that the recipient body should operate at arm's length.

3. Grants provided by the Scottish Government must be made subject to binding agreements in the form of an Offer of Grant document. The precise conditions attached to a grant should be tailored to meet the particular circumstances. The terms and conditions attached to a grant in aid should be set out in a formal Management Statement/ Financial Memorandum.

4. Conditions should normally be attached to grants or grants in aid which will be used to acquire or improve capital assets so that the Scottish Government's position is protected in the event of disposal.

5. Grant and grant in aid should not be paid in advance of need.

6. Business areas are responsible for ensuring, so far as possible, that grants are spent for the specific purposes for which they were authorised.

7. Proposals to provide assistance to private sector organisations should be carefully appraised and the terms on which any assistance is given made absolutely clear. Government assistance to private sector organisations is constrained by EC State Aid Rules.

Background

8. The decision whether to pay a grant or to provide grant in aid depends primarily on the level of detailed control which the Scottish Government or wishes to exercise over the related expenditure. Grants are subject to a more detailed level of control than grants in aid. Conditions of grant are set out in an Offer of Grant document while recipients of grant in aid have discretion over the spending of provision within a general framework of controls agreed between them and the Scottish Government and set out in a Management Statement / Financial Memorandum.

Grant

9. Payments to bodies / companies / individuals should be made in the form of a grant where the Scottish Government wishes to maintain detailed control over the expenditure and minimise the risk of funds not being used for the purposes intended. This includes "specific grants" to local authorities. Funds should not be issued to the recipient in advance of need and in many instances (e.g. under the terms of a grant scheme) will not be made available until the recipient has incurred the expenditure and claims reimbursement. Pre-funding, however, may be appropriate in the case of public sector or voluntary sector bodies. Any other proposals for pre-funding must be approved in advance by the relevant portfolio Finance Team. Grant should be provided net of recoverable VAT. Business areas are responsible for ensuring, so far as possible, that the recipient spends the grant for the specific purpose for which it was authorised. Grant funding provided by the Scottish Government must be subject to the lead business area being satisfied as to the standing and relevant experience / expertise of the recipient and any delivery partners. Checklists covering the grant proposal, application and assessment processes are available to Scottish Government staff on the SG Intranet.

10. There should be a presumption against bodies supported by grant in aid from the Scottish Government being eligible for separate payments of grant from the Scottish Government. Any such payments must therefore be approved in advance by the relevant portfolio Finance Team. Payments of grant should not be made to any other body funded directly from the Scottish Consolidated Fund as identified in a schedule to the annual Budget Act - support, where considered appropriate, should be provided by transferring budgetary provision. (This guidance is not applicable to EU Funding claimed via the Scottish Government.)

Funding asset creation and maintenance through endowments or dowries

11. In general, grant should provide cash on the basis of need in a particular financial year. Exceptionally, however, there may be a case for considering funding by way of endowment or dowry, i.e. making a one-off grant which will often represent a clean break between the Scottish Government and funded body whilst enabling a funded body to set up a fund from which to draw down over several years. Where business areas consider such funding appropriate they should seek the prior approval of their portfolio Finance Team. In assessing particular proposals business areas will need to provide an assessment of the overall value for money of such funding, including an assessment of:

the opportunity costs of locking public funds into a particular endowment, using investment appraisal techniques;
the value of the particular programme or project against others. The Finance Team will need to be satisfied that such funding would not protect any low-value programmes or projects from proper expenditure scrutiny;
the sustainability of the funded body and whether such funding decreases reliance on public funding or not;
whether there are clear objectives, outputs and outcomes of the funding; and
the risk of further call on public funds (e.g. because the endowed funds have not grown at the expected levels).

12. Where it is decided to make an endowment or dowry, its terms should:

provide clarity - the funded body should know where it stands and not have to approach the Scottish Government for annual funding; and
maintain clean boundaries between the Scottish Government and the grant recipient.

