Agenda Document Pack - Audit Committee - 16/06/2025
Midlothian Council · 16 June 2025
Back to Audit Committee — 16 June 2025 and its agenda
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Notice of Meeting and Agenda Audit Committee Venue: Council Chambers/Hybrid, Midlothian House, Dalkeith, EH22 1DN Date: Monday, 16 June 2025 Time: 11:00 Executive Director : Place Contact: Clerk Name: Democratic Services Clerk Telephone: Clerk Email: democratic.services@midlothian.gov.uk Further Information: This is a meeting which is open to members of the public. Privacy notice: Please note that this meeting may be recorded. The recording may be publicly available following the meeting. If you would like to know how Midlothian Council collects, uses and shares your personal information, please visit our website: www.midlothian.gov.uk Page 1 of 396
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1 Welcome, Introductions and Apologies 2 Order of Business Including notice of new business submitted as urgent for consideration at the end of the meeting. 3 Declaration of Interest Members should declare any financial and non-financial interests they have in the items of business for consideration, identifying the relevant agenda item and the nature of their interest. 4 Minute of Previous Meeting Minute of Audit Committee meeting of 24 February 2025 submitted for approval 5 - 14 Action Log 15 - 16 5 Public Reports 5.1 Midlothian Council Transformation: how councils are redesigning and delivering more efficient services to achieve planned outcomes, report by Audit Scotland 17 - 44 5.2 Annual Treasury Management Report 2024/25, report by Chief Financial Officer and Section 95 Officer 45 - 74 5.3 Unaudited Annual Accounts 2024/25, report by Chief Financial Officer and Section 95 Officer (report added - see below) 5.4 Accounts Commission – Local Government Budgets 2025/26, report by Chief Financial Officer and Section 95 Officer 75 - 114 5.5 Internal Audit Work to May 2025, report by Chief Internal Auditor 115 - 142 5.6 Council Tax Refunds Control Assurance Review, report by Chief Internal Auditor 143 - 176 5.7 Internal Audit Annual Assurance Report 2024/25, report by Chief Internal Auditor 177 - 190 5.8 Counter Fraud Annual Report 2024/25, report by Chief Internal Auditor 191 - 200 5.9 External Quality Assessment of Midlothian Council’s Internal Audit Service, report by Chief Internal Auditor 201 - 228 Page 2 of 396
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5.10 Draft Annual Governance Statement 2024/25, report by Chief Executive 229 - 242 5.11 Risk Management Update – Strategic Risk Profile Quarter 4, 2024-25, report by Chief Officer Place 243 - 290 6 Private Reports No items for discussion 7 Date of Next Meeting The next meeting will be held on Tuesday 30 September 2025. Page 3 of 396
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Minute of Meeting Audit Committee Monday 16 June 2025 Item No 4.1 Audit Committee Date Time Venue Monday 24 February 2025 11am Council Chambers/Hybrid Present: Councillor McEwan (Chair) Councillor Bowen Councillor McCall Councillor Milligan Councillor Smaill (virtual) In Attendance: Councillor Alexander (virtual) Councillor Curran (virtual) Dr Grace Vickers Chief Executive Fiona Robertson Executive Director, Children, Young People and Partnerships David Gladwin Chief Financial Officer and Section 95 Officer Saty Kaur Chief Officer Corporate Solutions Derek Oliver Chief Officer Place Duncan Stainbank Chief Internal Auditor Page 5 of 396
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Alan Turpie Legal and Governance Manager and Monitoring Officer Gary Thomson Senior Finance Business Partner Patricia Fraser Senior Audit Manager, Audit Scotland Claire Gardiner Audit Director, Audit Scotland Hannah Forbes Democratic Services Officer Nicola Thorburn Democratic Services Officer 1. Welcome and Apologies for Absence The Chair welcomed everyone to the meeting of the Audit Committee. 2. Order of Business The order of business was as detailed in the agenda. 3. Declarations of interest No declarations of interest were intimated at this stage of the proceedings. 4. Minute of Previous Meeting 4.1 Minutes of the previous meeting held 25 November 2024 were submitted and approved as the correct record. Minutes were moved by Councillor Milligan and seconded by Councillor McCall. 4.2 The Action Log was submitted and noted. 5. Public Reports Report No. Report Title Submitted by: 5.1 Midlothian Council Annual Audit Plan 2024/25 - Draft Audit Scotland Outline of report and summary of discussion The Audit Director presented the draft report highlighting areas of change and focus in relation to materiality and significant risks. The third-year theme for Best Value will be Transformation and will follow on from the national report which was published in October 2024. Work has commenced locally and engagement with key officers is underway. Audit Scotland plan to issue their report by 30 September 2025, which is line with the national target date. Page 6 of 396
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The audit fee of £295,490 for 2024/25 is also detailed within the report, this is a 1.9% increase from prior year which is standard across all bodies audited by Audit Scotland. The Chair thanked the Audit Director for their report and opened for questions. No questions were raised. The report was moved by Councillor McCall and seconded by Councillor Bowen. Decision The Audit Committee noted the report. Report No. Report Title Submitted by: 5.2 Local Government in Scotland: Financial Bulletin 2023/24 Audit Scotland Outline of report and summary of discussion The Audit Director advised that this report had been included for information. The report was compiled by the Audit Scotland Overview Team and is a review of the published financial statements of 2023/24 and information gathered from Section 95 Officers across Scotland. The report shows the challenging financial landscape across local authorities and the key messages are the reduction of income in-year in both revenue and capital, increased borrowing and capital expenditure and an acknowledgement of the dependency on reserves to meet service delivery commitments. The Chair thanked the Audit Director for their report and opened for questions. No questions were raised. The report was moved by Councillor Bowen and seconded by Councillor McCall. Decision The Audit Committee noted the report. Report No. Report Title Submitted by: 5.3 Treasury Management and Investment Strategy 2025/26 & Prudential Indicators Chief Financial Officer and Section 95 Officer Outline of report and summary of discussion The Chief Financial Officer and Section 95 Officer presented the report for decision, advising that in accordance with the Treasury Management Code of Practice, the annual Treasury Management & Investment Strategy (TMIS) & Prudential Indicators report is required to be adequately scrutinised before being referred to Council for approval. For Midlothian, this role is undertaken by the Audit Committee, with this report being presented today prior to consideration by Council Page 7 of 396
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on 25 February 2025. The purpose of the report to Council will be to provide an update on the implementation of the Council’s TMIS 2024/25, and to make recommendations to facilitate consideration of the 2025/26 Strategy. The Chief Financial Officer and Section 95 Officer highlighted one material change from the existing strategy that will prove to be effective in the delivery of the Council’s Capital Plan investment plans. The change asked is to move from a position of fully cash back Council reserves to a more flexible position allowing greater internal borrowing thus allowing the deferral of long-term borrowing to a point in time where interest rates are forecast to reduce. The Chief Financial Officer and Section 95 Officer added that the figures in the report and appendices reflect the approved General Services and Housing Revenue Account (HRA) Capital Plans and that further decisions on capital projects will impact delivery of the strategy. The implications of these will be picked up in the half-year review. The Audit Committee is asked to scrutinise and comment on this report before it is presented to Council and to note the following recommendations which are proposed to be presented to Council on 25 February 2025. The Chief Financial Officer and Section 95 Officer will verbally update Council of any changes to the paper that are agreed in this meeting. a) Approve the restriction of the Authorised Limit to the value of the Capital Financing Requirement at 31 March 2026 (£604.957 million), pending finalisation of the General Services Capital Plan Prioritisation. b) Note that there is no other material changes proposed to the Treasury Management and Investment Strategy (TMIS) for 2025/26 from the strategy currently in place, other than: (i) to no longer fully cash back the Council’s useable reserves - instead, to run down cash balances to support the deferral of borrowing as outlined in Section 4, to allow the Council to navigate past the current interest rate hump; and (ii) to update the Prudential Indicators (Section 5), to reflect the revised capital plans. c) Note the use of the Asset Life method for the repayment of all loans fund advances as outlined in Section 6; and d) Accordingly approve the Treasury Management and Investment Strategy for 2025/26. The Chair thanked the Chief Financial Officer and Section 95 Officer for their report and opened for questions. Elected Members thanked the Chief Financial Officer and Section 95 Officer for their report and noted that they were sympathetic to moving away from the old Page 8 of 396
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policy of cash backing the Council’s reserves and added the importance that Audit Committee has sight of the expansion of the Council’s debt and the implications. The Chief Financial Officer and Section 95 Officer thanked the Elected Members for their endorsement for the flexibility of internal borrowing and agreed that it should be monitored closely. The key point is the relativity of the borrowing and the borrowing costs which are embedded in the Medium-Term Financial Strategy (MTFS) for both General Fund reserves and multi-year HRA plans. Elected Members noted that there had been some press where international commentators and professors of economics expressed opinions that the UK economy is heading downwards and asked if this is something the Council should be concerned about. The Chief Financial Officer and Section 95 Officer is aware of the international concerns but the biggest risk, coming from this perspective, is that interest rates go up and the impact that will have on the affordability of the Council’s plan, and how those challenges are managed. The Senior Finance Business Partner agreed that the global economy is uncertain, even more so than in previous years. The Chair asked if an emergency were to occur, and it required a high spend, is there a contingency for this. The Chief Financial Officer and Section 95 Officer advised that the Council would not borrow explicitly to fund the costs of an emergency, the reserves would be used in that capacity. If there were insufficient liquid reserves, then Council could borrow to finance a capital expenditure and use that cash to release some funding. The report was moved by Councillor McCall and seconded by Councillor Bowen. Decision The Audit Committee approved the recommendations set out in the report. Report No. Report Title Submitted by: 5.4 Internal Audit Work to January 2025 Chief Internal Auditor Outline of report and summary of discussion The Chief Internal Auditor presented the report for decision, providing members of the Audit Committee with details of the recent work carried out by Internal Audit and the findings and recommended audit actions agreed by management to improve internal controls and governance arrangements. The Audit Committee is asked to: a) Consider the Executive Summary of the final Internal Audit assurance report issued associated with the delivery of the approved Internal Audit Annual Plan 2024/25. b) Note the Internal Audit Consultancy and Other Work carried out in accordance with the approved Internal audit Charter. Page 9 of 396
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c) Acknowledge the assurance provided on internal controls and governance arrangements in place for the areas covered by this Internal Audit work. The Chair thanked the Chief Internal Auditor for their report and opened for questions. No questions were submitted. The report was moved by Councillor Bowen and seconded by Councillor McCall. Decision The Audit Committee approved the recommendations set out in the report. Report No. Report Title Submitted by: 5.5 Internal Audit Mid-Term Performance Report 2024/25 Chief Internal Auditor Outline of report and summary of discussion The Chief Internal Auditor presented the report for decision, informing the Audit Committee of the progress Internal Audit has made in the first 10 months of the year to 31 January 2025, towards completing the Internal Audit Annual Plan 2024/25. It also summarises the statutory obligations for Internal Audit and requirements of the Public Sector Internal Audit Standards. The Audit Committee is asked to: a) Note the progress Internal Audit has made with activity in the Internal Audit Annual Plan 2024/25 to the end of January 2025. b) Confirm that it is satisfied with the performance of the Internal Audit service provision. The Chair thanked the Chief Internal Auditor for their report and opened for questions. Elected Members asked about East Renfrewshire Council auditing Midlothian Council, and whether this was normal practice and how long this takes. The Chief Internal Auditor advised that there is a requirement for Internal Audit function to be reviewed every 5 years by an external body. Local Authorities review each other within a framework that meets the standard requirements. Midlothian Council have previously audited Dumfries & Galloway Council, which took approximately 20-30 days. The alternative is paying an external body however the cost is extensive, so this is the best value way to complete the review at a very good standard. The report was moved by Councillor McCall and seconded by Councillor Bowen. Decision The Audit Committee approved the recommendations set out in the report. Page 10 of 396
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Report No. Report Title Submitted by: 5.6 Internal Audit Charter Chief Internal Auditor Outline of report and summary of discussion The Chief Internal Auditor presented the report for decision, providing the Audit Committee with the updated Internal Audit Charter, in accordance with Global Internal Audit Standards (GIAS), for approval that defines the purpose of Internal Audit and the mandate for Internal Audit within Midlothian Council. The Charter clarifies the independence, organisational position and reporting relationships of Internal Audit and outlines the roles and responsibilities of the Audit Committee and the Chief Audit Executive, who is the Chief Internal Auditor for Midlothian Council and Midlothian Integration Joint Board (MIJB). The Audit Committee is invited to: a) Note that the Internal Audit Charter has been fully updated in accordance with the Chartered Institute of Internal Auditors model charter and in compliance with Global Internal Audit Standards in application in the UK Public sector from 1 April 2025. b) Approve the revised Internal Audit Charter for use from 1 April 2025. c) Note that the Internal Audit Charter will be reviewed annually. The Chair thanked the Chief Internal Auditor for their report and opened for questions. No questions were submitted. The report was moved by Councillor Bowen and seconded by Councillor McCall. Decision The Audit Committee approved the recommendations set out in the report. Report No. Report Title Submitted by: 5.7 Internal Audit Strategy and Annual Plan 2025/26 Chief Internal Auditor Outline of report and summary of discussion The Chief Internal Auditor presented the report for decision, providing Audit Committee with the proposed Internal Audit Strategy and Annual Plan 2025/26 which enables the Chief Internal Auditor to prepare annual opinions on the adequacy of the overall control environment for Midlothian Council, and MIJB. The Chair thanked the Chief Internal Auditor for their report and opened for questions. Elected Members queried item 5.3 within the report which states that Midlothian Council do not fully comply with the GIAS Standard 9.5 Coordination and Reliance as they do not have a full assurance map and whether this is a serious problem. Page 11 of 396
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The Chief Internal Auditor confirmed that there is not a formal assurance framework in Midlothian Council and that there are several external bodies that provide reporting and assurances to Midlothian Council, and that they take cognisance of the work they are undertaking along with the Internal Audit Plan. Elected Members also asked for details on Mosaic, as detailed on page 204. The Chief Internal Auditor confirmed that this was an online system that provides case management within the Social Work Department. Elected Members queried School Transport being on the Internal Audit Plan (page 203) and that they were aware of a consultation being carried out and whether there was a risk of too many different areas working on this. The Chief Internal Auditor advised that School Transport had been identified as an area of risk and therefore must be on the plan. If it is deemed that the risk has diminished because of work elsewhere this can be removed from the plan after a further review. The report was moved by Councillor McCall and seconded by Councillor Bowen. Decision The Audit Committee approved the recommendations set out in the report. Report No. Report Title Submitted by: 5.8 Counter Fraud Annual Plan 2025/26 Chief Internal Auditor Outline of report and summary ofiscussion The Chief Internal Auditor presented the report for decision, providing the Audit Committee the proposed Counter Fraud Annual Plan 2025/26 to support the delivery of the Council’s Counter Fraud Strategy and to demonstrate compliance with the Council’s Counter Fraud Policy Statement. The Audit Committee is invited to approve the Counter Fraud Annual Plan 2025/26 The Chair thanked the Chief Internal Auditor for their report and opened for questions. Elected Members raised the recent public comment on the overpayment of housing benefit and asked if Midlothian Council were at risk to be involved as a data provider in relation to these overpayments. The Chief Internal Auditor advised that this will be reviewed as part of the fraud risk assessment however Universal Credit is no longer paid by the Council. There is a legacy role in housing benefits which are reviewed every 2 years in line with the National Fraud Initiative and there are controls in place. The Chief Internal Auditor is not aware of any particular risk in this area, but the risk assessment would highlight these and subsequently mitigations can be put in place. The Chair noted increased use of digital applications and asked how satisfied the Chief Internal Auditor is that they are dealing with real people and if there are any personal interactions with applicants. The Chief Internal Auditor advised that as Page 12 of 396
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they go through all the business areas dealing with the public online will be an area of review but there are already controls in place to request evidence where required. The Chief Internal Auditor is satisfied with what is in place currently but noted that cyber fraud will always be an area of risk for ongoing review. The report was moved by Councillor McCall and seconded by Councillor Bowen. Decision The Audit Committee approved the recommendations set out in the report. Councillor Curran joined the meeting virtually at 11:39am. Report No. Report Title Submitted by: 5.9 Audit Committee Recruitment of an Independent Member Chief Internal Auditor Outline of report and summary of discussion The Chief Internal Auditor presented the report for decision, highlighting the proposal to remunerate Independent Members. Audit Committee is recommended to a) Note the contents of the report, informed by the Audit Committee Annual/End of Term Report 2023/24. b) Provide comments on the proposal to remunerate Independent Members to inform Council’s decision on Tuesday 25 February 2025. The Chair thanked the Chief Internal Auditor for their report and opened for questions. No questions were submitted. The report was moved by Councillor Bowen and seconded by Councillor McCall. Decision The Audit Committee approved the recommendations set out in the report. Report No. Report Title Submitted by: 5.10 Strategic Risk Profile Quarter 2&3, 2024 -25 Chief Officer Place Outline of report and summary of discussion The Chief Officer Place presented the report for information, providing the Audit Committee with an update on the risk responses Midlothian Council has implemented during Q2 and Q3 2024/25 to respond to the current risk climate, assurance that Midlothian Council took a proportionate and planned approach to prepare and respond to the current risk climate and the risk evaluation of current strategic risks and opportunities for the Council. Page 13 of 396
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Audit Committee is recommended to note the current risk landscape and organisational response to the most significant risks in Quarter 2 (Q2) 2024-25 (1st Jul to 30th Sep 2024) and in Quarter 3 (Q3) 2024-25 (1st Oct to 31st Dec 2024). The Chair thanked the Chief Internal Auditor for their report and opened for questions. No questions were submitted. Decision The Audit Committee noted the recommendations in the report. 6. Private Reports No items for discussion. 7. Date of Next Meeting The Chair apologised for the proximity of today's meeting to the meeting of Midlothian Council. The next meeting of the Audit Committee will be held on Monday 16 June 2025 at 11:00, and the next meeting of Midlothian Council following that will be Tuesday 24 June 2024. The meeting ended at 11:43am. Page 14 of 396
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Audit Committee Monday 16 June 2025 Item 4.2 Audit Committee Action Log No Date of Meeting Item No and Title Action Action Owner Expected completion date Comments 1 5.1 Treasury management 06/12/2022 Session with members to be organised with regards to responsible treasury management/ethical issues. Chief Financial Officer / Section 95 Officer February 2025 An update will be provided in the Treasury Management and Investment Strategy for 2025/26. Reporting on ESG developments is contained in annual TMIS and ½ yearly reviews Recommended for closure. Page 15 of 396
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No Date of Meeting Item No and Title Action Action Owner Expected completion date Comments 2 5.5 Risk Management Update – Strategic Risk Profile Quarter 1 2024/25 30/09/2024 Review report to determine if risk scores linked to cost of living and Care at Home need to be upgraded. Chief Officer Place Dec 2024 in line with Q2 risk reporting. A combined Q2 and Q3 Strategic Risk Report submitted to Audit Committee on 24 February. Recommended for closure. Page 16 of 396
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Midlothian Council Transformation: how councils are redesigning and delivering more efficient services to achieve planned outcomes Prepared by Audit Scotland June 2025 Audit Committee Monday 16 June 2025 Item No 5.1 Page 17 of 396
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Midlothian Council | 2 Contents Key messages 3 Introduction 5 Transformation planning 8 Programme management 12 Partnership working and community engagement 15 Impact of transformation 20 Appendix 23 Accessibility You can find out more and read this report using assistive technology on our website www.audit.scot/accessibility. Page 18 of 396
