Department of Health officials warned the Treasury that accountancy rule changes affecting the private finance initiative would ‘throw the NHS system into chaos’.
The changes will add up to£10bn of debt to trusts’ balance sheets.
The Treasury delayed implementation of the new rules from April this year until April 2009.
The buildings and equipment from the NHS’s private finance initiative and other public-private partnership deals will need to be reported in balance sheets when international financial reporting standards are adopted for the public sector in 2009-10.
In board documents from February this year, just published by the Treasury, the DH warned the new rules could “push a large number of NHS organisations into deficit”, have an “adverse effect on the allocation of resources to the NHS” and cause organisations to breach their statutory duty to break even.
Foundation trust regulator Monitor told the Treasury the rules could cause foundation trusts to “immediately go into deficit” and break the terms of their authorisation.
When an asset such as a hospital appears on a trust balance sheet the trust must deduct from its income an annual charge to account for the fact its useful life is gradually depreciating. The Treasury also levies a 3.5 per cent “capital charge” against the building’s value to incentivise the most efficient use of assets.
Audit Commission director of audit policy Martin Evans told HSJ: “If a PFI comes on to the balance sheet, that will add a slug of costs to the income statement, which will mean trusts will need to generate more income if they are still going to break even.”
Monitor chief operating officer Stephen Hay told HSJthe change could affect trusts’ financial risk rating. Monitor “may decide to change aspects of the regulatory regime,” he said.
The board papers show the DH had wanted to abandon the new rules. But the Treasury ruled that out at a meeting of its financial reporting advisory board last Thursday.
A source on the board told HSJ that the Treasury was adamant concerns over budgets should not stand in the way of clear and transparent accounting.
Mr Evans said the difficulty was managing the implications for the NHS budget. The options are to give affected organisations more re-sources, or to change the breakeven duty and Monitor’s rules around prudential borrowing.
Discussions continue between the Treasury and DH on financial compensation.