HSJ’s expert briefing on NHS finances, savings and efforts to get the health service back in the black. This week by finance correspondent Tom Norton.
With control totals to meet and bonus payments to gain, NHS trusts have proved fairly adaptable when it comes to their reported income and expenditure performance.
There is far less room for creativity for capital spending, with the capital departmental spending limit proving a solid blocker to hundreds of essential projects.
But trusts have, until now, had one way to circumvent the CDEL — by renting an asset, instead of building or buying one, through an operating lease.
These leases appear throughout the NHS — accounts data suggests net spending on operating leases by provider trusts was £750m in 2018-19, with individual trusts spending up to £16m annually. They are often used for assets such as vehicles and scanners and have counted as revenue, and not capital spending. Until now.
From April, new operating leases (a right to use an asset) and their liabilities will be added to trusts’ balance sheets, as part of a switch to a new international accounting standard called IFRS 16.
It means spending on new leases will continue to hit the revenue accounts (as it has until now), while also scoring against the capital spending limit.
Existing leases will stay as they are, so there isn’t going to suddenly be a £750m hit to CDEL.
But the rules effectively remove the main appeal of operating leases, and the small amount of flexibility they offered many cash-strapped providers.
In theory, this is all fine, as the Treasury has made assurances CDEL will be raised to cover new leases (where there’s an “underlying case”), while an expected uplift to the capital budget might render them unnecessary anyway.
But it does seem to give HMT even more power and control over capital spending than it already wields — and leave the NHS even more reliant on its favour.
All this has produced a lengthy and complicated workload for trust finance departments — in figuring out each and every operating contract that has a leasing element — and a multitude of queries for regulators and the Healthcare Financial Management Association.
Besides the Treasury risk and the rigmarole, there’s also likely to be a small but unhelpful hit to I&E performance next year, due to changes around the accounting treatment of interest payments on leases. Essentially, trusts will have to pay more initially, which will drop as the liability is reduced through payments to a lessor.
It’s not yet clear how much this will be.