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Key messages | 3 Key messages 1 Midlothian Council recognises that transformation is essential to ensure service delivery remains financially sustainable and has published a Transformation Blueprint for Midlothian. This strategic plan was approved in June 2023 and has five clear objectives, including supporting the council in addressing the £8.9 million funding gap. 2 The council is focused on delivering a wide range of key transformation initiatives to progress the Transformation Blueprint. This includes a variety of digital initiatives being progressed as part of its Digital Transformation Strategy to create efficiencies in its operations. It is too early to fully determine the scale of all of the projects being taken forward, and the extent to which they will contribute towards closing the funding gap. The council recognises that it is operating in a fiscally challenging environment and now needs to find a way to accelerate progress on the remaining projects within the Transformation Blueprint within the resources it has available. 3 The council has established effective governance arrangements for reporting progress with delivering transformation to its senior leadership team and elected members. 4 There are challenges in recruitment and capacity across the public sector including Midlothian Council. In particular, the council is experiencing challenges recruiting into procurement and digital, among other service areas. The council is using its Transformation Fund to help alleviate some of these pressures, including the establishment of a fixed-term Programme Management Office. 5 The council is working well with partners, and has engaged with communities, the third sector and vulnerable groups to deliver transformation in Midlothian. 6 From our review of a sample of the council’s integrated impact assessments, we found it is not always clear how public consultation has influenced plans and the council does not always clearly document how it intends to mitigate potential negative impacts identified. Page 19 of 396
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Key messages | 4 7 The council can demonstrate the impact of previous transformation activity, including its Equipped for Learning project and No.11 Recovery Hub. It recognises the need to improve how it reports this to the public. Page 20 of 396
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Introduction | 5 Introduction 1. Transformation is about radically changing how councils operate and deliver services to achieve planned outcomes in a financially sustainable way (Transformation in councils, Accounts Commission, October 2024). The 2023 Local Government Overview (LGO) notes that councils have never faced such a challenging situation. Service demands have increased after the Covid-19 pandemic and funding is forecast to reduce in real terms. 2. The Accounts Commission’s Transformation in councils report recognises that, while work has been ongoing in relation to local government transformation for decades, a step change is required and the pace and scale of transformation must increase significantly. Transformation, through greater collaboration with partners, will be key for councils to deliver more sustainable service models in challenging financial climates. 3. This report sets out how the council is redesigning and delivering more efficient services to achieve planned outcomes. 4. The Accounts Commission’s Strategy (2021-26) sets out its priorities to focus on inequalities, funding, communities and recovery. The Code of Audit Practice sets out the Best Value work required to report on these priorities. 5. This report covers the thematic aspect of the Best Value audit requirements. The Commission has directed auditors to report on transformation and how councils are redesigning and delivering more efficient services to achieve planned outcomes. In carrying out the work, auditors have considered the following questions: • To what extent does the council have clear plans for transformation that link to its priorities and support long-term financial sustainability? • To what extent do the council’s programme management arrangements facilitate effective oversight of its transformation plans? • To what extent are partners and communities involved in the development and delivery of the council’s plans for transformation? Page 21 of 396
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Introduction | 6 • To what extent has the council considered the impact of its transformation activity, including on vulnerable or protected groups? 6. An improvement action plan is included at Appendix 1 of this report. This sets out audit recommendations in key areas, and the council’s planned response including responsible officers and dates for implementation. 7. The coverage of the work is in line with the expectations for council’s arrangements for the seven Best Value themes in the Local Government in Scotland Act 2003, Best Value Statutory Guidance 2020 and we have considered the Accounts Commission’s transformation principles set out in Transformation in councils (Exhibit 1). Exhibit 1: Transformation principles Principle Vision Have a clear vision that sets out the intended end state of any transformation activity, focused on: • delivering large-scale recurring savings or generating income for the council, contributing to its longer-term financial sustainability • improving outcomes for citizens in line with council priorities • taking a whole-system approach to see and realise opportunities both within councils and more widely • meeting the needs of the people who use services and reduce inequalities • focusing on preventative activity, where applicable, to reduce the demand for services and to make them sustainable in the longer term. Planning • Be clear on the scale of the change required and ensure transformation plans are sufficiently ambitious to credibly respond to the scale of the challenge. • Commit staff with appropriate skills, time, and resources to ensure transformation occurs at the scale and pace required and that there is enough capacity for the changes to be embedded. • Be clear about the timescales, costs, outcomes, and anticipated impacts of transformation projects. • Show urgency and progress projects at pace without compromising appropriate governance on projects. Governance • Have a clear process for monitoring, evaluating, and reporting progress. • Put in place effective governance and escalation processes so that the transformation activities are well managed in their own right, but also able to be given priority alongside other business-as-usual activities. Collaboration • Develop better working relationships with communities and/or partners to achieve a sustainable model of service delivery. Page 22 of 396
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Introduction | 7 Source: Accounts Commission • Actively consider the opportunities offered by regional or national sectoral collaboration, or by integrating services locally with partners, or by supporting individuals and communities to achieve desired outcomes in place of an existing service. • Learn from good practice across Scotland and beyond. Innovation • Implement new ways of thinking, including innovation, creativity and a desire, willingness, and action to change and do things in new and different ways that achieve the outcomes needed. • Embed the right culture and behaviours to manage change and help maximise the contribution of all the team. Page 23 of 396
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Transformation planning | 8 Transformation planning 8. Midlothian Council needs to ensure it can deliver sustainable services now and in the future, and difficult decisions will need to be made to achieve this. The Accounts Commission’s Local government budgets 2024/25 briefing noted that councils’ cumulative funding gap between 2025/26 and 2026/27 is £780 million. This means that, cumulatively, councils need to identify and deliver recurring measures such as savings or increased income of five per cent of their overall revenue budget to be financially sustainable in the short term. Findings and evidence relating to the council’s transformation planning arrangements Findings Evidence The council’s Transformation Blueprint provides a clear strategic plan for transformation organised around five themes. The Transformation Blueprint aligns with its Medium- Term Financial Strategy and the Single Midlothian Plan. The council’s Digital Transformation Strategy and Workforce Strategy are key enablers of the Transformation Blueprint. Transformation Blueprint The council agreed its Transformation Blueprint in June 2023, which recognises the council as the fastest growing local authority in Scotland. This strategic plan has five clear objectives, including supporting the council in addressing the £8.9 million funding gap. Work to support the Transformation Blueprint is organised around five themes: • Follow the money • 21st century workforce • Workplaces for the future • Income generation and commercialisation • Multi-agency transformation. Each of the themes has an elected member sponsor and are to be supported by a series of short projects, called sprints, to be phased over several years. Examples of sprints include: • Contract management • Delivering joined-up services in ‘One Stop Shop’ hubs • Digital transformation • Estate rationalisation • Advertising and marketing. The council has outlined that sprints are intended to be 100- day collaborative challenges but in reality activity is taking longer than this. Page 24 of 396
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Transformation planning | 9 Findings Evidence The Transformation Blueprint aligns with the ambitions set out within the council’s Single Midlothian Plan and the Medium- Term Financial Strategy. It is complemented by the council’s Digital Transformation Strategy 2024-2029, Workforce Strategy 2024-2029 and supports delivery of the Scottish Health and Social Care Partnership Strategy and Midlothian’s HSCP strategy. Digital Transformation Midlothian Council approved its Digital Transformation Strategy 2024-2029 in November 2024. Digital transformation supports the council’s vision and is viewed as a key element of driving change in the council and for the people of Midlothian. Digital transformation will create efficiencies and in so doing will assist the council in bridging its budget gap. Specifically, the council is aiming to make better use of digital tools, digitise and automate processes, use Artificial Intelligence and enhance data-led decision making. The council’s Digital Transformation Strategy 2024-2029 includes four strategic pillars with activities sitting below these. The pillars are: • Automate: For an Efficient, Modern Council • Reimagine: Transform Service Delivery • Data: Deeper Insights and Preventative Operations • Secure and Sustain: Protect and Preserve. The council is currently progressing 22 key digital projects, including implementing online payments through the customer services platform, rollout of Microsoft 365 tools and upgrading audio visual equipment across the learning estate. Creation of a 21st century workforce One of the key themes within the Transformation Blueprint is the creation of a 21st century workforce, which includes workstreams that focus on both digital and human resource. The council’s Workforce Strategy 2024-29 supports the delivery of this theme, and demonstrates the council’s innovation in its approach to addressing workforce and capacity issues. For example, it has worked with education providers to develop a programme of entry level apprenticeships across key professional groups to enable the council to grow its own workforce. The council has also introduced staff development conversations which link to workforce/succession plans. The council is carrying out a wide range of key transformation initiatives to progress the Work to deliver the Transformation Blueprint is ongoing. Current activities include, but are not limited to, reviews of the large grants programme, council estate and contract management; improvements to the council’s open revenues Page 25 of 396
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Transformation planning | 10 Findings Evidence Transformation Blueprint. It has identified priority projects for 2025/26 and is developing project plans to support these. The council recognises the fiscally challenging environment it is operating in and now needs to find a way to accelerate progress further. processes; implementation of the digital transformation strategy; and work to develop the twin-stream collection of waste and recycling, but as yet there are no projects with quantified costs and benefits. At March 2025, 24 projects were being monitored through Transformation Blueprint progress reporting. Two projects were complete: phase one of the school holiday programmes project and phase one of the building maintenance services contract project. Thirteen projects were at the business case stage. The council identified five priority projects to be prioritised in 2025/26 as part of its Transformation Blueprint. One is aligned with the workplaces of the future theme and the others relate to the income generation theme. The projects being taken forward are: • A one-stop shop pilot in Gorebridge • Commercial opportunities at Vogrie Country Park • Introduction of a RingGo service for on-street parking • Out of school childcare provision • Early learning and childcare 52 week provision. The council is now developing project plans for these and they are expected to be reported to the Business Transformation Steering Group in Spring 2025. The Transformation Blueprint covers the period from 2023-28. Therefore, the council now needs to find a way to accelerate progress further within the fiscally challenging environment it is operating in. The council projects an £8.9 million funding gap between 2025/26 and 2028/29 and is working to quantify projected savings from delivering transformation. The Medium-Term Financial Strategy (MTFS) approved in February 2025 forecasts a funding gap of £8.9 million. As part of its MTFS, the council intends to use one-off reserves to help achieve a balanced budget up to 2027/28. The council has also approved indicative increases in council tax from 2026/27 through to 2028/29. The council has reported that the delivery of savings through the Transformation Blueprint is its preferred route to financial sustainability. At February 2025, it had not identified savings or income generation for each of the projects to be taken forward in 2025/26, so these were not included in the 2025/26 budget savings. It is now developing plans for these and it intends to incorporate expected savings into its MTFS once developed. It is important that plans are developed at pace in order to ensure that these contribute to closing its funding gap and reduce its reliance on one-off reserves to balance future budgets. Page 26 of 396
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Transformation planning | 11 Recommendation 1 The council should finalise its plans for its identified priority transformation projects, outlining savings to be achieved, costs and anticipated financial and non-financial benefits. Findings Evidence In February 2023, the council earmarked £2 million from its General Reserve to invest in projects to support the delivery of the Transformation Blueprint. The council reports that this fund has been critical to the delivery of transformation, particularly in terms of resourcing. In February 2025, the council projected that the non-committed balance on this earmarked fund would be £0.849 million at 31 March 2025. The council reports that additional approvals in Q4 2024/25 for use of the fund have led to a further decrease in the remaining balance. The council plans to consider options to commit further reserves to supporting transformation as part of the 2024/25 year-end financial reporting process. Page 27 of 396
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Programme management | 12 Programme management 9. It is essential that the council has good programme management arrangements in place to ensure it is making sufficient progress against its transformation plans. It is important that the council has the structures and the staffing resource in place to deliver its transformation ambitions. In addition, the council must ensure that both senior officers and elected members have appropriate oversight of progress. Findings and evidence relating to the council’s programme management arrangements Findings Evidence The council has effective governance arrangements in place for reporting progress to the senior leadership team and elected members. It has developed a Transformation Blueprint dashboard to provide an overview of progress across projects. This is supported by detailed papers on individual projects. The council has a Business Transformation Board (BTB) and a Business Transformation Steering Group (BTSG). The BTB is an officer-only board attended by senior officers. Its purpose is to oversee Transformation Blueprint delivery and to report progress to the Corporate Management Team and BTSG. The BTSG is formed of elected members and has cross-party representation. Its purpose is to: • scrutinise and approve the transformation work for onward transmission to the Full Council; • advise the Business Transformation Board on priorities and risks; and • allocate funding from the council’s Transformation Fund. The council has developed a Transformation Blueprint dashboard, which is used for reporting progress on the Transformation Blueprint as whole to the Full Council, the BTB and the BTSG. This includes: • RAG statuses for the Transformation Blueprint as a whole and for individual projects; • key risks for the Transformation Blueprint as a whole; • three key milestones since the previous update and for the next three months; • more detailed updates for individual projects. The council is still at the early stages of delivering the Transformation Blueprint, so for most projects key information (such as financial savings) is still being developed. Therefore, Page 28 of 396
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Programme management | 13 Findings Evidence the dashboards only include limited reporting of areas such as costs, savings, anticipated benefits, and timescales. As projects progress and more information becomes available, the council should consider how to incorporate this into its reporting. The Transformation Blueprint dashboards are supplemented by more detailed papers on individual projects. These include limited information about timescales, savings, or anticipated benefits, reflecting the stage that the council is at with the Transformation Blueprint. A number of papers did include estimated costs. Overall, the papers reviewed provided suitable information for senior leadership and elected members on progress and issues relating to transformation work. The council faces challenges with recruitment and capacity in some service areas and reports that it is working to address these. It has used its Transformation Fund to develop a fixed-term Project Management Office to support implementation of the Transformation Blueprint. As documented in our Best Value report on workforce innovation, the council faces significant challenges related to capacity and recruitment in some service areas. In some cases, these are reflective of wider workforce issues across local government in Scotland. In particular, the council is experiencing challenges recruiting into procurement and digital, among other service areas. We identified a number of instances illustrating recruitment issues: • The council was repeatedly unsuccessful in recruiting a suitably qualified person for transformation work on developing a more robust approach to supporting children with complex additional support needs transitioning to adult services. These capacity issues caused delays in this work. • The council informed us that some of its project managers are contractors owing to difficulties recruiting in-house project managers, leading to increased costs. • The council’s Digital Transformation Strategy 2024-2029 notes difficulties in recruiting owing to a shortage of local workers and competition from other sectors and local authorities. The council has used its Transformation Fund to establish a Project Management Office (PMO) for a three-year period to October 2026. The PMO, which includes six Project Managers and three Project Support Officers, is led by the Executive Business Manager (Transformation), who attends BTB, BTSG and Midlothian Multi-Agency Transformation Management Group meetings. The council reports that the Executive Business Manager (Transformation) regularly reviews resourcing of the Page 29 of 396
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Programme management | 14 Recommendation 2 The council should consider how to incorporate consistent reporting of costs, savings, anticipated benefits, and timescales into its Transformation Blueprint dashboard updates as this information becomes available. Recommendation 3 The council should consider how it will resource its transformation work after the current three-year term for its Project Management Office ends. Findings Evidence Transformation Blueprint and discusses this in fortnightly meetings with the Chief Officer Corporate Solutions. The council informed us that the PMO has facilitated more collaborative working, given better oversight across the council’s transformation activities, and provided a forum for staff to suggest transformation ideas and get support with implementing transformation. The council has also used the Transformation Fund to create additional posts in service areas to implement transformation. However, the council has faced difficulties recruiting for some of these posts. Moreover, even where recruitment is successful, some projects require a deep knowledge of the council, which newly-hired staff need time to develop. To address this, the council has considered employing support staff and has recruited consultants to mitigate capacity issues around transformation work. There remains, however, an ongoing risk that recruitment and capacity issues lead to overreliance on key individuals for the delivery of transformation. In our Best Value report on workforce innovation, we reported that there were some examples of succession planning at the council, but that this was not being done in a formalised or consistent way. The council has since approved its revised Workforce Strategy 2024-34. The supporting action plan indicates the council’s intentions to have succession plans in place for all parts of the council by April 2026. Page 30 of 396
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Partnership working and community engagement | 15 Partnership working and community engagement 10. The Best Value in Scotland report noted that councils must now rethink how they work together, and with local partners and communities, to provide financially sustainable services. Few councils provide services jointly or share support services across different councils to a great extent. The scale and nature of the challenge, as set out in the Transformation in councils report, means that it is only by working more collaboratively that councils and their local partners, communities and the third sector will be able to provide sustainable local services. Findings and evidence relating to the council’s partnership working and community engagement arrangements Findings Evidence The council is working well with partners to deliver transformation in Midlothian. One of the Transformation Blueprint themes is multi-agency transformation. Projects being taken forward under this theme include economic growth and skills; the Midlothian Aligned Curriculum Offer; estate rationalisation; one stop shops; and exploring the Safeguarding Through Rapid Intervention (STRIVE) model. The council has established a board with its partners, the Multi-Agency Transformation Management Group (M-MATMG) to deliver whole system change, which is chaired by the Chief Executive. Partners which are represented on the M-MATMG include NHS Lothian, Police Scotland, Scottish Fire and Rescue Service, University of Edinburgh, Edinburgh College, Scottish Ambulance Service and East Lothian Council. As part of the workplaces for the future Transformation Blueprint theme, the council reported that it will review its workspaces to seek opportunities to share with partners and link this with the multi-agency transformation programme. The Transformation Blueprint is a standing item on the M-MATMG agenda and estate rationalisation is an area of focus. The council and its partners operate the No.11 Recovery Hub, which offers support with mental health, substance misuse and justice services for adults (Case study 1, page 18). Page 31 of 396