13. Business areas should however ensure that such payments are based on:

genuine need for funding; and
an assessment that the grant recipient has the necessary competence to preserve or increase the value of the endowment over time.

Conditions attached to the payment of grant

14. Grants provided by the Scottish Government must be made subject to binding agreements. A model Offer of Grant document, including standard conditions of grant and schedules covering claims and payments, is available to Scottish Government staff on the SG Intranet. This model should be used as the basis for all grants provided by the Scottish Government except where bespoke models have been developed in consultation with portfolio Finance Teams and the Scottish Government Legal Directorate (SGLD). The standard model Offer of Grant document may be adapted in consultation with Finance Teams and, as necessary, SGLD. Finance Teams and Internal Audit Division should be consulted when any new proposals for the provision of grant are being considered.

15. A separate model Offer of Grant document for third sector organisations, developed in consultation between the Scottish Government and the Scottish Council for Voluntary Organisations, is also available to Scottish Government staff on the SG Intranet. This model documentation should be used in relation to grant funding provided to voluntary bodies to assist with their operational costs.

Using assets as collateral or to generate income

16. The Scottish Government needs to be satisfied that funded assets are used for their agreed purpose. It may however take into account that using the assets as collateral might help the transition from a short-term social project to a viable third sector body e.g. the voluntary and community sector, charities. Equally the appropriateness of giving grants to finance asset acquisition when it is being used solely to lever in income or provide security for lending must be taken into consideration. Business areas should be alert to the risk of third party creditors gaining a benefit at the expense of the Scottish Government, in the event of a funded body becoming insolvent and having used publicly funded assets as security. They should therefore ensure that the funded body seeks the agreement of the Scottish Government to publicly funded assets being used as security whilst a charge / clawback condition still applies - see paragraph 24.

17. Similarly, conditions may be set on the ability of the recipient to generate income from a publicly funded asset. Such conditions should be proportionate and weigh up the balance between impeding a funded body's ability to be self-supporting against the appropriateness of using public funds for the body to acquire an asset solely for the purpose of generating income. It would be appropriate to allow a body to retain income if, for example, it was generated by using spare capacity.

Statements on compliance with conditions of grant

18. A standard condition of grant (but not grants to voluntary bodies to assist with their operational costs) is the requirement for the grant recipient to provide statements on compliance with the conditions attached to the grant - see paragraph 3.2 of the standard model Offer of Grant. Such statements may be provided by the grant recipient's director of finance or head of internal audit, except where an assessment of the risks involved indicate that certification should be provided by the grant recipient's external auditor or an independent accountant. The Scottish Government has agreed that all statements provided by local authorities should be signed by the relevant director of finance. Where external certification is considered necessary - taking into account the risks of the grant recipient failing to use the grant for the purpose intended or failing to abide by the grant conditions in general, together with such matters as materiality - the precise wording of the statement would need to be agreed between the Scottish Government and the external auditor / independent accountant on a case by case basis. Advice on the wording should be sought from Internal Audit Division.

Grant in aid

19. Grant in aid is funding provided to finance all or part of the costs of a body in receipt of the grant in aid. (Where a sponsored body comes within the Scottish Government's resource budgeting boundary grant in aid is the cash required from the Scottish Government to fund the agreed resource budget.) Grant in aid is paid where the Scottish Government has decided, subject to parliamentary controls, that the recipient body should operate at arm's length. The Scottish Government does not therefore seek to impose the same detailed controls over day-to-day expenditure as it would over a grant. See also the guidance on Accountability.

20. Once the grant in aid has been paid over to the sponsored body any unspent balances it holds are not liable to surrender to the Scottish Government at the end of the financial year. However, to ensure that sponsored bodies do not build up unacceptably large balances, the sponsoring unit within the Scottish Government should ensure that grants in aid are not paid in advance of need. The full amount of grant in aid may not therefore have to be issued.

