• Provider accounts reveal £206m of £409m raised from land sales in 2017-18 treated as revenue 
  • By comparison, just a fifth of land sale money went into revenue in 2015-16
  • DHSC has previously said trusts would be allowed to keep proceeds “on condition that they are reinvested in the NHS estate”

More than half of the money raised from NHS land sales last year was diverted into day to day spending budgets, despite a government commitment for the proceeds to be reinvested into new estates’ projects.

NHS provider accounts show that £206m (50.3 per cent) of the £409m raised from land sales in 2017-18 helped prop up the Department of Health and Social Care’s revenue budget, rather than topping up its capital account.

It comes after a period in which capital budgets have been repeatedly cut and raided, which has resulted in a spiralling backlog of overdue maintenance work. Local health leaders have also been frustrated by the delays they have faced in getting new infrastructure projects signed off.

An increasingly used accounting “wheeze” around land valuations – encouraged by NHS Improvement and within DHSC rules – appears to have resulted in a higher proportion of land sale proceeds being diverted into revenue budgets. (See box below)

In 2015-16, around £65m (20 per cent) of the £314m raised from land sales went into the revenue budget, according to accounts data published by NHSI. In 2016-17, £80m (36 per cent) of £222m went into revenue.

Sally Gainsbury, senior policy analyst at the Nuffield Trust, told HSJ the accounting treatment was, in effect, creating another capital to revenue transfer. She added: “This is not what the general public believed would happen when NHS assets were sold. In their eyes, the money would be there ready to invest in new facilities.

“It shows just how dependent the revenue performance is on these big one-off accounting measures, but it’s happening because trusts continue to be set impossible control total targets.”

In its response to Sir Robert Naylor’s review of NHS estates, the DHSC said trusts would be penalised if they failed to maximise their disposal of surplus assets. It also said providers would be allowed to keep the proceeds from sales “on condition that they are reinvested in the NHS estate to deliver local priorities and sustainability and transformation partnership strategies”.

The accounts show that dozens of trusts have kept the proceeds, but the benefit has been scored against their revenue performance as opposed to boosting capital budgets.

For trusts in deficit, the cash will typically have been spent on the day to day running of services. For trusts in surplus, the cash proceeds will be held in reserve with the potential to be spent on infrastructure projects.

But because the benefit has been accounted for within the revenue budget at a national level, there is no increase to the capital budget. Therefore, although some trusts will have cash available to spend, their freedom to do so will be constrained by the national capital spending limit (as all capital spending by trusts scores within this).

Actual NHS capital spending has remained relatively flat in cash terms since 2010 (averaging around £5bn), with budgets being repeatedly raided to cover overspending in revenue budgets. The DHSC said spending is due to rise as capital to revenue transfers are phased out. Future budgets are due to be set out in the 2019 spending review.

A spokesman added: “We work closely with NHSI to monitor and manage the in-year capital expenditure across NHS providers, and we expect all trusts to follow our accounting guidance to ensure that their assets are valued fairly.”

Saffron Cordery, deputy chief executive at NHS Providers, said: “It’s disappointing to see growing amounts of capital raised from the sale of trust assets diverted to revenue budgets, despite assurances these self-raised funds would be reinvested in facilities.

“It is unsustainable to continue to prop up day to day spending for the NHS through land sales and one-off accountancy measures. We will need the forthcoming review of NHS capital spending to reverse this trend and provide adequate and long-term investment to ensure trusts can meet growing demand and the future needs of patients.”

Why the proceeds are going into revenue budgets

Under government accounting rules, the benefit from a land sale is split between the capital and revenue account depending on the amount of “profit” reported in the deal.

The profit is the difference between the asset’s actual sale price and the value of the asset stated within the organisation’s balance sheet.

As previously reported by HSJdozens of trusts have deployed a “legitimate (accounting) wheeze” in recent years – under instruction from NHSI – resulting in large downward revaluations of their assets.

As well as other benefits, the revaluations increase the profit element within a subsequent land sale, thereby boosting a trust’s performance within its revenue budget and against its “control total”.

The revaluations are within accounting guidelines issued by the DHSC, although the Chartered Institute of Public Finance and Accountancy has said this demonstrates that public bodies “should not set their own accounting rules”.