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Partnership working and community engagement | 16 Findings Evidence The M-MATMG is exploring a multi-agency approach for early intervention to support vulnerable individuals, known as STRIVE. The council is working collaboratively with Police Scotland, the Midlothian/East Lothian Public Protection Unit and East Lothian Council on the project. As part of its work on economic growth and skills, the M- MATMG visited Highland Council and Aberdeenshire Council to look at their agendas for developing skills for pathways to healthcare jobs. It is working with NHS Lothian, Edinburgh University and Edinburgh College to explore how pathways can be developed for Midlothian. The council is working with Vattenfall Heat UK on a joint venture known as Midlothian Energy Limited (MEL). This will deliver low-carbon heat through energy captured from the Millerhill Recycling and Energy Recovery Centre waste plant to homes, education and retail properties in Midlothian (Case study 2, page 19). There is a current business plan to extend the network beyond this. There is evidence of jointly funded transformation activity with partners. MEL is a joint venture between the council and Vattenfall Heat UK. The council provided a £1.6 million shareholder equity injection into MEL to cover business costs of the company and up to £8.6 million to allow the Shawfair project to proceed. This is being matched by Vattenfall. MEL has also benefitted from £7.4 million funding from the Scottish Government’s Low Carbon Transition Programme. In December 2023, the council received £2.2 million grant funding from Zero Waste Scotland’s Recycling Improvement Fund for the implementation of its twin stream recycling project. The project aims to introduce a new residential waste collection system to separate out paper and cardboard from plastic by February 2026. The council is working with partners on Midlothian’s House Project, which supports care experienced young people aged 16-26 to live independently. The council received Life Changes Trust Funding to launch the National House Project framework in Midlothian and has supported 40 care experienced young people, with 65 per cent now in their own permanent properties. The council engaged with communities on its savings options as part of its 2025/26 budget setting. It has engaged with communities on certain projects within the Transformation Blueprint. Community engagement is important to Midlothian Council. The council ran a budget consultation for its 2025/26 budget between October and November 2024. As part of this, respondents were asked to rate the extent to which savings proposals would negatively impact them, from no impact to high impact. The consultation incorporated proposals being considered as part of the Transformation Blueprint, including Page 32 of 396
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Partnership working and community engagement | 17 Findings Evidence There is evidence of engagement with the third sector and vulnerable communities on specific projects, some of which pre-date the Transformation Blueprint. Vogrie Country Park commercialisation, closing Roslin library and reviewing out of school childcare provision. Four out of the five Transformation Blueprint projects which are now being prioritised for 2025/26 were included in the consultation and the results for all four showed that the majority of respondents rated these as having a low or no negative impact on them. It will be important for the council to engage with those who are impacted to a greater extent by the proposals to shape its plans for redesigning services. The council has been progressing various activities to support the delivery of its Transformation Blueprint. Not all ongoing projects require public consultation as some focus on the council’s internal operations. Examples of community engagement exercises which have been carried out as part of the Transformation Blueprint include: • Client Transport Review – the council is developing an integrated transport policy as part of its client transport review. An online consultation was conducted from February- March 2025 which aimed to explore ways in which the transport system could be made more inclusive, fairer and accessible to users, particularly those with additional support needs (ASN). Feedback will be incorporated in the draft policy, where appropriate. The council also presented information on the new policy to an ASN parent chairs meeting ahead of the online consultation launch. • Large Grants Review – the council has established a short- life working group as part of the review of its large grant programme. Membership of the group includes representation from the third sector interface and communities. The scope of the group includes comparing different grant delivery models across Scotland, developing options for funding core costs against the current approach and adoption of and agreed data/evidence informed approach to allocating funding. Recommendations for future funding are expected to be presented to the Full Council in May 2025. The council also engaged with service users in its transformation work prior to the Transformation Blueprint. For example: • The council provided numerous examples of engagement with people who use services through the No.11 hub, which opened in November 2019. For example, within justice services there is a focus group of community advisors, who have been part of the justice system (known as Bound) which are consulted on community justice projects and social worker recruitment. The justice service has also engaged with women who use the Spring Service to identify ways to Page 33 of 396
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Partnership working and community engagement | 18 Case study 1 No. 11 Recovery Hub The council has worked with NHS Lothian and third sectors partners through the health and social care partnership to develop the No.11 Recovery Hub. This provides shared care for recovery and services which focus on early intervention and prevention. Community substance use and mental health staff, employed by both NHS Lothian and the council, are co-located with Justice Social Work and third sector partners at the Hub. All services within the No.11 Recovery Hub work in partnership to provide a person-centred, trauma informed, holistic approach to improving people’s health and well-being. The council and its partners deliver a variety of services through the No.11 Recovery Hub. For example: − Health and social care partners work with third sector partners to identify people who are at high risk of severe drug-related harm and provide rapid support to the individual for engagement or re-engagement with holistic care, such as medication assisted treatment for those who are opiate dependent. − The Midlothian Young Peoples’ Advice Service (MYPAS) provides support, information and advice on drugs and alcohol to young people within Midlothian and East Lothian. − The council worked with a third sector partner to develop and implement a new Mental Health and Resilience Service for citizens between 18-65 years old. This provides same day access for individuals experiencing crisis and distress related to their mental health and wellbeing. − The council delivers a bespoke service for women called the Spring Service in partnership with NHS, Health in Mind, Access to Industry and Woman’s Aid. This provides support to women who have experience of trauma or who have challenges with substance abuse or mental health and are at risk of entering the justice system. The council has provided a range of data on the outputs and outcomes generated through the No.11 centre which demonstrate its impact. For example, the council reported that 107 people Findings Evidence develop the service further, such as sessions addressing issues around online safety. • The council reports that it engages annually with stakeholders, including pupils, families, staff and senior leaders on its Equipped for Learning project. This five-year project (2021-2026) aims to equip learners with digital skills for learning, life and work. The council has established a Digital Leader Network of staff from school and early years settings who influence and shape the planned work. The council also reports engagement with parent council chairs and pupil councils. The council is able to demonstrate how engagement has influenced the project. For example, the council created communication grids for iPad introductory materials and the 2025 pupil survey to improve accessibility in response to feedback received. Page 34 of 396
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Partnership working and community engagement | 19 engaged in ongoing support through MYPAS in Midlothian, of which 47 reported a reduction in substance use and 11 reported becoming drug-alcohol free. The council also reported that MYPAS uses a ‘Teen Star’ outcomes measuring tool at initial and final assessments. This facilitates an assessment of progress across six categories, such as drugs and alcohol, wellbeing, and safety and security. The council reports that average scores across all categories improved between initial and final assessments in Midlothian for 2023/24. The council also has three performance indicators relating to substance use services and mental health, which it measures quarterly. These monitor mental health bed occupancy and waiting times for referrals relating to ‘Adults with Incapacity’, drugs and alcohol. The council reported that during Q1-Q3 24/25: • Waiting times were below the 12-week target for 100 per cent of ‘Adults with Incapacity’ reports; • Waiting time targets for drugs and alcohol referrals exceeded the target of treatment being offered within three weeks in 90 per cent of cases (100 per cent of cases in Q1 and Q3 and in 98.11 per cent of cases in Q2); and • The target of maintaining mental health bed occupancy below 100 per cent was met in Q1, but not in Q2-3 owing to increases in new presentations and existing patients requiring hospital admission. Source: Audit Scotland Case study 2 Midlothian Energy Limited (MEL) Midlothian Energy Limited is an energy services company which is a joint venture between Midlothian Council and Vattenfall Heat UK. The company was set up to deliver low carbon energy projects across Midlothian and supports the council’s 2020 Climate Change Strategy. Waste heat captured from the Millerhill Recycling and Energy Recovery Centre waste plant will be supplemented with other waste heat sources and aims to provide low-carbon heat to homes, education and retail properties in the Midlothian region. The council reports that waste heat captured and supplied by MEL will be cheaper than alternative low-carbon sources and not affected by the current wholesale energy cost inflation. Initially, the project will supply low-carbon heat to around 3,000 homes, education and retail spaces in Midlothian’s new town, Shawfair. The first connection to a residential property was achieved in December 2024. The council and Vattenfall are aiming to expand the MEL network into existing buildings in Midlothian and Edinburgh over the next five years. MEL is expected to benefit the council’s long-term financial position, while providing both environmental and community benefits, such as helping to achieve its net zero carbon ambition by 2030, jobs creation, outreach events for schools and generating local supply chain opportunities. Source: Audit Scotland Page 35 of 396
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Impact of transformation | 20 Impact of transformation 11. It is important that the council has success measures in place to demonstrate the impact of its transformational activity on service quality; outcomes for people who use services, inequalities and/or savings. Findings and evidence relating to the impact of the council’s transformation activity Findings Evidence The council can demonstrate the impacts of previous transformation projects through a variety of success measures. It should continue to establish and monitor impacts and outcomes for transformation as work progresses with the Transformation Blueprint. As part of the audit, we requested case study examples of successful transformation achieved by the council to date. We found that for each project, success measures were in place. Equipped for Learning The council conducted surveys with pupils, staff and families to get feedback on the programme. This fed into the Equipped for Learning Digital Strategy 2024, which set priorities for the programme going forward. Each priority has an ‘Impact Measure Challenge Question’, i.e. the question to be answered in order to assess whether the priority has been addressed successfully. For each question, the council sets out the position it is aiming to reach and by what date. For example, in feedback staff requested training and guidelines for fast-moving technological developments such as AI. In response, the council set a priority to develop a robust professional learning offer to equip staff with the digital skills they need, including for AI, by June 2026. The council could further strengthen its future priorities for the project by adding quantifiable success measures where appropriate. No.11 Recovery Hub The council provided a range of data on the outputs and outcomes generated through the No.11 Recovery Hub. Examples are provided in Case study 1, page 18. Midlothian Energy Limited (MEL) Midlothian Energy Limited is expected to benefit the council’s long-term financial position, while providing both environmental and community benefits (Case study 2, page 19). Anticipated benefits in relation to these areas are set out Page 36 of 396
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Impact of transformation | 21 Findings Evidence in MEL’s Business Plan 2025-29. The Business Plan also includes financial forecasts for MEL over a 40-year period. Ongoing transformation work The council told us that there are no separate key performance indicators for the Transformation Blueprint work, but that projects contribute to improved service delivery which is reported to elected members through Cabinet and the Performance, Review and Scrutiny Committee. It said that Senior Responsible Officers determine reporting at a service level. While committee papers set out the rationale for going ahead with projects, most projects in the Transformation Blueprint do not have success measures in place at this stage. However, we identified good practice in this area in the council’s Waste Services In-Cab transformation project. The council listed benefits with contextual information, set quantified measures of success for each benefit, and set out baselines and measurement frequency. The council also considered what benefits might be achieved under different scenarios. In summary, the council should apply a similarly robust approach to all projects in its Transformation Blueprint as it moves forward with this work. The council recognises that it should be more transparent in reporting the impacts of its transformation work and is taking steps to improve this. As noted above, the council collects a variety of information on the impacts of its transformation work. The council acknowledges that it could do more to publicly report these. In March 2025, it included ‘good news’ stories around transformation in its staff newsletter, which is publicly available on the council’s website. It could supplement this by publicly reporting progress and impacts of key transformation projects. This could include both projects still in progress and those already implemented. The council has recently developed a Transformation webpage, which it plans to use to inform the public on delivery of transformation workstreams against the five Transformation Blueprint themes as work progresses. In the council’s integrated impact assessments for transformation proposals, it is not always clear how public consultation has influenced plans, nor what mitigating actions are in place to address potential negative impacts. The council published integrated impact assessments (IIAs) for a number of savings proposals in its MTFS 2025/26 to 2028/29. These documented potential negative impacts on vulnerable groups. While mitigating actions were generally set out within these, two of the eleven IIAs did not set out any mitigating actions for these negative impacts. Three IIAs concluded that the proposal should not go ahead owing to potential negative impacts, but these proposals were approved in the council’s budget setting meeting in February Page 37 of 396
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Impact of transformation | 22 Recommendation 4 The council should clearly report the impact of its transformation activity to the public. Recommendation 5 The council should consistently document how it intends to mitigate potential negative impacts from its transformation proposals within its integrated impact assessments. Findings Evidence 2025. The council plans to agree mitigating actions as part of the development process. The IIAs published with the MTFS 2025/26 to 2028/29 also demonstrate limited public consultation beyond the council’s budget survey. The council should ensure that this is documented in IIAs. The council provided a number of additional IIAs alongside those published with the MTFS 2025/26 to 2028/29. These primarily identified neutral or positive impacts. They set out details of consultation with service users and other stakeholders, but it is not always clear how this contributed to proposals. The council has guidance and training in place around IIAs, so should make sure that this is adhered to in practice. Page 38 of 396
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Appendix | 23 Appendix Improvement action plan Issue/risk Recommendation Agreed management action/timing 1. Transformation planning The council is carrying out a wide range of activities to progress the Transformation Blueprint. It has identified priority projects for 2025/26 and is developing project plans to support these. The council recognises the fiscally challenging environment it is operating in and now needs to find a way to accelerate progress further. The council should finalise its plans for its identified priority transformation projects, outlining savings to be achieved, costs and anticipated financial and non- financial benefits. Management response The Council has reported that the delivery of savings through the Transformation Blueprint is its preferred route to financial sustainability. Transformation projects are initiated once approval for funding etc. is agreed through the Council’s governance route. Currently, transformation projects such as Waste In-Cab, Client Transport, Customers Payments and Open Revenues have been approved and are underway. Plans for the proposals agreed at Council in February 2025 are being developed and when Business Cases are approved, plans for delivery will be developed. Once expected or identified savings are known these will be incorporated into the MTFS. It is recognised pace is required to ensure transformation contributes to closing the Council’s funding gap and reduce its reliance on one-off reserves to balance future budgets. Page 39 of 396
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Appendix | 24 Issue/risk Recommendation Agreed management action/timing Responsible officer Business Transformation Board Business Transformation Steering Group Actioned by December 2025 2. Reporting progress of transformational activities The council has effective governance arrangements in place for reporting progress to the senior leadership team and elected members. It has developed a Transformation Blueprint dashboard to provide an overview of progress across projects. This is supported by detailed papers on individual projects. The council should consider how to incorporate consistent reporting of costs, savings, anticipated benefits, and timescales into its Transformation Blueprint dashboard updates as this information becomes available. Management response The Transformation Blueprint dashboard is a summary of the individual transformation projects/workstreams. The dashboard is supported by individual project documentation through which spend, timescales and benefits are reported through Project Boards and relevant Committees. The dashboard will continue to report on key milestones and project status and incorporate key anticipated benefits for each project. Financial reporting on overall transformation spend will be incorporated from Q1 2025/26. Individual project spend is monitored through Project Boards. Savings or income generation identified from the delivery of projects will be incorporated in the MTFS. Responsible officer Executive Business Manager, Transformation Page 40 of 396
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Appendix | 25 Issue/risk Recommendation Agreed management action/timing Business Transformation Steering Group Actioned by December 2025 3. Resources for transformation The council faces challenges with recruitment and capacity in some service areas and reports that it is working to address these. It has used its Transformation Fund to develop a fixed-term Project Management Office to support implementation of the Transformation Blueprint. The council should consider how it will resource its transformation work after the current three-year term for its Project Management Office ends. Management response The future resourcing of Transformation work and the Programme Management Office will be considered as part of the Council’s Transformation Blueprint and strategic workforce and organisational planning. Responsible officer Business Transformation Steering Group Midlothian Council Actioned by August 2027 4. Reporting the impact of transformational activity The council recognises that it should be more transparent in reporting the impacts of its transformation work and is taking steps to improve this. The council should clearly report the impact of its transformation activity to the public. Management response Public information is communicated through various social media channels, and a local community radio channel. Transformation work is also shared on the news pages of the Council’s website and media releases to highlight where achievements and milestones have been reached. There have been recent social media releases highlighting the Council’s key performance statistics some of which link to transformation initiatives. Page 41 of 396
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Appendix | 26 Issue/risk Recommendation Agreed management action/timing The development of the Council’s Transformation web pages will be used to strengthen public communications and highlight progress and successes to the public. Responsible officer Transformation Programme Management Office Actioned by August 2025 5. Integrated impact assessments In the council’s integrated impact assessments for transformation proposals, it is not always clear how public consultation has influenced plans, nor what mitigating actions are in place to address potential negative impacts. The council should consistently document how it intends to mitigate potential negative impacts from its transformation proposals within its integrated impact assessments. Management response The Council ensures the importance and legal and moral reasons for Integrated Impact Assessments is known to relevant staff through the delivery of training. Training is delivered in partnership with City of Edinburgh Council, East Lothian Council, West Lothian Council and NHS Lothian. The training will be reviewed to ensure it focuses on mitigating factors for transformation proposals. Responsible officer Transformation Project Senior Responsible Officer Actioned by December 2025 Page 42 of 396
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Midlothian Council Transformation: how councils are redesigning and delivering more efficient services to achieve planned outcomes Audit Scotland, 4th Floor, 102 West Port, Edinburgh EH3 9DN Phone: 0131 625 1500 Email: info@audit.scot www.audit.scot AS.5.0 Page 43 of 396
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2 Audit Committee Monday 16 June 2025 Item No 5.2 Annual Treasury Management Report 2024/25 Report by David Gladwin, Chief Financial Officer & Section 95 Officer Report for Decision 1 Recommendations The Audit Committee is invited to consider this report before the final report is presented to Council. Committee should note that the proposed recommendation to Council is that it note the Annual Treasury Management Report 2024/25. 2 Purpose of Report/Executive Summary The purpose of the report is to inform members of the Audit Committee of the Treasury Management activity undertaken in 2024/25 and the year-end position. Date: 2 June 2025 Report Contact: Gary Thomson, Senior Finance Business Partner gary.thomson@midlothian.gov.uk Page 45 of 396