21. A grant in aid will reflect the Parliament's agreement to surrender, in some degree, its control over the spending of the money it has authorised. The relevant Budget Documents should therefore contain sufficient detail on the application of grants in aid and, as a general rule, grants in aid of £500,000 or more should be shown separately.

Conditions attached to the payment of grant in aid

22. While the Scottish Government does not normally seek to exercise detailed control of the activities of the recipient body, it must set out the terms and conditions on which the grant in aid is paid. The extent of the freedoms which the recipient body enjoys, and their limitations, and the recipient body's responsibilities, must be clearly understood. The Audit Committee of the Scottish Parliament can be expected to maintain a continuing interest in the nature of the controls applied by the Scottish Government, as a consequence of the Parliament's agreement to surrender in some degree its controls over the spending of the money it has granted.

23. In drawing up the terms and conditions a balance should be sought between the need to ensure prudent management of grant in aid provision / resource budget and achieve value for money, and the need to provide a reasonable degree of freedom to the sponsored body to take decisions of its own. The extent of controls will be influenced by the nature of the body concerned. The terms and conditions should be set out in a formal framework document consistent with the model Management Statement / Financial Memorandum at Annex 3 of the guidance on Accountability.

Assets funded by grant or grant in aid

24. Where assets acquired or developed with the aid of grant or grant in aid are disposed of, the proceeds - or an appropriate proportion of them if the grant was for less than the whole cost of acquisition or improvement - should normally be clawed back by the Scottish Government in accordance with conditions attached to the grant or grant in aid. General guidance on the introduction of a charge / clawback condition over a publicly funded asset is provided in Annex 1. Business areas should consult their portfolio Finance Teams on the application of the guidance.

Third party grants

25. In many areas across the Scottish Government the funding of third parties has devolved to organisations such as Local Authorities, Non-Departmental Public Bodies (NDPBs) and other bodies such as regeneration partnerships. In delegating such responsibilities, it is important that business areas put in place effective systems to ensure the propriety and regularity of expenditure. A framework for the control over funds to third parties is set out in Annex 2.

Assistance to private sector organisations

26. Government assistance to private sector organisations is constrained by EC State Aid Rules. Business areas must, before any scheme is launched or grants paid, establish that the measure or payment is either covered by relevant permissive European legislation or has been notified to and approved by the European Commission as a State Aid.

27. Before assistance is given to private sector organisations to undertake or assist with a specific project, business areas should establish, so far as possible, that the organisation will be capable of carrying out the project and taking ownership of risks which fall to it, and that the organisation's general management procedures and organisation are sound. The potential cost which would fall on the organisation, after allowing an appropriate margin for contingencies commensurate with the organisation's exposure to risks, must also be examined in relation to the assisted organisation's total resources and commitments.

28. Business areas should ensure that the terms on which assistance is given, the length of time involved, and the extent of the Scottish Government's involvement are clearly stated. (Loans by sponsored bodies to organisations should, wherever possible, be properly secured. Exceptions to this general principle should be made only after careful consideration and for adequate reasons.)

29. Business areas should take all practicable steps, without diminishing the responsibility of directors for management, to ensure that proper and early warning is received of any major problems that may be developing; and, in particular, agree with the assisted organisation the nature and frequency of returns needed by the business area to keep itself adequately informed of the organisation's situation. Consideration should be given to providing for access to the records of the organisation bearing in mind the risk attached to the grant. The primary objective of such monitoring is to provide early warning of project failure or cost increases which might lead to requests for further assistance. With such warning a business area is able to consider the financial position with the organisation and decide whether to continue with the project on an agreed basis or to cancel it with minimal further expenditure.

30. Scottish Government assistance to private sector organisations is subject to the "Concordat on Financial Assistance to Industry" attached to the Memorandum of Understanding between the UK Government and Scottish Ministers.

Page Published/ Updated: September 2007

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Grant and Grant in Aid