CIPFA says accounting standards for other parts of the public sector, such as local government and policing, are set independently (by CIPFA) and provide a “far more robust framework”.

In one land deal, the Royal Free London Foundation Trust booked a £47m profit after selling land to its charity arm for £50m. This followed a downward revaluation which had the effect of boosting the profit element by £13m. The trust said it followed DHSC guidance and the revaluation was part of a routine annual review, rather than an attempt to secure the revenue benefit.

University College London Hospitals FT posted a £30m profit on its land sales, including the £80m sale of Eastman Dental Hospital. The trust said it followed DHSC guidance.

Accounting wheeze

HSJ has previously revealed how trusts have used a complex accountancy adjustment to revalue their estate in a way that assumes services could theoretically be consolidated to a cheaper “alternative site”.

This results in a lower “book value” within the accounts, which boosts their revenue position by reducing the charges applied to their estate.

Trusts have been able to use these revaluations for around ten years, but their use has increased dramatically over the last two years, as the Department of Health and Social Care has desperately sought to remain within its spending limit.

The adjustments improve the department’s headline financial position but are purely accountancy based and do not produce real cash savings for the overall health budget.

However, the cash savings are circular - they simply shift money within the national health budget. Benefits arising from lower “depreciation” charges also help boost the headline financial position, but do not represent a real cash saving.

Some trusts have paid specialist consultancy firms to undertake the revaluations, which can cost around £40,000 per trust, meaning there is an overall negative impact.

According to a letter seen by HSJ from January 2016, NHS Improvement instructed trusts to undertake these revaluations “where advantageous” for the headline deficit figure reported by the trust sector (and therefore the DHSC position).

Since then, there has been a dramatic increase in “impairments” to land and property, which is the accounting entry which includes the revaluations.

According to DHSC accounts, net impairments to land and property have risen to £2.5bn in 2016-17, up from £2.1bn in 2015-16 and £1bn in 2014-15. These figures also include other types of impairment.

HSJ has spoken to several NHS finance directors who feel uncomfortable with some of the adjustments. One said they have been pursued to “window dress” the trust sector deficit, while another described them as a “legitimate wheeze”.

Rob Whiteman, chief executive of the Chartered Institute of Public Finance and Accountancy, said the adjustments should only be “chosen to best reflect fair value” and not with the intention to improve the reported surplus or deficit. He also suggested that accounting standards deployed by the NHS and DHSC are less effective than other sectors, because they are not set independently.

He told HSJ: “Firstly, the asset valuation method should be chosen to best reflect fair value and not for the utility of treatment to minimise (revenue spending) or release revenue resources.”

“Secondly, it demonstrates that bodies should not set their own accounting rules. The system for local government, policing and charities, where CIPFA independently sets accounting standards, provides a far more robust framework.”

Meanwhile, concerns have also been raised that some revaluations could result in unrealistic accounting assumptions that could lead to cash shortages in the future, due to the reduced depreciation charges.

Trusts contacted by HSJ stressed they had followed the relevant accounting guidance in undertaking the revaluations, and that auditors had approved them. DHSC and NHS Improvement did not respond. Nor did the Healthcare Financial Management Association.

Although public bodies all use the “government financial reporting manual”, which provides guidance on applying international accounting standards, different sectors then produce their own technical guidance beneath this. While the standards for local government are set independently, the DHSC sets the guidance for the NHS, with oversight from the Treasury.

Largest impairments identified by HSJ

Organisation Name Year impairment applied  Net impairments in year (£m)
Guy’s & St Thomas’ Hospital NHS Foundation Trust 2015-16 217
Central Manchester University Hospitals NHS Foundation Trust 2016-17 154
Chelsea and Westminster NHS Foundation Trust 2015-16 119
King’s College Hospital NHS Foundation Trust 2015-16 107
The Newcastle Upon Tyne Hospitals NHS Foundation Trust 2016-17 98
Oxford University Hospitals NHS Foundation Trust 2016-17 91
Barts Health NHS Trust 2015-16 86
University College London Hospitals NHS Foundation Trust 2015-16 73
Royal Free London NHS Foundation Trust 2015-16 72
Mersey Care NHS Foundation Trust 2016-17 65