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3 Background The main points arising from treasury activity in 2024/25 were: • The pooled internal loans fund rate for General Fund and HRA was 2.73% in 2024/25, which is again expected to be one of the lowest when benchmarked against all mainland Authorities in Scotland; • Were the pooled internal loans fund rate to have equated to the Scottish weighted average of 3.66%, this would have generated loan charges in 2024/25 of £26.4 million. The Council’s actual 2024/25 loan charges for General Services and HRA were £22.3 million, representing a cash saving (compared to the Scotland weighted average) of £4.1 million in 2024/25; • Total long term borrowing maturing in the year amounted to £1.426 million, comprising the following:- o £0.057 million of PWLB Annuities of various tenors and interest rates; o £0.626 million of PWLB Maturities (original o £0.673 million of Annuity and EIP, and £0.070 million of interest free loans. • Total new long term borrowing taken in the year amounted to £40.000m, this being four £10.000 million loans from PWLB:- o 2 x £10.000 million Maturity loans drawn on 20 August 2024 with tenors of 4 and 4.5 years and at interest rates of 4.15% and 4.13% respectively; o 1 x £10.000 million Maturity loan drawn on 25 November 2024 with a tenor of 5.5 years and at an interest rate of 4.67%; o 1 x £10.000 million Equal Instalment of Principal (EIP) loan drawn on 20 December 2024 with a total tenor of 10 years and at an interest rate of 4.49% all drawing down loan funding to fund the Council’s 2024/25 capital plans in line with the 2024/25 Treasury Management and Investment Strategy approved by Council on 27 February 2024; • The remainder of the 2024/25 borrowing requirement was supported by the change in policy to no longer fully cash back the Council’s useable reserves and to run down cash balances, to allow the Council to navigate past the current interest rate plateau; • As a result, the Council were under-borrowed by £90.421 million (19% of the borrowing Capital Financing Requirement (CFR)) at Page 46 of 396
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31 March 2025. This means that the Council has funded the majority (81%) of its underlying borrowing requirement as at 31 March 2025. This position is prudent in the current economic climate (with PWLB rates forecast to drop from their prevailing rates, across the next 2-3 financial years), as it balances longer- term interest rate and refinancing risk with short-medium term budgetary implications; • The average rate of interest paid on external debt was 3.14% in 2024/25, up from 3.00% in 2023/24 reflective of the financing of the Council’s CFR in the current interest rate environment; • Only instant access deposits were placed during the year, with each deposit with an approved counterparty in line with the Council’s approved creditworthiness process as outlined in the “Treasury Management and Investment Strategy 2024/25 & Prudential indicators” (TMSS 24/25) report approved by Council on 27 February 2024. The Council’s deposit portfolio at 31 March 2025 is outlined in Table 2 below and in detail in Table 11 in Appendix 1; • The average rate of return on deposits was 5.03% in 2024/25 (exceeding the benchmark1 of 4.82% for the twenty first year in succession) with total interest earned on deposits totalling £2.438 million and reflecting the approved strategy in the TMSS 24/25; • Useable reserves at 31 March 2025 equated to £85.295 million, with cash balances partly cash backing reserves and partly used to support the deferral of borrowing as outlined in the TMSS for 2025/26. • No debt rescheduling was undertaken during 2024/25. A detailed report “Annual Treasury Management Review 2024/25” on the activity during 2024/25 is attached as Appendix 1. The Treasury Portfolio at the start and end of the financial year is shown in Tables 1 and 2 below. 1 3 month forward uncompounded SONIA (Sterling Overnight Index Average) which reflects the weighted average duration of the Council’s portfolio for the year Page 47 of 396
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Table 1: Loan Portfolio at 1 April 2024 and 31 March 2025 Loan Type Principal Outstanding 1 Apr 2024 £000’s Principal Outstanding 31 Mar 2025 £000’s Movement £000’s PWLB Annuity 452 395 -57 PWLB Maturity 304,128 333,502 +29,374 PWLB EIP 0 10,0000 +10,000 LOBO 20,000 20,000 0 Other Market Loans 16,221 15,548 -673 Salix Loans 70 0 -70 Total Loans 340,871 379,445 +38,574 Underlying Borrowing Requirement 401,845 469,866 +68,021 Over/(Under) Borrowed -60,974 -90,421 -29,447 Table 2: Deposits at 1 April 2024 and 31 March 2025 Deposit Type Principal Outstanding 1 Apr 2024 £000’s Principal Outstanding 31 Mar 2025 £000’s Movement £000’s Bank Call Accounts 1,518 538 -980 Money Market Funds 25,100 25,946 +846 Bank Fixed Term Deposit Accounts 30,000 0 -30,000 Total Deposits 56,618 26,484 -30,134 Useable Reserves 84,505 85,295 +1,504 Throughout 2024/25, all counterparties that the Council placed deposits with met their obligations in respect of the return of the deposited funds and interest receivable in full and on the required dates. 5 Report Implications (Resource, Digital and Risk) 5.1 Resource Treasury Management activity during the year, in accordance with the approved strategy, has once again been effective in minimising loan charges through minimising the cost of borrowing and maximising the return on deposits within the parameters set by the strategy for the year. Although benefits from Treasury Management activity continue to accrue there are no direct financial implications or other resource issues arising from this report. Page 48 of 396
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The loan charges associated with Capital Expenditure and Treasury Management activity during 2024/25 are reported in the Financial Monitoring 2024/25 – General Fund Revenue report and HRA 2024/25 Outturn report elsewhere on the Council agenda for 24 June 2025. 5.2 Digital None. 5.3 Risk As the Council follows the requirements of the CIPFA Code of Practice and the Prudential Code this minimises the risks involved in Treasury Management activities place. For those risks that do exist there are robust and effective controls in place to further mitigate the level of risks. These include full written Treasury Management Practices, which define the responsibilities of all staff involved and reflect the provisions of the Prudential and Treasury Management Codes. 5.4 Ensuring Equalities (if required a separate IIA must be completed) This report does not recommend any change to policy or practice and therefore does not require an Equalities Impact Assessment. 5.5 Additional Report Implications See Appendix A Appendices:- Appendix 1: Annual Treasury Management Review 2024/25 Page 49 of 396
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APPENDIX A – Report Implications A.1 Key Priorities within the Single Midlothian Plan Not applicable A.2 Key Drivers for Change Key drivers addressed in this report: Holistic Working Hub and Spoke Modern Sustainable Transformational Preventative Asset-based Continuous Improvement One size fits one None of the above A.3 Key Delivery Streams Key delivery streams addressed in this report: One Council Working with you, for you Preventative and Sustainable Efficient and Modern Innovative and Ambitious None of the above A.4 Delivering Best Value The report does not directly impact on Delivering Best Value. A.5 Involving Communities and Other Stakeholders Although no external consultation has taken place, cognisance has been taken of professional advice obtained from Link Asset Services, the Council’s appointed Treasury Consultants. A.6 Impact on Performance and Outcomes The strategies adopted are an integral part of the corporate aim to achieve Best Value as they seek to minimise the cost of borrowing by exercising prudent debt management and placement of deposits. This in turn helps to ensure that the Council’s capital expenditure is sustainable in revenue terms. A.7 Adopting a Preventative Approach Page 50 of 396
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Not applicable. A.8 Supporting Sustainable Development Not applicable. Page 51 of 396
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Appendix 1 Annual Treasury Management Review 2024/25 Midlothian Council June 2025 Page 52 of 396
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Contents 1 The Council’s Capital Expenditure and Financing 2024/25 2 The Council’s overall borrowing need 3 Treasury Position as at 31 March 2025 4 The Strategy for 2024/25 5 The Economy and Interest Rates 6 Borrowing Rates in 2024/25 7 Borrowing Outturn for 2024/25 8 Deposit Rates in 2024/25 9 Deposit Outturn for 2024/25 10 Performance Measurement 11 Conclusion Page 53 of 396
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This Council is required by regulations issued under the Local Government in Scotland Act 2003 to produce an annual treasury management review of activities and the actual prudential and treasury indicators for 2024/25. This report meets the requirements of both the updated CIPFA Code of Practice on Treasury Management, (the Code), and the updated CIPFA Prudential Code for Capital Finance in Local Authorities, (the Prudential Code). During 2024/25 the minimum reporting requirements were that the full Council should receive the following reports: • an annual treasury strategy in advance of the year (Council 27 February 2024); • a mid-year, (minimum), treasury update report (Council 17 December 2024); • an annual review following the end of the year describing the activity compared to the strategy, (this report); The regulatory environment places responsibility on members for the review and scrutiny of treasury management policy and activities. This report is, therefore, important in that respect, as it provides details of the outturn position for treasury activities and highlights compliance with the Council’s policies previously approved by members. This Council confirms that it has complied with the requirement under the Code to give prior scrutiny to all of the above treasury management reports by the Audit Committee before they are reported to the full Council. Page 54 of 396
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1. The Council’s Capital Expenditure and Financing 2024/25 The Council undertakes capital expenditure on long-term assets. These activities may either be: • Financed immediately through the application of capital or revenue resources (capital receipts, capital grants, revenue contributions etc.), which has no resultant impact on the Council’s borrowing need; or • If insufficient financing is available, or a decision is taken not to apply resources, the capital expenditure will give rise to a borrowing need. The actual capital expenditure forms one of the required prudential indicators. The table below shows the actual capital expenditure and how this was financed. 2023/24 2024/25 2024/25 Actual Budget Actual £000 £000 £000 General Fund Capital Expenditure 47,656 78,524 48,778 Available Funding 26,903 28,579 19,155 Borrowing Required 20,753 49,945 29,623 HRA Capital Expenditure 50,412 103,054 53,175 Available Funding 6,724 19,611 9,523 Borrowing Required 43,688 83,443 43,652 General Fund and HRA Capital Expenditure 98,068 181,578 101,953 Available Funding 33,627 48,190 28,678 Borrowing Required 64,441 133,388 73,275 Table 1: Capital Expenditure + Financing Page 55 of 396
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2. The Council’s Overall Borrowing Need The Council’s underlying need to borrow for capital expenditure is termed the Capital Financing Requirement (CFR). This figure is a gauge of the Council’s indebtedness. The CFR results from the capital activity of the Council and what resources have been used to pay for the capital spend. It represents the 2024/25 unfinanced capital expenditure (see above table), plus prior years’ net or unfinanced capital expenditure which has not yet been paid for by revenue or other resources. Part of the Council’s treasury activities is to address the funding requirements for this borrowing need. Depending on the capital expenditure programme, the treasury service organises the Council’s cash position to ensure sufficient cash is available to meet the capital plans and cash flow requirements. This may be sourced through borrowing from external bodies (such as the Government, through the Public Works Loan Board [PWLB] or the money markets), or utilising temporary cash resources within the Council. Reducing the CFR – the Council’s underlying borrowing need (CFR) is not allowed to rise indefinitely. Statutory controls are in place to ensure that capital assets are broadly charged to revenue over the life of the asset. The Council is required to make an annual revenue charge, called the Scheduled Debt Amortisation (or loans repayment), to reduce the CFR. This is effectively a repayment of the borrowing need. This differs from the treasury management arrangements which ensure that cash is available to meet capital commitments. External debt can also be borrowed or repaid at any time, but this does not change the CFR. The total CFR can also be reduced by: • the application of additional capital financing resources (such as unapplied capital receipts); or • charging more than the minimum loan repayment each year through an additional revenue charge. The Council’s CFR for the year is shown below, and represents a key prudential indicator. 31-Mar-24 2024/25 31-Mar-25 Actual Budget Actual £000 £000 £000 Opening balance 346,898£ 496,656£ 401,845£ Add Borrowing Required 64,441£ 73,893£ 72,862£ Loans Fund Review Retrospective -£ -£ 5,525£ Less scheduled debt amortisation (9,494)£ (10,760)£ (10,366)£ Closing balance 401,845£ 559,789£ 469,866£ Table 2: Council's Underlying Borrowing Requirement CFR: Page 56 of 396
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Borrowing activity is constrained by prudential indicators for net borrowing and the CFR, and by the authorised limit. Gross borrowing and the CFR - in order to ensure that borrowing levels are prudent over the medium term and only for a capital purpose, the Council should ensure that its gross external borrowing does not, except in the short term, exceed the total of the capital financing requirement in the preceding year (2023/24) plus the estimates of any additional capital financing requirement for the current (2024/25) and next three financial years. This essentially means that the Council is not borrowing to support revenue expenditure. This indicator allows the Council some flexibility to borrow in advance of its immediate capital needs in 2024/25. The table below highlights the Council’s gross borrowing position against the CFR (excluding PFI schemes). The Council has complied with this prudential indicator. The authorised limit – this Council has kept within its authorised external borrowing limit as shown by the table below. Once this has been set, the Council does not have the power to borrow above this level. The operational boundary – the operational boundary is the expected borrowing position of the Council during the year. Periods where the actual position is either below or over the boundary is acceptable subject to the authorised limit not being breached. 31-Mar-24 2024/25 31-Mar-25 Actual Budget Actual £000 £000 £000 Gross Borrowing 340,871£ 509,105£ 379,445£ CFR 401,845£ 559,789£ 469,866£ Table 3: Council's Gross Borrowing Position 2024/25 Authorised limit - borrowing £ 604,957 Operational boundary - borrowing £ 604,957 Maximum gross borrowing position £ 379,623 Average gross borrowing position £ 358,618 Table 4: Gross Borrowing against Authorised Limit / Operational Boundary Page 57 of 396
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3. Treasury Position as at 31 March 2025 The Council’s debt and investment position is organised by the treasury management service in order to ensure adequate liquidity for revenue and capital activities, security for investments and to manage risks within all treasury management activities. Procedures and controls to achieve these objectives are well established both through Member reporting detailed in the Purpose section of this report, and through officer activity detailed in the Council’s Treasury Management Practices. At the beginning and the end of 2024/25 the Council‘s treasury (excluding borrowing by PFI and finance leases) position was as follows: 31 March 2024 Principal Rate/ Return Average Life (Yrs) 31 March 2025 Principal Rate/ Return Average Life (Yrs) Debt Fixed Rate Debt PWLB 304,580£ 3.02% 29.40 343,897£ 3.16% 25.79 Market 21,291£ 3.01% 28.34 20,548£ 3.03% 27.68 Total Fixed Rate Debt 325,871£ 3.02% 29.33 364,445£ 3.15% 25.90 Variable Rate Debt PWLB -£ n/a n/a -£ n/a n/a Market 15,000£ 4.63% 26.71 15,000£ 4.63% 25.71 Total Variable Rate Debt 15,000£ 4.63% 26.71 15,000£ 4.63% 25.71 Total debt/gross borrowing 340,871£ 3.09% 29.22 379,445£ 3.21% 25.89 CFR 401,845£ 469,866£ Over/(under) borrowing (60,974)£ (90,421)£ Deposits Fixed Rate Deposits In House 30,000£ 5.12% 0.83 -£ n/a n/a With Managers -£ n/a n/a -£ n/a n/a Total Fixed Rate Deposits 30,000£ 5.12% 0.83 -£ n/a n/a Variable Rate Deposits In House 26,618£ 5.28% 0.01 26,484£ 4.54% 0.01 With Managers -£ n/a n/a -£ n/a n/a Total Variable Rate Deposits 26,618£ 5.28% 0.01 26,484£ 4.54% 0.01 Total Deposits 56,618£ 5.20% 0.45 26,484£ 4.54% 0.01 Table 5: Treasury Position Page 58 of 396
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The maturity structure of the debt portfolio was as follows: The maturity structure of the Council’s deposits was as follows: The exposure to fixed and variable interest rates on debt was as follows:- £000 % £000 % Under 12 months 1,426£ 0% 0% to 50% 2,263£ 1% 12 months to 2 years 1,263£ 0% 0% to 50% 11,759£ 3% 2 years to 5 years 22,323£ 7% 0% to 50% 45,346£ 12% 5 years to 10 years 45,106£ 14% 0% to 50% 60,095£ 16% 10 years to 20 years 32,365£ 10% 0% to 50% 22,220£ 6% 20 years to 30 years 51,505£ 16% 0% to 50% 60,879£ 16% 30 years to 40 years 81,883£ 25% 0% to 50% 81,883£ 22% 40 years to 50 years 100,000£ 31% 0% to 50% 90,000£ 24% 50 years and above 5,000£ 2% 0% to 50% 5,000£ 1% Total 340,871£ 106% 379,445£ 100% Table 6: Maturity Structure of Debt Portfolio 31-Mar-24 2024/25 31-Mar-25 Actual Original Limits Actual % 31-Mar-24 31-Mar-25 £000 £000 Deposit Under 1 Year 56,618£ 26,484£ Over 1 Year -£ -£ Total 56,618£ 26,484£ Table 7: Maturity Structure of Deposit Portfolio £0 % £0 % Fixed Interest Rate Exposure £325,871 96% 0% to 100% 364,445£ 96% Variable Interest Rate Exposure £ 15,000 4% 0% to 30% 15,000£ 4% Total 340,871£ 100% 379,445£ 100% Table 8: Fixed/Variable Interest Rate Exposure of Debt Portfolio 31-Mar-24 2024/25 31-Mar-25 Actual Original Limits Actual % Page 59 of 396
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4. The Strategy for 2024/25 At the outset of the financial year, the Council were under borrowed by £60.974 million and holding £56.618 million in instant access accounts and fixed term deposits. Interest rate forecasts within the 2024/25 Treasury Management & Investment Strategy suggested that interest rates were expected to gradually fall throughout the year and the forthcoming 2 financial years. Link Interest Rate forecasts at time of TMIS 2024/25 setting (February 2024) MUFG Interest Rate forecasts at end of 2024/25 Financial Year (May 2025, unchanged from March 2025) With interest rates on new borrowing remaining elevated throughout much of 2024/25 at the medium-long end of the curve, borrowing was undertaken at the short end, in order to navigate past the expected hump in interest rates, and timed to correlate to dips in Gilt Yields. Borrowing undertaken during the 2024/25 financial year amounted to £40.000 million, this comprising • 2 x £10.000 million Maturity loans drawn on 20 August 2024 with tenors of 4 and 4.5 years and at interest rates of 4.15% and 4.13% respectively; • 1 x £10.000 million Maturity loan drawn on 25 November 2024 with a tenor of 5.5 years and at an interest rate of 4.67%; • 1 x £10.000 million Equal Instalment of Principal (EIP) loan drawn on 20 December 2024 with a total tenor of 10 years and at an interest rate of 4.49% all drawing down loan funding to de-risk the funding of the Council’s 2024/25 capital plans in line with the 2024/25 Treasury Management and Investment Strategy approved by Council on 27 February 2024; MUFG Corporate Markets Interest Rate View 05.02.24 Mar-24 Jun-24 Sep-24 Dec-24 Mar-25 Jun-25 Sep-25 Dec-25 Mar-26 Jun-26 Sep-26 Dec-26 Mar-27 BANK RATE 5.25 5.25 4.75 4.25 3.75 3.25 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3 month ave earnings 5.30 5.30 4.80 4.30 3.80 3.30 3.00 3.00 3.00 3.00 3.00 3.00 3.00 6 month ave earnings 5.20 5.10 4.60 4.10 3.70 3.30 3.10 3.10 3.10 3.10 3.10 3.10 3.10 12 month ave earnings 5.00 4.90 4.40 3.90 3.60 3.20 3.10 3.10 3.10 3.10 3.10 3.20 3.20 5 yr PWLB 4.50 4.40 4.30 4.20 4.10 4.00 3.80 3.70 3.60 3.60 3.50 3.50 3.50 10 yr PWLB 4.70 4.50 4.40 4.30 4.20 4.10 4.00 3.90 3.80 3.70 3.70 3.70 3.70 25 yr PWLB 5.20 5.10 4.90 4.80 4.60 4.40 4.30 4.20 4.20 4.10 4.10 4.10 4.10 50 yr PWLB 5.00 4.90 4.70 4.60 4.40 4.20 4.10 4.00 4.00 3.90 3.90 3.90 3.90 MUFG Corporate Markets Interest Rate View 28.05.24 Jun-24 Sep-24 Dec-24 Mar-25 Jun-25 Sep-25 Dec-25 Mar-26 Jun-26 Sep-26 Dec-26 Mar-27 BANK RATE 5.25 5.00 4.50 4.00 3.50 3.25 3.25 3.25 3.25 3.00 3.00 3.00 3 month ave earnings 5.30 5.00 4.50 4.00 3.50 3.30 3.30 3.30 3.30 3.00 3.00 3.00 6 month ave earnings 5.30 4.90 4.40 3.90 3.50 3.30 3.30 3.30 3.30 3.10 3.10 3.20 12 month ave earnings 5.10 4.80 4.30 3.80 3.50 3.40 3.40 3.40 3.40 3.20 3.30 3.40 5 yr PWLB 4.90 4.70 4.50 4.30 4.10 4.00 3.90 3.90 3.90 3.90 3.90 3.80 10 yr PWLB 5.00 4.80 4.60 4.40 4.30 4.10 4.10 4.10 4.00 4.00 4.00 3.90 25 yr PWLB 5.30 5.20 5.00 4.80 4.70 4.50 4.50 4.40 4.40 4.40 4.30 4.30 50 yr PWLB 5.10 5.00 4.80 4.60 4.50 4.30 4.30 4.20 4.20 4.20 4.10 4.10 Page 60 of 396
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This position is prudent in the current economic climate (with PWLB rates forecast to drop from their prevailing rates, across the next 2 financial years), as it balances longer-term interest rate and refinancing risk with short-medium term budgetary implications. At 31 March 2025, the Council was under-borrowed by £90.421 million. This means that the majority (81%) of the capital borrowing need, (the Capital Financing Requirement), is fully funded with loan debt. Useable reserves at 31 March 2025 equated to £85.295 million, with cash balances partly used to support the deferral of borrowing as outlined in the TMSS for 2025/26. Deposits at 31 March 2025 equated to £26.484 million. Page 61 of 396
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5. The Economy and Interest Rates UK Economy UK inflation has proved somewhat stubborn throughout 2024/25. Having started the financial year at 2.3% y/y (April), the CPI measure of inflation briefly dipped to 1.7% y/y in September before picking up pace again in the latter months. The latest data shows CPI rising by 2.8% y/y (February), but there is a strong likelihood that figure will increase to at least 3.5% by the Autumn of 2025. Against that backdrop, and the continued lack of progress in ending the Russian invasion of Ukraine, as well as the potentially negative implications for global growth as a consequence of the implementation of US tariff policies by US President Trump in April 2025, Bank Rate reductions have been limited. Bank Rate currently stands at 4.50%, despite the Office for Budget Responsibility reducing its 2025 GDP forecast for the UK economy to only 1% (previously 2% in October). Moreover, borrowing has becoming increasingly expensive in 2024/25. Gilt yields rose significantly in the wake of the Chancellor’s Autumn Statement, and the loosening of fiscal policy, and have remained elevated ever since, as dampened growth expectations and the minimal budget contingency (<£10bn) have stoked market fears that increased levels of borrowing will need to be funded during 2025. The table below provides a snapshot of the conundrum facing central banks: inflation pressures remain, labour markets are still relatively tight by historical comparisons, and central banks are also having to react to a fundamental re- ordering of economic and defence policies by the US administration. UK Eurozone US Bank Rate 4.50% 2.5% 4.25%-4.5% GDP 0.1%q/q Q4 (1.1%y/y) +0.1%q/q Q4 (0.7%y/y) 2.4% Q4 Annualised Inflation 2.8%y/y (Feb) 2.3%y/y (Feb) 2.8%y/y (Feb) Unemployment Rate 4.4% (Jan) 6.2% (Jan) 4.1% (Feb) The Bank of England sprung no surprises in their March meeting, leaving Bank Rate unchanged at 4.50% by a vote of 8-1, but suggesting further reductions would be gradual. The Bank of England was always going to continue its cut- hold-cut-hold pattern by leaving interest rates at 4.50% but, in the opposite of what happened at the February meeting, the vote was more hawkish than expected. This suggested that as inflation rises later in the year, the Bank cuts rates even slower, but the initial impact of President Trump’s tariff policies in Page 62 of 396
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April 2025 on the financial markets underpin our view that the Bank will eventually reduce rates to 3.50%. Having said that, the Bank still thinks inflation will rise from 2.8% in February to 3.75% in Q3. And while in February it said “inflation is expected to fall back thereafter to around the 2% target”, this time it just said it would “fall back thereafter”. That may be a sign that the Bank is getting a bit more worried about the “persistence in domestic wages and prices, including from second-round effects”. Accordingly, although we expect a series of rate cuts over the next year or so, that does not contradict the Bank taking “a gradual and careful” approach to cutting rates, but a tepid economy will probably reduce inflation further ahead and prompt the Bank to cut at regular intervals. From a fiscal perspective, the increase in businesses’ national insurance and national minimum wage costs from April 2025 is likely to prove a headwind, although in the near-term the Government’s efforts to provide 300,000 new homes in each year of the current Parliament is likely to ensure building industry employees are well remunerated, as will the clamp-down on immigration and the generally high levels of sickness amongst the British workforce. Currently wages continue to increase at a rate close to 6% y/y. The MPC would prefer a more sustainable level of c. 3.5%. As for equity markets, the FTSE 100 has recently fallen back to 7,700 having hit an all-time intra-day high 8,908 as recently as 3rd March. The £ has also endured a topsy-turvy time, hitting a peak of $1.34 before dropping to $1.22 in January and then reaching $1.27 in early April 2025. USA Economy Despite the markets willing the Federal Open Market Committee (Fed) to repeat the rate cut medicine of 2024 (100 basis points in total), the Fed Chair, Jay Powell, has suggested that the Fed Funds Rate will remain anchored at 4.25%- 4.5% until inflation is under control, and/or the economy looks like it may head into recession as a consequence of President Trump’s tariff policies. Inflation is close to 3.0% and annualised growth for Q4 2024 was 2.4%. With unemployment just above 4.0%, and tax cuts in the pipeline, the FOMC is unlikely to be in a hurry to cut rates, at least for now. EZ Economy The Eurozone economy has struggled throughout 2024 and is flat lining at present, although there is the promise of substantial expenditure on German defence/infrastructure over the coming years, which would see a fiscal loosening. France has struggled against a difficult political backdrop, but with a large budget deficit it is difficult to see any turn-around in economic hopes in the near-term. Page 63 of 396
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With GDP currently below 1% in the Euro-zone, the ECB is likely to continue to cut rates, although the headline inflation rate is still above 2% (2.3% February 2025). Currently at 2.5%, a further reduction in the Deposit Rate to at least 2% is highly likely. Page 64 of 396
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6. Borrowing Rates in 2024/25 PWLB rates are based on gilt (UK Government bonds) yields through HM Treasury determining a specified margin to add to gilt yields. The main influences on gilt yields are Bank Rate, inflation expectations and movements in US treasury yields. Inflation targeting by the major central banks has been successful over the last 30 years in lowering inflation and the real equilibrium rate for central rates has fallen considerably due to the high level of borrowing by consumers: this means that central banks do not need to raise rates as much now to have a major impact on consumer spending, inflation, etc. This has pulled down the overall level of interest rates and bond yields in financial markets over the last 30 years. Indeed, in recent years many bond yields up to 10 years in the Eurozone turned negative on expectations that the EU would struggle to get growth rates and inflation up from low levels. In addition, there has, at times, been an inversion of bond yields in the US whereby 10-year yields have fallen below shorter-term yields. In the past, this has been a precursor of a recession. However, since early 2022, yields have risen dramatically in all the major developed economies, first as economies opened post-Covid; then because of the inflationary impact of the war in Ukraine in respect of the supply side of many goods. In particular, rising cost pressures emanating from shortages of energy and some food categories have been central to inflation rising rapidly. Furthermore, at present the Fed, ECB and Bank of England are all being challenged by levels of persistent inflation that are exacerbated by tight labour markets and high wage increases relative to what central banks believe to be sustainable. Gilt yields have been volatile through 2024/25. Indeed, the low point for the financial year for many periods was reached in autumn 2024. Thereafter, and especially following the Autumn Statement, PWLB Certainty rates have remained elevated at between c. 5% - 6% with the exception of the slightly cheaper shorter dates. At the close of 31 March 2025, the 1-year PWLB Certainty rate was 4.82% whilst the 25-year rate was 5.98% and the 50-year rate was 5.67%. Regarding PWLB borrowing rates, the various margins attributed to their pricing are as follows: - • PWLB Standard Rate is gilt plus 100 basis points (G+100bps) • PWLB Certainty Rate is gilt plus 80 basis points (G+80bps) • HRA Borrowing Rate is gilt plus 40bps (G+40bps) There is likely to be a fall in gilt yields and PWLB rates across the whole curve over the next one to two years as Bank Rate falls and inflation (on the Consumer Price Index measure) moves lower. Page 65 of 396
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As a general rule, short-dated gilt yields will reflect expected movements in Bank Rate, whilst medium to long-dated yields are driven primarily by the inflation outlook. The Bank of England is also continuing on a process of Quantitative Tightening. The Bank’s original £895bn stock of gilt and corporate bonds will gradually be sold back into the market over several years (currently c£623bn). The impact this policy will have on the market pricing of gilts, while issuance is still markedly increasing, and very high in historic terms, is an unknown at the time of writing. HIGH/LOW/AVERAGE PWLB RATES FOR 2024/25 3.50% 4.00% 4.50% 5.00% 5.50% 6.00% 6.50% PWLB Rates 02.04.24 - 31.03.25 1 Year 5 Year 10 Year 25 Year 50 Year 50 year target % 1 Year 5 Year 10 Year 25 Year 50 Year Low 4.77% 4.31% 4.52% 5.08% 4.88% Date 26/02/2025 17/09/2024 17/09/2024 17/09/2024 17/09/2024 High 5.61% 5.34% 5.71% 6.18% 5.88% Date 29/05/2024 13/01/2025 13/01/2025 13/01/2025 09/01/2025 Average 5.14% 4.86% 5.07% 5.56% 5.32% Spread 0.84% 1.03% 1.19% 1.10% 1.00% Page 66 of 396
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7. Borrowing Outturn for 2024/25 New Treasury Borrowing:- The following table gives details of new external treasury loans drawn during the year:- Maturing Debt:- The following table gives details of treasury debt maturing during the year:- Rescheduling:- No rescheduling was done during the year. Summary of debt transactions:- The average interest rate payable on external debt gradually increased during the year as a result of new external loans drawn at the prevailing PWLB rates, averaging 3.14% for the 2024/25 financial year (opening rate of 3.09% with closing rate of 3.21%). The average life of debt within the loan portfolio dropped from 29.22 years to 25.89 years. Lender Date Taken Principal £000's Interest Rate Fixed/ Variable Maturity Date Term (Yrs) PWLB Maturity 20 Aug 2024 £ 10,000 4.15% Fixed 22 Aug 2028 4.00 PWLB Maturity 20 Aug 2024 £ 10,000 4.13% Fixed 22 Feb 2029 4.50 PWLB Maturity 25 Nov 2024 £ 10,000 4.67% Fixed 24 May 2030 5.50 PWLB EIP 20 Dec 2024 £ 10,000 4.49% Fixed 20 Dec 2034 10.00 Total £ 40,000 Table 9: New Loans Taken in Financial Year 2024/25 Lender Date Repaid Principal £000's Interest Rate Fixed/ Variable Date Originally Taken Original Term (Yrs) PWLB Annuities Various £ 57 7.75%-9.50% Fixed 02 Aug 1968 to 15 May 1972 56-60 years PWLB Maturity 28 Sep 2024 £ 626 8.25% Fixed 28 Sep 1995 29.00 Salix Various £ 70 0.00% Fixed Various 7-8 years Deutsche Pfandbriefbank Various £ 357 2.63% Fixed 29 Jun 2017 28.00 Deutsche Pfandbriefbank Various £ 316 2.73% Fixed 15 Nov 2018 25.50 Total £ 1,426 Table 10: Maturing Debt in Financial Year 2024/25 Page 67 of 396
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8. Deposit Rates in 2024/25 Investment returns decreased throughout 2024/25, reflective of the Bank of England base rate cuts during the year. Money market funds and instant access bank call accounts were utilised to manage the Council’s day to day liquidity needs. Money market fund / bank account rates started the year at 5.09%-5.29%, decreasing throughout the year in line with movements in Bank of England Base Rates, ending the year at 4.34%-4.56%. HIGH/LOW/AVERAGE BANK AND SONIA RATES FOR 2024/25 Investment returns remained robust throughout 2024/25 with Bank Rate reducing steadily through the course of the financial year (three 0.25% rate cuts in total), and even at the end of March the yield curve was still relatively flat, which might be considered unusual as further Bank Rate cuts were expected in 2025/26. 4.00 4.25 4.50 4.75 5.00 5.25 5.50 5.75 6.00 Bank Rate vs term SONIA rates % 2.4.24 - 31.03.25 Bank Rate SONIA 1 mth 3 mth 6 mth 12 mth FINANCIAL YEAR TO QUARTER ENDED 31/03/2025 Bank Rate SONIA 1 mth 3 mth 6 mth 12 mth High 5.25 5.20 5.21 5.20 5.17 5.08 High Date 02/04/2024 03/05/2024 27/06/2024 17/04/2024 31/05/2024 30/05/2024 Low 4.50 4.45 4.45 4.36 4.28 4.15 Low Date 06/02/2025 12/02/2025 04/03/2025 31/03/2025 31/03/2025 10/02/2025 Average 4.95 4.90 4.88 4.82 4.72 4.54 Spread 0.75 0.75 0.76 0.85 0.89 0.93 Page 68 of 396
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Bank Rate reductions of 0.25% occurred in August, November and February, bringing the headline rate down from 5.25% to 4.50%. Each of the Bank Rate cuts occurred in the same month as the Bank of England publishes is Quarterly Monetary Policy Report, therein providing a clarity over the timing of potential future rate cuts. As of early April 2025, market sentiment has been heavily influenced of late by President Trump’s wide-ranging trade tariffs policy. Commentators anticipate a growing risk of a US recession, whilst UK GDP is projected by the Office for Budget Responsibility to remain tepid, perhaps achieving 1% GDP growth in 2025/26. Looking back to 2024/25, returns in excess of 5% were able to be achieved for all periods ranging from 1 month to 12 months in the spring of 2024, but by March 2025 deposit rates were some 0.75% - 1% lower. That is not to say that investment choices were straight-forward. Concerns over rising inflation after the Autumn Statement in October led to reduced expectations for Bank Rate to fall. Indeed, the CPI measure of inflation is expected to reach c. 3.75% by the autumn of 2025, which could provide for some presentational issues for a Bank whose primary mandate is to ensure inflation is close to 2% on a two-to-three-year timeframe. At the end of March, only two further rate cuts were priced into the market for 2025 (to fall to 4.00% by December 2025). A week later and sentiment has changed dramatically in the wake of the equity market sell-off to the extent that markets now expect three Bank Rate reductions between May and December 2025 (Bank Rate to fall to 3.75% by December 2025). Page 69 of 396
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9. Funds on Deposit Outturn for 2024/25 Deposit Policy:- The Council’s policy for placing deposits is governed by Scottish Government Investment Regulations, and the requirements of the CIPFA Prudential and Treasury Management Codes, which have been implemented in the annual investment strategy approved by the Council on 27 February 2024. This policy sets out the approach to the considerations when placing deposits, specifically security, liquidity and then yield (in that order) and sets out the approach for choosing counterparties based on their credit strength, and for financial institutions is based on credit ratings provided by the three main credit rating agencies supplemented by additional market data (such as rating outlooks, credit default swaps, bank share prices etc.). The activity during the year conformed to the approved strategy, and the Council had no liquidity difficulties. The position at 31 March 2025 was as follows:- * As at 31 March 2025 by MUFG Clients Deposits placed by the Council:- The Council maintained an average balance of £48.386 million of instant access and fixed term deposits, earning an average rate of return of 5.03%. The comparable performance indicator2 is 4.82%. 2 3 month forward uncompounded SONIA (Sterling Overnight Index Average) which reflects the weighted average duration of the Council’s portfolio for the year Counterparty Principal Outstanding 31 Mar 2025 £000's Security Long/Short Term Rating (Colour) Yield UK Local Authority Investment* £000's Bank of Scotland 518 AA-/F1+ (Orange) 4.34% 162,087 Royal Bank of Scotland 1 A+/F1 (Orange) 2.50% 21,221 Handelsbanken 19 AA/F1+ (Orange) 4.34% 129,896 MMF - Aberdeen Liquidity Fund 10,982 AAAmmf (Yellow) 4.53% 1,118,170 MMF - Federated 51 AAAmmf (Yellow) 4.53% 704,965 MMF - LGIM 14,913 AAAmmf (Yellow) 4.56% 548,057 Total Deposits 26,484 4.54% 2,684,395 Instant Access Money Market Fund Instant Access Money Market Fund Table 11: Breakdown of Deposits by Counterparty at 31 March 2025 Liquidity Instant Access Call Account Instant Access Call Account Instant Access Call Account Instant Access Money Market Fund Page 70 of 396
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10. Performance Measurement One of the key requirements in the Code is the formal introduction of performance measurement relating to investments, debt and capital financing activities. Loans Fund Rate Combining the interest paid (earned) on external debt (deposits) with charges for premiums written off and internal interest allowed into an average Loans Fund Rate, Midlothian’s result of 2.08% for 2023/24 was the 2nd lowest Loans Fund Rate amongst all mainland authorities in Scotland, as reported previously to Council. The comparative Loans Fund Rate for 2024/25, of 2.73%, is once again expected to be one of the lowest when benchmarked against all mainland authorities in Scotland (note that at present, these benchmark figures are not yet available). Deposit Benchmarking The Council participates in the Scottish Investment Benchmarking Group set up by its Treasury Management Consultants, Link. This service provided by Link provides benchmarking data to authorities for reporting and monitoring purposes, by measuring the security, liquidity and yield within an individual authority portfolio. Based on the Council’s funds on deposit as at 31 March 2025, the Weighted Average Rate of Return (WARoR) on deposits of 4.54% against other authorities is shown in the graph below:- As can be seen from the above graph, Midlothian is performing in line with the Link model benchmarks (red to green lines). Population Returns against Model Returns Actual WARoR Model WARoR Difference Lower Bound Upper Bound Performance 4.52% 4.65% -0.13% 4.50% 4.80% Inline Midlothian Council Midlothian Council 3.00% 3.25% 3.50% 3.75% 4.00% 4.25% 4.50% 4.75% 5.00% 5.25% 5.50% 5.75% 6.00% 4.00% 4.25% 4.50% 4.75% 5.00% 5.25% 5.50% 5.75% 6.00% Actual WARoR Model WARoR Upper Return Lower Return Peer Returns Portfolios within +/- 2% Benchmarking Group 6 Midlothian Council Page 71 of 396
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Debt Performance Whilst deposit performance criteria have been well developed and universally accepted, debt performance indicators continue to be a more problematic area with the traditional average portfolio rate of interest acting as the main guide. In this respect, the relevant figures for Midlothian are incorporated in the table in Section 3. Page 72 of 396
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11. Conclusion The Council’s overall cost of borrowing continues to benefit significantly from the approved strategy and the proactive Treasury Management activity undertaken. The weighted average cost of long term borrowing has risen marginally during the year, reflective of the borrowing undertaken at prevailing Gilt Yields during the year. Tenor of borrowing has been kept short on the market expectation that the current plateau in Gilt Yields will gradually reduce over the coming 2-3 years. A better than average return on deposits has been achieved for the twenty first consecutive year and Midlothian continues to perform in line with the Link model benchmarks. Overall Midlothian’s Loans Fund Rate of 2.73% for the year is expected to be one of the lowest when benchmarked against all mainland Authorities in Scotland. Page 73 of 396
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Audit Committee Monday 16 June 2025 Item No 5.4 Accounts Commission – Local Government Budgets 2025/26 Report by David Gladwin, Chief Financial Officer and Section 95 Officer Report for Information 1 Recommendation 1.1 Audit Committee is recommended to: • Consider the Audit Scotland Report; and • Note the key messages. 2 Purpose of Report / Executive Summary 2.1 The purpose of this report is to provide Audit Committee with a summary of the Local Government Budgets 2025/26 report which was published by Audit Scotland in May 2025 and is appended to this report. 2.2 Five main messages come from the report covering Scottish Government funding, rising costs and increasing demand for Councils, requirements for Councils to find local solutions to budget gaps, transparency of the presentation of budget information and community engagement as part of budget processes. Date: 29 May 2025 Report Contact: David Gladwin: 0131 271 3113 David.gladwin@midlothian.gov.uk Page 75 of 396
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2 3 Background 3.1 Audit Scotland is a statutory body established in April 2000, under the Public Finance and Accountability (Scotland) Act 2000. It provides services to the Auditor General for Scotland and the Accounts Commission for Scotland. 3.2 Audit Scotland has prepared the attached report “Local Government Budgets 2025/26” for the Auditor General for Scotland. The Auditor General appoints auditors to Scotland’s central government and NHS bodies; examines how public bodies spend money; helps them to manage their finances to the highest standards; and checks whether they achieve value for money. 3.3 The report sets out the key messages relating to 2025/26 budget setting in Councils and looks to challenges ahead and areas of improvement for Councils to consider. Key Messages 3.4 Scottish Government funding to Councils increased in 2025/26 but Councils face significant recurring cost pressures from inflation, customer demand and infrastructure investment costs. Not all cost increases can be matched by government funding and Councils require to take local action including savings and increasing Council Tax to balance budgets 3.5 Councils continue to make savings to address financial challenges and have successfully implement recurring measures. However, more is needed to balance budgets looking forward. 3.6 Transparency of how budget information is presented is important both to aid local decision making and to also support effective community engagement. Report Implications 4.1 Resource None. 4.2 Digital None. 4.3 Risk None. 4.4 Ensuring Equalities None. 4.5 Additional Report Implications (See Appendix A) Page 76 of 396
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3 Appendices Appendix A – Additional Report Implications Appendix B – Local Government Budgets 2025/26 Page 77 of 396
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4 APPENDIX A – Additional Report Implications A.1 Key Priorities within the Single Midlothian Plan Midlothian Council and its Community Planning Partners have made a commitment to treat the following areas as key priorities under the Single Midlothian Plan:- • Reducing the gap in learning outcomes • Reducing the gap in health outcomes • Reducing the gap in economic circumstances This report does not directly impact Midlothian Council’s key priorities but a key message within the Accounts Commission report is that the way Council’s respond to the financial challenge will inevitably impact on how they can deliver of key priorities and outcomes. A.2 Key Drivers for Change Key drivers addressed in this report: Holistic Working Hub and Spoke Modern Sustainable Transformational Preventative Asset-based Continuous Improvement One size fits one None of the above A.3 Key Delivery Streams Key delivery streams addressed in this report: One Council Working with you, for you Preventative and Sustainable Efficient and Modern Innovative and Ambitious A.4 Delivering Best Value The report does not directly impact on Delivering Best Value. A.5 Involving Communities and Other Stakeholders No consultation was required. A.6 Impact on Performance and Outcomes The decisions taken to balance the budget will have fundamental implications for service performance and outcomes. The Council’s Transformation Programme aims to minimise the impact on priority services. Page 78 of 396
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5 A.7 Adopting a Preventative Approach The proposals in this report do not directly impact on the adoption of a preventative approach. A.8 Supporting Sustainable Development There are no sustainability issues arising from this report. Page 79 of 396
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Briefing Local government budgets 2025/26 Prepared by Audit Scotland May 2025 Page 81 of 396
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2Local government budgets 2025/26 Contents Key facts 3 Key messages 4 Commission expectations 6 Introduction 8 1. Scottish Government funding to councils 10 2. Council budgets 14 3. Consulting with communities 28 Appendix 1. Selected 2025/26 budget information 31 Appendix 2. Progress since 2024/25 32 Accessibility You can find out more and read this report using assistive technology on our website www.audit.scot/accessibility. Page 82 of 396
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3Key facts Key facts Local government budgets 2025/26: £15.2 billion funding from the Scottish Government £18 billion councils’ approved net revenue budgets £4.7 billion councils’ approved capital budgets 9.6 per cent average council tax increase £647 million identified revenue budget gap Actions to bridge the gap: £275 million increase to council tax £24 million increase to income (including fees and charges) £192 million agreed savings (recurring) £12 million agreed savings (non-recurring) £1 million unidentified savings £113 million use of reserves £30 million other measures (recurring) 30 the number of councils that carried out budget consultations to inform 2025/26 budget- setting 31 the number of councils that carried out equality- impact assessments as part of budget-setting Page 83 of 396
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4 Key messages Key messages 1 Scottish Government funding to local government in 2025/26 is increasing by six per cent in real terms, to £15.2 billion. However, local government continues to face recurring pressures in excess of funding uplifts, such as inflation, annual pay deals and growing demand for services, and most of the increase will be used to deliver previously agreed national commitments. Alongside this, councils are facing additional costs related to the increase in employer’s National Insurance contribution rates, and investing in new buildings and assets is increasingly expensive. 2 At a time of constrained public finances and growing demand, not all cost increases can be met from central government funding and councils need to take local action to achieve budget balance over the short and medium term. At the time of setting their budgets, councils identified a difference of £647 million between anticipated expenditure and the funding and income they receive (the ‘budget gap’). Councils are required to set balanced budgets and have agreed a range of actions to achieve this and close this gap. This includes all councils raising council tax rates, by between six and 15.6 per cent, identifying savings, drawing on reserves and increasing or introducing charges for accessing some services. Page 84 of 396
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Key messages 5 3 Councils continue to make savings across a broad range of services to address financial challenges and have been successful in identifying recurring measures that will help to address underlying pressures. Despite this, councils are still forecasting that more will need to be done in future years to achieve financial sustainability given their projected increases in both costs and level of service demand. 4 Councils’ budget-setting processes vary, partly reflecting differences in organisational structures and local priorities, and this makes it difficult to compare information across Scotland. There remains an underlying issue with the transparency of how budget information is being presented. 5 Most councils engaged communities in some way to make decisions on their budgets for 2025/26, but there were variations in the depth and level of this engagement. By improving the accessibility and transparency of how they are reporting budget information, councils can better inform and include their local communities in making the choices required to address ongoing financial challenges. Page 85 of 396
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6Commission expectations Commission expectations We published our first briefing on council budgets last year. Within this, we acknowledged that variation in how budgets are presented. We also set out a range of expectations related to the transparency of council budget papers. The return of greater freedom in setting council tax rates, with residents in all areas of Scotland being asked to contribute more, means that there is greater expectation on the performance of local services. With financial pressures forecast to remain, and the continued need to identify savings and transform services to address these, it is more important than ever that communities are actively involved in decision-making. The decisions taken by councils when setting their budgets impact us all. Without clear and transparent reporting, however, it is difficult for elected members and communities to fully engage and participate in making these decisions. There has been good progress against most of the expectations set out in Local government budgets 2024/25 (set out in Appendix 2). However, further improvements could be made in the transparency of budget gaps and associated savings. In future, we expect to see councils encourage more active participation in the budget-setting process by ensuring that: • budget papers and financial monitoring reports provided to elected members include clear and understandable headline figures that state the impact of specific budget decisions on the overall financial position of the council Page 86 of 396
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Commission expectations 7 • budgets should link back to the council’s corporate plan to allow elected members to make spending choices better informed by, and based upon, the council’s priorities • fundamental information, such as the forecast budget gap, is clearly presented as part of the consultation process with residents • estimated costings of how specific proposals will contribute to managing the budget gap are made available to residents, including the potential contribution of any proposed increase to council tax and the anticipated impact on levels of service delivery • general public consultations are supplemented by targeted consultations with groups most impacted by changes to specific services and that consideration is given to how to encourage participation • the ongoing impact of budget decisions are fully assessed, including through Equality Impact Assessments, to enable elected members to make informed decisions. Page 87 of 396
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8Introduction Introduction Purpose and methodology 1. Audit Scotland has prepared this budget briefing on behalf of the Accounts Commission to summarise key issues arising from our analysis of the 2025/26 budgets recently agreed by Scotland’s 32 councils. 2. Councils are legally required to set a balanced budget for each upcoming financial year. This means that a council’s funding and income must cover their anticipated expenditure. Councils might identify a budget gap as they are preparing their budgets. This is the difference between their anticipated expenditure for the year and the funding and income they expect to receive. Councils will identify and agree actions, including saving measures or using reserves, to allow them to set a balanced budget. 3. This briefing brings together data from all 32 councils to provide an indicative national picture of budgets set for 2025/26. It considers how Scottish councils are addressing the challenges faced in achieving a balanced budget and long-term financial sustainability. It also considers how councils have consulted with communities on their budget priorities including the measures agreed to achieve financial savings. 4. The wide range of approaches councils take to budget-setting and the level of information, and the way that it is publicly reported, make it challenging to report a definitive national position. Some of the variation between councils is likely due to differing budgeting approaches. We have added caveats to the exhibits where caution is required. 5. The report is part of a series of overview outputs produced for the Accounts Commission. These reports provide an independent overview of the financial and operational performance of Scotland’s local government sector. In the next 12 months, we intend to publish a spotlight report, highlighting overall and specific service performance, and then our annual financial bulletin which assesses the financial performance and position of Scotland’s councils in the most recently audited financial year. Methodology 6. Councils completed a data return and submitted these to us in March and April 2025, shortly after agreeing their 2025/26 budgets. The data return requested information on councils’ revenue and capital budgets; the identified budget gaps and bridging actions; fees and charges; and savings and their anticipated impact. Page 88 of 396
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Introduction 9 7. As part of the data return, we asked councils to identify the assumptions they made when calculating projected revenue budget gaps over the short term. As expected, these assumptions varied across the country in relation to general inflation, pay awards and the Scottish Government finance settlement in future years. 8. When looking at trends, we convert some financial data into real terms, adjusting it for inflation to make trend information comparable. We have used the March 2025 deflators published by HM Treasury to adjust financial information from past or future years into 2025/26 prices. Page 89 of 396
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10 1. 1. Scottish Government funding to councils 1. Scottish Government funding to councils Initial funding to councils is higher than last year, with revenue and capital funding both increasing in real terms, but additional costs and inflationary pressures will remain challenging to manage. Scottish Government core funding to local government is increasing in 2025/26 9. The Scottish Government publishes a draft budget every year, usually in December, which is subject to parliamentary scrutiny and approval. The final Scottish Budget, generally agreed in February, is accompanied by the Local Government Finance settlement, which outlines the funding each council will receive. The Scottish Government will provide £15.2 billion to local government in 2025/26 (Exhibit 1). 10. The level of funding allocated to local government is expected to change throughout the year as additional funding is made available to councils. For example, the 2024/25 local government budget increased in real terms to £14.7 billion by the spring Budget revision. It is therefore likely that the 2025/26 local government budget will change. Exhibit 1. Scottish Budget initial government settlement 2023/24 to 2025/26 Scottish Government core funding to local government is increasing in 2025/26. Cash terms Real terms 2023/24 £ million 2024/25 £ million 2025/26 £ million 2023/24 £ million 2024/25 £ million 2025/26 £ million Total local government funding 13,481 13,913 15,177 14,363 14,281 15,177 Total revenue funding 12,652 13,257 14,397 13,480 13,608 14,397 Total capital funding 829 656 780 883 673 780 Note: Real terms funding has been adjusted into 2025/26 prices using March 2025 GDP deflators. Source: Analysis of Scottish Government Finance Circulars The Scottish Government adjusts its budget during the year. This generally takes place during the annual autumn and spring Budget revisions and includes allocating additional funding to, as well as in-year transfers between, spending portfolios. Page 90 of 396
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1. Scottish Government funding to councils 11 All councils are receiving an annual increase in their initial revenue funding allocations 11. The finance settlement outlines both the revenue and capital funding allocations that individual councils receive from the Scottish Government. Revenue funding can be used to meet day-to-day costs of providing services including staff costs. The Scottish Government allocated £14.4 billion of revenue funding to local government in 2025/26, an annual real terms increase of £789 million (six per cent) (Exhibit 2). 12. This settlement differs from the figures presented in the draft Scottish Budget published in full in December, due to changes made to the budget prior to receiving parliamentary approval. All councils are receiving an increased revenue allocation in 2025/26, in both cash and real terms. Exhibit 2. Scottish Budget 2025/26 local government revenue settlement in real terms 2023/24 to 2025/26 All councils are receiving an increase in their revenue allocation in 2025/26. 3,246m 3,149m 3,114m 827m 270m 272m 9,407m 10,189m 11,012m General Revenue Grant Non-Domestic rates Specific Revenue Grant 2023/24 2024/25 2025/26 Note: Prior years have been adjusted into 2025/26 prices using the March 2025 GDP deflators. Source: Analysis of Scottish Government Finance Circulars Page 91 of 396
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1. Scottish Government funding to councils 12 13. The increase in total revenue funding to councils is driven by an eight per cent annual real terms increase in the General Revenue Grant (GRG) to £11 billion. GRG has increased due to additional funding, but also because the Scottish Government moved previously ring-fenced funding into the general grant. Similarly, some elements of funding that were previously transferred from other portfolios during the year have now been included within initial allocations. 14. An increase in GRG is in-line with the commitments made as part of the Verity House Agreement to reduce ring-fenced funding. The Convention of Scottish Local Authorities (COSLA), however, contends that the increase in GRG does not provide councils with greater autonomy or discretion when setting their own budgets. This is because much of the increase is to support previously announced commitments that have been carried forward into 2025/26 and ‘baselined’ into GRG. For example, increasing GRG to fund previously agreed pay awards. 15. In 2025/26, the increase in GRG includes baselining of funding for non-teaching staff pay awards and teacher pension contribution increases, as well as the following: • £125 million of Living Wage funding • £43 million of 2024 pay awards to teachers • £10 million free personal and nursing care funding. 16. The 2025/26 finance settlement also outlines an additional £152 million of revenue funding, including £144 million of additional funding to partly compensate for the increase in employer’s National Insurance contributions. Prior to this funding being confirmed, COSLA estimated that councils would need to identify £240 million to meet additional costs related to directly employed council staff (paragraphs 29–31). Capital funding is increasing for 2025/26, but it is still lower than in 2023/24 17. Capital funding is used to buy, maintain or improve assets such as buildings, general infrastructure and equipment. The Scottish Government is allocating £779.7 million of capital funding to local government,1 a 16 per cent increase compared to last year (Exhibit 3, page 13). 18. Again, the final settlement slightly differs from the figures presented in the draft Scottish Budget, due primarily to around £60 million of Specific Capital Grant moving into the General Capital Grant. Twenty-six councils are receiving less capital funding in 2025/26 than in 2023/24, The General Revenue Grant (GRG) is funding provided by the Scottish Government to councils to help them finance their general services. Most of this grant is typically not ring-fenced for specific purposes and this provides councils flexibility to allocate based on local needs and priorities. However, some funding received by councils through the GRG is directed for national policy initiatives. Though not formally ring-fenced, this funding is provided with the expectation that it will be spent on specific services. The Verity House Agreement aims to increase collaboration on shared priorities between the Scottish Government and councils. It outlines a shared vision around tackling poverty, transitioning to net zero and delivering sustainable public services. It also includes commitments on agreeing a new fiscal framework and an accountability and assurance framework, aiming to reduce ring- fenced funding.1 This includes £12.4 million of funding to Strathclyde Partnership for Transport and £89.5 million of undistributed funding in 2025/26. Page 92 of 396
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1. Scottish Government funding to councils 13 and three councils are receiving less funding (in both cash and real terms) than in 2024/25. In two of these councils, East Lothian and Stirling, reductions in capital funding have been enough to offset increases in revenue funding resulting in a real-terms reduction in their total funding. 19. Our Local government budgets 2024/25 briefing explained how the significant reduction in capital funding between 2023/24 and 2024/25 was largely because of the decision to move general capital to the general revenue grant to fund prior year local government pay awards (alongside additional funding also provided for that purpose). Exhibit 3. Scottish Budget 2025/26 local government capital settlement in real terms 2023/24 to 2025/26 Capital funding is increasing in 2025/26 from the previous year but it is lower compared to 2023/24. Note: Funding allocation directly to Strathclyde Partnership for Transport is included within Specific Capital Grants (2025/26: £12.4 million). Prior years have been adjusted into 2025/26 prices using the March 2025 GDP deflators. Source: Analysis of Scottish Government Finance Circulars £735m £644m£549m £148m £136m £124m 2023/24 2024/25 2025/26 General Capital Grant Specific Capital Grant Page 93 of 396
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142. Council budgets 2. Council budgets Councils continue to identify savings, use reserves and review how they deliver services to manage financial pressures. Councils’ combined revenue budgets for 2025/26 have increased from 2024/25 20.Councils’ revenue budgets need to cover the cost of delivering services each year as well as certain other expenses. Councils need to set a balanced revenue budget every year. 21.Most of councils’ revenue funding comes from the Scottish Government with around 61 per cent coming through the General Revenue Grant. The revenue budget available for the year also includes funding from other sources, including council tax, other grants, non-domestic rates (NDR, commonly referred to as business rates) and income raised through fees and charges: • £11 billion of funding from the Scottish Government mainly through the GRG. • £3 billion of funding from non-domestic rates. • £3 billion of funding from council tax. • £1 billion from other income and fees that councils set. 22.In 2025/26, councils reported a combined revenue budget of around £18 billion, increasing from £16.7 billion in 2024/25 (around seven per cent). Councils have again reported budget gaps in 2025/26. Where councils are forecasting that their in-year spending will be greater than their available income, we refer to this as a budget gap. The budget gap is the difference between anticipated income (excluding income drawn from reserves) and expenditure (reduced only for savings approved by elected members). 23.At the time of setting their 2025/26 budgets, councils identified a combined revenue budget gap of around £647 million. This represents a budget gap in the range of 3.4 per cent of councils’ total combined revenue budgets for 2025/26. Compared to 2024/25, the total budget gap identified by councils has increased by £52 million. Paragraph 25 sets out some of the pressures on councils which may account for this increase in the budget gap. 24.At a council level, budget gaps ranged from £70.3 million in the City of Edinburgh Council to £4.4 million in Eilean Siar. This represents five per cent and three per cent of their respective total revenue budgets (Exhibit 4, page 15 and Exhibit 5, page 16). Appendix 1 sets out further selected information on individual council budgets for 2025/26 where available. Page 94 of 396
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2. Council budgets 15 Exhibit 4. Council budget gaps 2025/26 0 10 20 30 40 50 60 70 80 Eilean Siar South Lanarkshire East Renfrewshire South Ayrshire Inverclyde Moray Clackmannanshire Scottish Borders Dundee City West Dunbartonshire Argyll and Bute Dumfries and Galloway Stirling Angus Midlothian North Ayrshire East Ayrshire East Lothian Renfrewshire North Lanarkshire Aberdeen City Orkney Islands West Lothian Fife East Dunbartonshire Perth and Kinross Falkirk Highland Aberdeenshire Shetland Islands Glasgow City City of Edinburgh £ million Councils Note: There are differences in the way councils’ approach and present their budget and identify budget gaps. This means that direct comparisons should be made with caution. Source: Council data returns Page 95 of 396
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2. Council budgets 16 Exhibit 5. Budget gaps for 2025/26 as a percentage of their total revenue budget 0 1 2 3 4 5 6 7 8 South Lanarkshire North Lanarkshire South Ayrshire East Renfrewshire Fife Dundee City Glasgow City Dumfries and Galloway Scottish Borders Inverclyde Renfrewshire Aberdeen City Moray North Ayrshire Eilean Siar East Ayrshire Argyll and Bute Angus West Lothian West Dunbartonshire Highland Stirling Midlothian City of Edinburgh East Lothian Aberdeenshire Clackmannanshire Perth and Kinross East Dunbartonshire Falkirk Percentage Councils Note: Shetland and Orkney hold significant reserves related to oil, gas and harbour activity. They are excluded from this chart as they are outliers due to their planned use of available reserves to balance their budgets. Their budget gaps as a percentage of revenue budget are 20 per cent and 18 per cent respectively. Source: Council data returns Page 96 of 396
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2. Council budgets 17 Councils are continuing to forecast budget gaps over the short term 25. Councils are anticipating that funding pressures will continue, citing several key assumptions that inform budgets in the medium term. Where the information was available: • most councils report the pressures around annual pay settlements, with many expecting three per cent increases to 2027/28. This, alongside higher employer’s National Insurance contributions, increasing overall workforce costs • potential increases to employer pension contributions, following recent reductions in these (paragraph 35) • a majority of councils also reference general inflationary pressures, including increasing costs of goods and services, making councils’ operations more expensive • several councils are also projecting flat cash funding settlements from the Scottish Government • potential annual increases to council tax rates with a lack of consistency on the projected expected increase from individual councils. Councils will need to carefully manage these financial pressures to maintain services whilst still addressing rising costs. 26. Based on 31 councils, the total projected revenue budget gap for 2026/27 is £528 million. The projected revenue gap for 2027/28 is £496 million, also across these 31 councils. If savings in 2025/26 are not delivered, or are made through non-recurring means, then there is potential that these gaps will widen further. 27. The largest cumulative revenue budget gap to 2027/28 is Glasgow (£116.8 million), followed by Shetland (£106.0 million). When evaluating the budget gap relative to the proportion of councils’ revenue budgets, Shetland and Orkney rank as the highest (Exhibit 6, page 18). 28. While elements of these projections are either expected to be addressed or lessen in impact, councils are currently anticipating a cumulative revenue budget gap of £997 million over the next two years. This means that councils will need to increase their income levels, identify further saving measures or consider how they can continue to transform how (and what) they deliver to close these projected revenue budget gaps. Page 97 of 396
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2. Council budgets 18 Exhibit 6. Councils’ projected budget gaps to 2027/28 Councils Budget gap for 2026/27 £ million Budget gap for 2027/28 £ million Cumulative gap to 2027/28 £ million Cumulative gap as % of 2025/26 net revenue budget Shetland Islands 47.7 58.3 106.0 51% East Dunbartonshire 40.1 43.0 83.1 22% Orkney Islands 15.0 11.0 26.0 22% East Lothian 21.0 15.8 36.8 10% West Dunbartonshire 8.2 8.3 16.5 5% Eilean Siar 6.7 3.7 10.4 8% Highland 34.6 27.3 61.9 8% Clackmannanshire 7.3 4.7 12.0 7% South Ayrshire 17.5 8.2 25.8 7% Scottish Borders 13.3 13.5 26.7 7% Stirling 10.0 10.4 20.4 7% Aberdeen City 29.0 40.8 40.8 6% Aberdeenshire 11.1 13.4 24.5 3% East Ayrshire 13.0 14.0 27.0 6% Argyll and Bute 9.6 10.3 19.9 6% Falkirk 20.1 9.0 29.1 6% West Lothian 16.9 18.1 35.0 6% Inverclyde 8.1 8.3 16.4 6% Renfrewshire 15.6 17.9 33.0 6% Glasgow City 72.9 43.9 116.8 5% North Lanarkshire 32.3 25.3 57.7 5% Dumfries and Galloway 10.7 11.9 22.6 5% Dundee City 8.4 12.2 20.6 4% Angus 6.0 8.6 14.6 4% East Renfrewshire 5.0 5.0 10.0 3% City of Edinburgh 19.9 19.3 39.2 3% South Lanarkshire 11.7 13.8 25.5 3% Midlothian 5.4 2.3 7.7 2% North Ayrshire 3.6 7.4 11.0 2% Fife 5.1 11.1 16.2 1% Moray 1.9 1.1 3.0 1% Total 527.8 495.7 997.3 Note: Perth and Kinross Council did not report any projected budget gaps. Source: Council data returns Page 98 of 396
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2. Council budgets 19 Financial pressures in 2025/26 include increased costs related to National Insurance contributions 29. The UK Government announced in October 2024 that they would increase the rate of employers’ National Insurance (NI) contributions, alongside a reduction in the threshold of when employers would also start paying the contribution. 30. All councils report facing increased costs from the changes in NI contributions for employers and in response to this, the Scottish Government announced £144 million in additional funding (paragraph 16). COSLA, however, estimated the additional cost could be up to £370 million: £240 million for directly employed staff and £130 million for indirectly employed staff (£85 million for staff working in Adult Social Care commissioned services, and up to £46 million for staff across other commissioned services and ALEOs). 31. Returns submitted to us by councils showed additional costs of around £235 million within approved 2025/26 budgets, as councils mainly adjusted budgets to recognise costs associated with direct employees. Councils need to meet these increased costs, and manage them within overall revenue budgets, potentially impacting the funding available for frontline services. Councils, however, continue to benefit from reduced pension costs 32. LGPS employer contributions decreased (as a percentage of employee pay) in 2024/25, with councils using the results of the 2023 triennial pension fund revaluation as an opportunity to reduce contribution rates. From 2024/25, up until 2026/27, this allows councils to redirect the notional savings to other project or service areas. 33. The scale of reduction to required employer contributions varies. They are directly influenced by the funding position for each individual employer within each fund, considering historic contributions, and can therefore vary across councils even within the same fund. 34. Councils’ financial plans and budgets for 2025/26 incorporated the reduction in pension contributions, allowing the reduced costs against 2023/24 rates to be redirected to other areas. Not all councils recognised this reduction as a saving in 2025/26, as the changes were implemented during 2024/25, but 12 councils directly referenced savings from reduced pension contributions when setting their 2025/26 budgets. 35. Reduced pension contribution rates should only be seen as a temporary source of funding by council, with rates increasing in 2026/27. The level of reductions range from 13 per cent (for a two-year period) to one per cent. Councils who reported a 13 per cent reduction in The triennial revaluation assesses the funding position of each of Scotland’s 11 Local Government Pension Scheme (LGPS) Funds, looking at the investments held, and the forecast returns, against the projected future liabilities of each. The results from all LGPS funds in Scotland (31 March 2023) showed a significantly improved funding position, compared to 31 March 2020. Page 99 of 396
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2. Council budgets 20 contribution rates are the 12 members of Strathclyde Pension Fund. They will see their contribution rates rise from 6.5 per cent in 2025/26 to 17.5 per cent in 2026/27. Further increases in future employer contribution rates across all councils will be subject to the outcome of the next triennial revaluation. Councils are taking various actions to close their 2025/26 budget gaps 36. In order to set a balanced budget, councils must not operate with a budget gap. There are various tools available to councils to close a budget gap, either by generating additional income or by reducing their expenditure, and to balance their budgets (Exhibit 7). 37. Councils should use recurring measures to ensure cost savings take effect over multiple years, for example by transforming how they deliver services, by permanently reducing staff numbers or; taking decisions that will increase their annual income, for example by making changes to council tax rates (paragraph 45). Exhibit 7. Councils’ bridging actions to set their 2025/26 budgets Councils are taking various actions to close their 2025/26 budget gap. Source: Council data returns 6 0 50 100 150 200 250 300 Unidentified savings Agreed savings – non-recurring Increase to income Other measures – recurring Use of reserves Agreed savings – recurring Increase to council tax £ million 113 192 12 275 30 24 0.7 Page 100 of 396
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2. Council budgets 21 38. They can also identify non-recurring measures that are one-off or produce only temporary savings, for example delaying certain spending or temporarily leaving vacant posts unfilled. Relying on non-recurring measures is unsustainable and is only a temporary plug for a budget gap in that one year. The gap will need to be met with the same level of recurring measures such as recurring savings or increases to income in future years and will not address a cumulative funding gap (paragraph 28). Councils continue to make savings across a broad range of services to address financial challenges 39. Most councils have identified service areas where they are expecting to make savings in 2025/26. Reducing the level of unidentified savings supports sound financial planning by minimising the need to find additional budget reduction measures and unplanned reprioritisation of spending throughout the year. 40. All councils provided information on the service areas where they are planning financial savings in 2025/26. Councils are planning to deliver around £210 million of approved savings in 2025/26. Most of these saving measures are recurring, with only £12.2 million of non-recurring savings planned. The City of Edinburgh Council is proposing the highest service-level saving measures in 2025/26, totalling £28.4 million representing around two per cent of their total 2025/26 revenue budget. South Ayrshire Council projects the lowest level of service level saving measures of £0.7 million, around 0.2 per cent of the council’s total 2025/26 total revenue budget. 41. Across all councils, most savings are planned within corporate services, followed by children’s services. Councils plan to achieve £68 million of savings within corporate services and £58 million of savings in children’s services. Actions to tackle climate have the lowest level of saving measures planned, with £0.4 million of savings planned in 2025/26. 42. Sixteen councils provided information on the services where they are planning significant reductions, exceeding five per cent of their overall service budgets. For example, Glasgow City Council is making savings of around £8 million in its financial services through policy changes, partly in providing relief to unoccupied non-domestic properties. Generally, councils provided limited information on their assessment of how these saving measures will impact on particular groups and communities. Councils have a responsibility to assess the impact budgetary decisions may have on groups with protected characteristics and will also have to consider the impact on their corporate priorities (paragraphs 62 and 63). 43. Councils are introducing new and innovative measures to reduce costs. For example, Renfrewshire Council’s new digital advisor, Millie, provides 24/7 assistance to individuals who have routine or transactional requests. By December 2024, this service answered over 18,000 calls, Page 101 of 396
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2. Council budgets 22 of which 36 per cent were resolved, with no staff involvement. East Ayrshire Council is also progressing its £40 million Early Intervention Fund which supports projects that reduce dependency on council services. 44. Audit Scotland and appointed auditors are carrying out further work on transformation activities across all councils as part of the 2024/25 thematic Best Value work. These reports will be published throughout 2025/26, followed by a national report that outlines consistent themes later in 2027. All councils chose to increase council tax rates significantly in 2025/26 45. Councils had full flexibility over Council Tax decisions in 2025/26. All councils increased their council tax levels, ranging from a six per cent increase in South Lanarkshire Council to a 15.6 per cent rise in Falkirk Council (Exhibit 8, page 23). Exhibit 8 also demonstrates the variation in the ‘baseline’ of council tax levels for councils. For example, North Ayrshire council agreed a seven per cent rise in council tax taking their band D amount to £1,553.77, while North Lanarkshire agreed a higher increase of ten per cent, with the new band D rating of £1,452.86. Across councils, band D rates vary by 20 per cent between the highest and lowest. 46. Council tax only represents a small proportion of a council’s overall revenue budget, making up around 19 per cent of total council income across Scotland, with the exact proportion varying across council areas. On this basis, for example, a ten per cent increase to council tax rates will not represent an overall ten per cent increase in council budgets; but only increase available funding by 1.9 per cent. This is often referred to as the council tax gearing effect. 47. Council tax increases can also disproportionately impact lower income households, although the Council Tax Reduction Scheme is in place to support a range of claimants. Analysis shows that councils with the highest deprivation (Dundee, Glasgow City, Inverclyde, North Ayrshire) were among those with the lowest council tax increase ranging from seven per cent to 8.5 per cent (West Dunbartonshire increased their council tax by 11.5 per cent). With the exception of North Lanarkshire Council (ten per cent increase), council areas with the highest local authority housing stock were also among those councils with the lowest council tax increases (ranging from six per cent to 8.2 per cent). 48. In total, councils expect to receive £284.3 million from the increase to council tax in 2025/262. The amount of income that individual councils expect to receive from the increase in council tax is influenced by the scale of the increase, the size of the council and the nature of the local housing stock. Expected increases in income range from £1 million in Comhairle nan Eilean Siar to £31 million in the City of Edinburgh Council. 2 £275 million will be used to bridge the funding gap and the remaining is additional income. Page 102 of 396
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2. Council budgets 23 Exhibit 8. All councils increased their council tax in 2025/26 Councils increased council tax rates significantly in 2025/26. Councils Council Tax increase in 2025/26 % Council Tax Band D 2025/26 £ Band D Annual Increase in 2025/26 £ Additional income from council tax increase in 2025/26 (£000) Aberdeen City 9.85 1,636.3 146.7 13,790 Aberdeenshire 10 1,532.8 139.3 16,922 Angus 11 1,461.5 144.8 6,999 Argyll and Bute 9.9 1,625.6 146.4 6,275 City of Edinburgh 8 1,563.5 115.8 30,997 Clackmannanshire 13 1,594.4 183.4 3,321 Dumfries and Galloway 9 1,454.0 120.1 7,685 Dundee 8 1,605.3 118.9 6,311 East Ayrshire 8 1,606.4 119.0 6,388 East Dunbartonshire 13 1,599.0 183.3 9,440 East Lothian 10 1,579.2 143.6 9,456 East Renfrewshire 8 1,528.4 113.2 5,446 Eilean Siar 8 1,387.6 96.8 1,033 Falkirk 15.6 1,576.8 213.0 12,247 Fife 8.2 1,498.8 113.6 15,908 Glasgow 7.5 1,611.4 112.0 20,250 Highland 7 1,527.1 99.9 10,487 Inverclyde 8.5 1,551.3 121.5 2,975 Midlothian 10 1,666.2 151.5 6,600 Moray 10 1,573.8 143.1 5,516 North Ayrshire 7 1,553.8 101.7 5,008 North Lanarkshire 10 1,452.9 132.1 15,300 Orkney 15 1,574.6 205.4 1,446 Perth and Kinross 9.5 1,537.0 133.3 10,480 Renfrewshire 9.5 1,572.6 136.4 10,606 Scottish Borders 10 1,491.7 135.6 7,654 Shetland Islands 10 1,386.7 126.1 1,147 South Ayrshire 8 1,569.4 116.3 5,921 South Lanarkshire 6 1,378.9 78.1 9,480 Stirling 8.8 1,611.9 130.4 5,329 West Dunbartonshire 11.5 1,559.9 160.9 4,685 West Lothian 8.95 1,515.5 124.5 9,191 Note: Council tax figures have been rounded to one decimal place. Source: Council data returns and Scottish Government Council Tax DocumentsPage 103 of 396
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2. Council budgets 24 49. Increasing council tax allows councils to address some immediate financial pressures, but wider sustainability pressures remain. Some councils reported that council tax rate increases would have been higher had they not identified savings in 2025/26. Councils continue to raise income by charging for certain local services 50. Councils also generate income from the fees and charges they set for using certain services. For example, councils may charge households for the collection of garden waste, although must collect food waste free of charge. Twenty-four councils provided information on their 2024/25 income from fees and charges. Those councils generated £966 million from fees and charges in 2024/25, representing around five per cent of their 2025/26 revenue budgets. Fourteen councils received more income from fees and charges in 2024/25 compared to initial projections. 51. In total, councils anticipate receiving £1.1 billion from fees and charges in 2025/26. This represents around six per cent of the combined 2025/26 approved revenue budgets for councils. Glasgow City Council expects to raise the most from fees and charges in 2025/26, with around £210.6 million projected to be raised, around ten per cent of their approved 2025/26 revenue budget. 52. Twenty-five councils provided information on the areas where they plan to significantly increase fees and charges in 2025/26. For example: • Income from Glasgow City Council’s Neighbourhood, Regeneration and Sustainability services is projected to increase by three per cent to £111 million, driven by the fees and charges in place for 2025/26. • Midlothian Council are increasing the fees and charges in their leisure services on average by eight per cent. The council will now raise £5.9 million in total from fees and charges within leisure services. • Falkirk Council is increasing fees and charges within leisure charges by five per cent for 2025/26. This is projected to contribute to a combined income of £5.6 million from the fees and charges in place within leisure services. 53. Thirteen councils are introducing new charges for services in 2025/26. For example: • North Lanarkshire Council will start charging to collect garden waste. The council expects this to generate £1.5 million in additional income. • South Lanarkshire Council forecasts generating £1.4 million from issuing garden waste permits. Page 104 of 396
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2. Council budgets 25 • Highland Council is introducing charges for tourist visitor experiences. The councils expect this to raise £0.2 million in additional income. Councils are also continuing to use reserves to balance their budgets 54. As set out in the Local government in Scotland: Financial bulletin 2023/24, councils’ continuous use of reserves to balance budget pressures is not sustainable. Using reserves in one year means future years’ services are at greater risk if they are directly used to support expenditure but are not invested to address underlying issues and transform service delivery. All councils have a reserves policy in place which sets out a minimum level of uncommitted reserves held. While it is for each council to set their own reserves policies, and the minimum level of uncommitted reserves they hold varies, two per cent of their net budgeted revenue expenditure is commonly regarded as a suitable benchmark. 55. At the end of 2024/25, 25 councils are estimating that they will be holding £1.8 billion in their General Fund, a usable reserve, with £1.3 billion of this committed. An estimated £0.14 billion has been identified by councils as formal contingency funding, with a further £0.4 billion of uncommitted reserves also available for that purpose if required. Combined, this represents a potential contingency of 2.9 per cent of net revenue expenditure. Councils approved the use of £0.19 billion of reserves in 2025/26 during budget-setting as a means of balancing budgets. Borrowing continues to be the primary funding source for capital projects 56. Councils’ capital budgets are used for key capital projects such as constructing or upgrading public buildings, such as schools or libraries, or infrastructure such as roads. Capital projects across the public sector are now costing more, with the cost of delivering projects estimated to have been increasing at a greater rate than general inflation for a sustained period. The total capital budget for all councils in 2025/26 is £4.74 billion. This is an increase from £4.23 billion in 2024/25 across Scotland, however eleven councils are reducing their capital budgets. 57. Borrowing is the main source for funding capital projects, and councils are intending to borrow £3.13 billion in 2025/26, an increase from 2024/25 (£2.67 billion). Exhibit 9 (page 26) shows a breakdown of the sources of capital finance for 2025/26 and compares them to 2024/25. Councils are increasing the amount they intend to spend on building and maintaining social housing 58. Twenty-six councils own and maintain council housing, and all these councils provided information on how much of their capital budget is allocated to their Housing Revenue Account (HRA). Councils are committing a combined £1.5 billion from their capital budgets to the The Housing Revenue Account (HRA) is a ring-fenced account relating to local authority housing. The HRA is intended to record expenditure and income on running a council’s own housing stock and closely related services or facilities, which are provided primarily for the benefit of the council’s own tenants. The main sources of income are from tenants in the form of rents and service charges. Page 105 of 396
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2. Council budgets 26 HRA in 2025/26, an increase of £186 million from the previous year. All councils are planning expenditure on new builds in 2025/26: • Councils expect to spend £656 million from the HRA on new builds in 2025/26, an increase of £81 million from 2024/25. This represents the largest area of expenditure within the HRA. East Renfrewshire Council had the largest expenditure on new builds in 2024/25, although their 2025/26 forecast expenditure will be lower than all other councils. The council accelerated its new build programme during 2024/25, which involved utilising the grant support available for both 2024/25 and 2025/26. As a consequence, the council’s new build plan for 2025/26 was reduced. However, this will be reviewed in light of revised grants available. Exhibit 9. Source of capital budgets for 2024/25 and 2025/26 Borrowing continues to be the key funding source for capital projects. Source: Council data returns 0 50 100 150 200 250 300 350 Borrowing Government General Capital Grants Government Specific Capital Grants Internal revenue funding Capital receipts Developer contributions Other £ million 2024/25 2025/26 Page 106 of 396
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2. Council budgets 27 • Refurbishment costs are the second largest area of expenditure within the HRA, increasing by £142 million from 2024/25 to 2025/26. Councils expect to spend £521 million on refurbishing housing stock in 2025/26 compared to £379 million in 2024/25. • Sixteen councils are planning programmes of maintenance work in 2025/26. They are expecting to utilise £289 million of funding for maintenance, an increase of £78 million from 2024/25. Social care revenue budgets make up a high proportion of total revenue budgets for 2025/26 59. Of the £18 billion revenue budget in 2025/26, councils reported £4 billion related specifically to social care services. This equates to almost 23 per cent of councils’ total revenue budget. Across councils, the social care budget ranges between 18 and 30 per cent of councils’ total revenue budget for 2025/26. Most councils provide social care services through separate integrated joint boards (IJBs), with the exception of Highland who operate a different model. At the time of collecting the data, 21 IJBs had agreed their budgets with the remaining ten to be agreed. 60. The financial pressures and risks experienced by IJBs include reliance on non-recurring sources of income, such as reserves and one-off savings, and reserve levels falling below individually agreed minimum reserve policy levels. These have a strong impact on council budgets and collaborative working and planning is needed across IJB partners in the budget-setting process. 61. The Accounts Commission IJB Finance bulletin 2023/24 set out that the agreement of savings plans and NHS partner funding were the most common reasons for balanced budgets not being agreed at the start of the financial year. This misalignment in budget processes, however, presents a challenge as councils look to identify savings and transform how they deliver services, given the significant proportion of their budgets dedicated to providing social care services. Page 107 of 396
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283. Consulting with communities 3. Consulting with communities As councils continue to make difficult decisions, it is more important than ever that they involve communities in the decisions that impact their local services. Most councils carried out an assessment to understand the impact budget decisions will have on different groups 62. Public bodies use Equality Impact Assessments (EIA) to understand how policies or budgetary decisions affect groups with a protected characteristic. These assessments identify ways to advance equality while highlighting potential discrimination. Public bodies must complete an EIA when introducing new policies or making strategic decisions that could affect different groups. 63. Councils must consider the impact their budget choices will have on different groups and communities, especially those with protected characteristics under the Equality Act 2010. This is even more important when councils face difficult choices about their budget allocations at a time of financial pressure. For example, an EIA should highlight the consequences of a council closing a community centre, particularly for potential disabled or elderly residents who rely on it for essential local services. 64. Thirty-one councils completed an EIA as part of their 2025/26 budget process. Shetland Islands Council carried out an informal assessment which assessed an EIA as not necessary, as there had been no major changes to existing policies or practices and limited impact on services contained within their budget proposals. With financial pressures forecast to continue (paragraphs 25 and 26) it is increasingly important that councils continue to assess how the financial decisions they are taking impact their local populations, including vulnerable or marginalised communities. Councils must consult with groups in addressing financial challenges 65. A March 2025 blog, outlines the Accounts Commission’s expectation on councils engaging with communities in responding to the challenging financial environment. Councils should engage with residents Page 108 of 396
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3. Consulting with communities 29 to increase their understanding of the challenging financial environment, the options available to manage these challenges and how council tax rises can support local services. For example, residents’ expectations on the quality and provision of local service may grow and councils need to be able to demonstrate how it is using funds to maintain services and improve performance. Most councils consulted with residents on their 2025/26 budgets 66. Thirty councils provided evidence to us of how they engaged with residents, while identifying saving measures and wider proposals within their 2025/26 budgets. However, the approaches taken varied. 67. There was variance in the form and level in how councils engaged with their communities while setting their 2025/26 budgets: • Some councils held focus groups with residents to discuss budget proposals whereas others directly consulted with groups that will be impacted by service-saving measures. • There was a mixed approach in how councils monitored the response rate to any consultation exercise. Most councils recorded consultation responses based on the population of the local authority area, whereas others based on it on a street survey response rate. • Some councils used innovative ways to consult with stakeholders. For example, Stirling Council ran a dedicated survey for young people on the impact that proposed reductions to library services would have on their learning and education. Shetland Islands Council created animations which were shown in the local cinema to inform the public on the council’s finances. • Comhairle nan Eilean Siar’s consultation results did not influence this year’s budget-setting decision as the measures taken to achieve the savings required did not impact significantly on service delivery. They will however feed into the 2026/27 budget-setting process. 68. Councils provided examples of how their engagement activities influenced budgetary decisions: • East Ayrshire Council agreed to various initiatives which were all raised during the consultation process. This included services around free school meals, road improvement projects and the Community Safety Fund. Page 109 of 396
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3. Consulting with communities 30 Work remains to make councils’ budgets accessible, transparent and more easily understood 69. As highlighted in last year’s report, budget-setting processes vary across councils, partly reflecting differences in organisational structures and local priorities. By issuing a standardised data return we have looked to make information as comparable as possible. However, it continues to be challenging to compare information across the sector. 70. Within individual councils, the way in which budget papers are presented could also be improved. A lack of transparency in the presentation of financial and budget information is a recurring theme across our programme of Best Value audits of individual councils, and within annual audit reports produced by our appointed auditors. 71. This means that elected members and communities cannot easily determine the impact of budget decisions nor the overall financial position of the council, highlighting a need to improve accessibility and transparency. More transparent reporting of agreed budgets, the budget gaps they are facing and how they intend to make use of reserves (including previously agreed actions), councils can inform and better include their local communities in making the choices still needed to address ongoing financial challenges. 72. Appendix 2 sets out, at a high level, how councils have progressed against the expectations related to these issues that we set out in our Local government budgets 2024/25 briefing published in May 2024. The Accounts Commission’s forthcoming work will assess how key council services are performing 73. The Accounts Commission produces a series of overview reports which provide an independent assessment of the financial and operational performance of Scotland’s local government sector. This report follows the Local government in Scotland: Financial bulletin 2023/24, published in January 2025. 74. For the next report in this series, the Accounts Commission will publish a service spotlight. This new report, due to be published in October 2025, will provide an overview of council performance as set out by the Local Government Benchmarking Framework (LGBF) and other key metrics. For 2025, the spotlight will have a particular focus on culture and leisure services that councils provide. Page 110 of 396
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31Appendix 1. Selected 2025/26 budget information Appendix 1. Selected 2025/26 budget information All councils’ 2025/26 revenue budget, budget gaps, approved savings and other bridging to close budget gap. Councils Revenue budget 2025/26 £ million Budget gap 2025/26 £ million Approved savings 2025/26 £ million Other bridging actions 2025/26 £ million Aberdeen City 665 21.2 4.0 17.1 Aberdeenshire 802 38.5 15.8 22.7 Angus 372 13.6 2.1 11.5 Argyll and Bute 327 11.5 3.0 8.5 City of Edinburgh 1,496 70.3 28.4 41.9 Clackmannanshire 171 10.2 3.8 6.4 Dumfries and Galloway 482 12.8 3.5 9.3 Dundee City 496 11.0 4.9 6.1 East Ayrshire 439 15.1 8.6 6.5 East Dunbartonshire 379 24.0 3.6 20.4 East Lothian 372 17.7 2.3 15.3 East Renfrewshire 350 7.1 1.2 5.8 Eilean Siar 135 4.4 1.4 3.0 Falkirk 488 33.8 10.0 23.8 Fife 1,148 15.6 7.1 8.5 Glasgow City 2,127 49.2 26.2 23.0 Highland 818 34.2 6.6 27.6 Inverclyde 272 7.6 3.1 4.5 Midlothian 321 14.1 2.0 12.1 Moray 294 9.4 7.9 1.5 North Ayrshire 459 14.9 3.6 11.3 North Lanarkshire 1,103 20.9 0.0 20.9 Orkney Islands 119 21.2 0.7 20.5 Perth and Kinross 503 31.1 7.6 23.5 Renfrewshire 589 18.1 6.4 11.7 Scottish Borders 400 10.8 1.9 8.9 Shetland Islands 207 42.2 8.3 33.9 South Ayrshire 377 7.2 0.7 6.5 South Lanarkshire 1,019 5.3 4.7 0.5 Stirling 310 13.0 7.7 5.3 West Dunbartonshire 311 11.4 5.2 6.2 West Lothian 603 22.1 11.9 10.1 Note: How councils present their budgets, and budget gaps, can vary and is often influenced by specific local arrangements. The information is taken from council budget documents, as supplied to us by councils. Other bridging actions are set out as part of Exhibit 7 and include increase to income, increase to council tax and use of reserves. Figures may not exactly sum due to rounding. Page 111 of 396
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32Appendix 2. Progress since 2024/25 Appendix 2. Progress since 2024/25 Progress against the expectations in Local Government Budget Briefing 2024/25. Councils should: Progress/ status The Commission expects councils to present some fundamental information within publicly available budget papers. Information we expect to see set out clearly includes: • The annual revenue budget, comprising funding and income, prior to savings and other ‘bridging’ actions. • The associated budget gap, prior to ‘bridging’ actions such as savings and use of reserves. • The savings plan, clearly setting out the split between recurring and non- recurring actions. • Projected revenue budget gaps, both annual and cumulative. • The assumptions used in calculating projected budget gaps. Substantial progress We reviewed around a third of 2025/26 budget papers to assess progress, and found that ten of the 11 reviewed provided links or copies of the required budget documents. Of the ten councils providing information seven met all five of the expectations, with three councils meeting three or four. The main area not documented was the split between recurring and non-recurring savings. The information from two councils in relation to one or more of the following areas, could have been demonstrably clearer: • The annual revenue budget, comprising funding and income, prior to savings and other ‘bridging’ actions. • The associated budget gap, prior to ‘bridging’ actions such as savings and use of reserves. • Projected revenue budget gaps, both annual and cumulative. Page 112 of 396
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Briefing Local government budgets 2025/26 Audit Scotland 4th Floor 102 West Port Edinburgh EH3 9DN Phone: 0131 625 1500 Email: info@audit.scot www.audit.scot ISBN 978 1 915839 70 1 Page 113 of 396
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Audit Committee Monday 16 June 2025 Item No 5.5 Internal Audit Work to May 2025 Report by Chief Internal Auditor Report for Decision 1 Recommendations The Audit Committee is asked to: a) Consider the Executive Summary of the final Internal Audit assurance report issued associated with the delivery of the approved Internal Audit Annual Plan 2024/25; b) Note the Internal Audit Consultancy and Other Work carried out in accordance with the approved Internal audit Charter; and c) Acknowledge the assurance provided on internal controls and governance arrangements in place for the areas covered by this Internal Audit work. 2 Purpose of Report/Executive Summary The purpose of this report is to provide members of the Audit Committee with details of the recent work carried out by Internal Audit and the findings and recommended audit actions agreed by Management to improve internal controls and governance arrangements. The Internal Audit Annual Plan 2024/25 was approved by the Audit Committee on 18 March 2024. Internal Audit has carried out work associated with the delivery of the plan to meet its objective of providing an opinion on the efficacy of the Council’s risk management, internal control and governance. An Executive Summary of the final Internal Audit assurance report issued, including audit objective, findings, good practice and recommendations (where appropriate), and the Chief Internal Auditor’s independent and objective opinion on the adequacy of the control environment and governance arrangements within each audit area is shown in Appendix 1. The Internal Audit function conforms to the professional standards as set out in Public Sector Internal Audit Standards (PSIAS) (2017) including the production of this report to communicate the results of the reviews. Date 2 June 2025 Report Contact: Duncan Stainbank duncan.stainbank@midlothian.gov.uk Page 115 of 396
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2 3 Progress Report 3.1 The Internal Audit Annual Plan 2024/25 was approved by the Audit Committee on 18 March 2024. Internal Audit has completed the following work in the period from 1 February 2025 to 31 May 2025 associated with the delivery of the plan to meet its objective of providing an opinion on the efficacy of the Council’s risk management, internal control and governance. 3.2 The Internal Audit function conforms to the professional standards as set out in Public Sector Internal Audit Standards (PSIAS) (2017), including the production of this report to communicate the results. 3.3 Internal Audit issued final assurance reports on the following subjects: • SEEMIS; • Education Construction Governance; • IT Asset Management; and • Revenue Financial Budget Monitoring. 3.4 An Executive Summary of the final Internal Audit assurance report issued including audit objective conclusions, key findings, recommendations, areas of good practice, the Chief Internal Auditor’s independent and objective opinion on the adequacy of the control environment and governance arrangements within each audit area is shown in Appendix 1. 3.5 The definitions for Internal Audit assurance categories are as follows: Level Definition Substantial Assurance A sound system of governance, risk management and control exists, with internal controls operating effectively and being consistently applied to support the achievement of objectives in the area audited. Reasonable Assurance There is a generally sound system of governance, risk management and control in place. Some issues, non-compliance or scope for improvement were identified which may put at risk the achievement of objectives in the area audited. Limited Assurance Significant gaps, weaknesses or non-compliance were identified. Improvement is required to the system of governance, risk management and control to effectively manage risks to the achievement of objectives in the area audited. No Assurance Immediate action is required to address fundamental gaps, weaknesses or non-compliance identified. The system of governance, risk management and control is inadequate to effectively manage risks to the achievement of objectives in the area audited. Internal Audit Consultancy and Other Work 3.6 Internal Audit staff have been involved in the following for the Council to meet its aims and objectives, and its roles and responsibilities in accordance with the approved Internal Audit Charter and Strategy: a) In its critical friend role provided an independent view and challenge at various forums including: Capital Plan and Asset Management Board, Chief Officers Risk & Resilience Group, and the Integrity Group. b) Learning and development during the research stage of new audit areas for all Internal Audit team members and through joining audit forums (Computer Audit Sub-group) and meetings; and c) Monitored publication of Audit Scotland reports. Page 116 of 396
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3 Recommendations 3.7 Recommendations in reports are suggested changes to existing procedures or processes to improve the controls or to introduce controls where none exist. The grading of each recommendation reflects the risk assessment of non-implementation, being the product of the likelihood of the risk materialising and its impact: High Recommendations relating to factors fundamental to the success of the control objectives of the system. The weaknesses may give rise to significant financial loss/misstatement or failure of business processes. Medium Recommendations which will improve the efficiency and effectiveness of the existing controls. Low Recommendations concerning minor issues that are not critical, but which may prevent attainment of best practice and/or operational efficiency. Outwith the report, Internal Audit informs operational managers about other matters as part of continuous improvement. 3.8 The table below summarises the number of Internal Audit recommendations made during 2024/25: Recs Rating 2024/25 Number of Recs High 0 Medium 12 Low 21 Not Graded 0 Sub-total reported this period 33 Previously reported 22 Total 55 Recommendations agreed with action plan 55 Not agreed; risk accepted 0 Total 55 4 Report Implications (Resource, Digital, Risk and Equalities) 4.1 Resource Resource implications of implementing Internal Audit recommendations are considered as part of the audit process to ensure these are reasonable and proportionate to the risks. 4.2 Digital There are no digital implications arising from this report. Page 117 of 396
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4 4.3 Risk The PSIAS require Internal Audit to evaluate the effectiveness of the Council’s Risk Management arrangements and contribute to improvements in the process. At the start of each audit engagement, to capture potential areas of risk and uncertainty more fully, key stakeholders have been consulted and risk registers have been considered. During each audit engagement the management of risk has been tested. It is anticipated that improvements in the management and mitigation of risks will arise as a direct result of Management implementing the Internal Audit recommendations made. If audit recommendations are not implemented, there is a greater risk of financial loss and/or reduced operational efficiency and effectiveness, and Management may not be able to demonstrate improvement in internal control and governance arrangements, and effective management of risks. 4.4 Ensuring Equalities This report does not relate to a new or revised policy, service or budget change, which affects people (the public or staff), so an Integrated Impact Assessment (IIA) is not an applicable consideration. The Internal Audit work is carried out in accordance with the appropriate legislation and professional standards. The latter includes compliance by those within the Internal Audit function with the Code of Ethics set out in the PSIAS which is appropriate for the profession of Internal Audit founded as it is on trust placed in its independent and objective assurance about risk management, internal control and governance. 4.5 Additional Report Implications (See Appendix A) Page 118 of 396
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5 APPENDIX A – Additional Report Implications A.1 Key Priorities within the Single Midlothian Plan Although this report does not relate directly to the key priorities within the Single Midlothian Plan to which Midlothian Council and its Community Planning Partners have made a commitment (Reducing the gap in economic circumstances; Reducing the gap in learning outcomes; Reducing the gap in health outcomes; and Reducing the impact of climate change), good governance is important to enable Midlothian Council to deliver its key priorities in support of achieving the Council’s objectives. A.2 Key Drivers for Change Key drivers addressed in this report: Holistic Working Hub and Spoke Modern Sustainable Transformational Preventative Asset-based Continuous Improvement One size fits one None of the above Midlothian Council is committed to creating a great place to grow supported by the 9 drivers for change. Implementing the 9 drivers for change in practice is applicable to the Council’s Internal Audit service provision to assist the Council in achieving its objectives. A.3 Key Delivery Streams Key delivery streams addressed in this report: One Council Working with you, for you Preventative and Sustainable Efficient and Modern Innovative and Ambitious A.4 Delivering Best Value The definition of Internal Auditing within the Public Sector Internal Audit Standards (PSIAS) is “Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organisation’s operations. It helps an organisation accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes.” Implementation by Management of the actions associated with Internal Audit recommendations, that are designed to improve internal control and governance arrangements and management of risks, underpins the Council’s own continuous improvement arrangements to enhance its effectiveness, thus supporting the delivery of the Council’s best value duties. Page 119 of 396
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6 A.5 Involving Communities and Other Stakeholders The Chief Internal Auditor is accountable to the Audit Committee which, in fulfilling its governance role, acts as a bridge between the Council and other stakeholders. This report has been presented to Senior Management relevant to the areas audited and have agreed the final Internal Audit assurance reports as set out in the relevant Executive Summary within Appendix 1. A.6 Impact on Performance and Outcomes The Findings and Recommendations from Internal Audit work during the year are designed to assist the Council in improving its performance and outcomes. A.7 Adopting a Preventative Approach Internal Audit assurance work includes assessments on when a preventative approach can be adopted. A.8 Supporting Sustainable Development This report does not relate directly to supporting sustainable development. Good governance is important to enable Midlothian Council to achieve its objectives. Page 120 of 396
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Appendix 1 Executive Summary: SEEMiS Conclusion: Reasonable Assurance In relation to the management of the SEEMiS system there is a generally sound system of internal control in place including an SLA and members agreement implemented in 2015; and appropriate processes to review and manage staff and pupil records on the system. However, a number of SEEMiS userIDs for employees who no longer work for the Councill had access to SEEMiS and some users who are not employed by the Council, or are temporary staff, require to be reviewed to ensure their access to the system remains appropriate. Some user profiles or SEEMiS accounts for school employees may no longer be required. A number of Education employees who have access to SEEMiS have not completed the Council’s mandatory courses. Further clarification is required on the business continuity arrangements for SEEMiS, guidance is required on the retention of data within the system and an audit trail of user access changes at a school level needs to be implemented. Background Strathclyde Educational Establishments Management Information System (SEEMiS) is used by all Scottish Councils to support electronic education administration within Council headquarters and schools. SEEMiS is a Limited Liability Partnership (LLP) made up of all Scottish Local Authorities, including Midlothian Council, and provides the education management information needs for all Midlothian schools as well as a wide range of central, administrative and quality improvement functions. It is used for the maintenance of personal and academic (including SQA) records for pupils; personal information and work records for staff; and attendance records for pupils and staff. The system is modular in nature with the Click & Go module being the primary one. There is also functionality which records and supports business processes relating to free school meals, attainment, Education Maintenance Allowances and Clothing Grants. The responsibility for maintaining the system is split between the Council and SEEMiS LLP. The Council is responsible for day-to-day user administration, data input and user access control whereas SEEMiS LLP is responsible for system security, system developments, issue resolution, backup and performance monitoring. Within the Council, the Business Applications Team has oversight of SEEMiS and is responsible for implementing new functionality. Schools are responsible for managing access within their respective schools. The Children and Young People Partnership (CYPP) Business Support team assist schools with their statutory returns and liaise with the Business Applications team when required. In December 2024, a business case was approved by the Business Transformation Steering Group (BTSG) to implement the Parent’s Portal module within SEEMiS with a one-off cost of £42,250. This will improve the way in which schools engage with parents and reduce the amount of time that staff in schools spend on routine and repetitive tasks that are inefficient and labour intensive. The delivery of the project will be phased with an initial roll out to a small number of schools during February and March 2025 with the remaining schools onboarded during April to June 2025. Management advised that a Data Protection Impact Assessment (DPIA) will be completed as part of the deliverables for the Parent Portal project. Page 121 of 396
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Summary of findings & recommendations The following key findings and recommendations are highlighted which have all been agreed by Management: A recommendation has been raised in the Business Continuity audit to ensure that appropriate business continuity plans are in place, reviewed and updated within services. Recommendation Summary • A number of employees who no longer work for the Council still had access to SEEMiS and there were some users who did not work for the Council (eg careers advisors) or temporary staff (eg supply teachers) that require review to ensure access is still appropriate. In addition, user profiles or SEEMiS accounts for school employees not being used should be disabled. Leavers identified have been reviewed, access and user profiles will be reviewed, and schools will be reminded to enter leaving dates for employees if they leave the school by June 2025. • There are a number of Education employees who have not completed the Council’s mandatory courses, including GDPR and Introduction to Information Security. Management will follow this up with the individuals who have not completed the mandatory courses by 31 March 2025. • Signed copies of variation agreements needed to be obtained, further clarification was also required on the business continuity arrangements for SEEMiS and guidance is required on the retention of data within the system. Management has clarified this with SEEMiS and have obtained signed copies of the variation agreements - Complete. Guidance is still required on the retention of data within the system which will be clarified by 30 June 2025. • An audit trail of requests to update user access is not maintained by schools as it is actioned on verbal instruction from senior management. A documented approval process to ensure there is an audit trail of user access changes at a school level will be implemented by 30 June 2025. Recommendations Grade High Medium Low Total Current Report - 2 3 5 Prior Report (N/A) - - - - Materiality SEEMiS is funded via an annual membership fee. During 2024/25, Midlothian Council paid £100,611 for the membership fee and £13,707 for extra charges based on the number of SMS messages sent from the system in quarter 1 and 2. Page 122 of 396
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Headlines Objectives Conclusion Comments 1. Contractual arrangements have been established with the provider to ensure the availability, integrity and confidentiality of Council information. Reasonable Members entered into an agreement for the supply of certain Education Management Information Systems and services by SEEMiS which is noted in the service level agreements (SLAs) and a Members Agreement with SEEMiS and other partners which has been in place since 2015. Variations occur in the service level agreements between SEEMiS and Midlothian Council. The last variation occurred in 2023. There were no signed copies (by SEEMiS) of the variation agreements at the time of review; further clarification was required on the business continuity arrangements for SEEMiS and guidance is required on the retention of data within the system. 2. User procedures, support and training are available to SEEMiS users. Reasonable System guidance notes are provided on the SEEMiS website which can be accessed by anyone with a SEEMiS account. There are no Council specific guides available on the Council’s intranet however guidance notes have been produced by the Business Applications Team and sent to schools. Schools can also contact the Business Applications Team regarding any queries / issues; and if required this can be escalated to the SEEMiS helpdesk. A number of SEEMiS webinars are held throughout the year but there is a low record of attendance from employees based in Midlothian Schools (only 13 employees from schools attended sessions between January to September 2024). There are no formal training sessions or workshops held for school staff. New staff undertake on the job training, and support and training can be requested from the Business Applications Team. It was reported that there have been occasions where there was no handover process in schools when an employee leaves. Management advised that formal training sessions will be arranged in May 2025 which will include SEEMiS and other system processes. A report dated December 2024 highlighted a number of employees within Education services (including supply teachers and administration staff) who have not completed the Council’s mandatory courses. 3. There is effective user account management which ensures only authorised users have access. Limited A SEEMiS user access form needs to be completed to allow school employees to be set up as a staffing record. Each employee has their own user ID, creates their own passwords and a work record is created detailing the position they are filling at the school (e.g. Teacher, Music Teacher or Support Staff). Once the employee is set up on the system, changes can be managed by school system administrators. An audit trail of requests to update user access is not maintained by schools as it is actioned on verbal instruction from senior management. The list of SEEMiS users (as at November 2024) was reviewed against the Council’s HR system, (iTrent) and the data match identified 83 anomalies which required to be updated. 4. There are effective data input and validation Substantial There are validation controls in the SEEMiS system in the form of mandatory completion fields and drop- down cells which only allow specific inputs and addresses can be verified on SEEMiS. SEEMiS data Page 123 of 396
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controls and data interfaces ensure complete and accurate transfer of data. quality checks are undertaken during the collation of staff and pupil census for the Scottish Government at the start of each school year. There are a significant number of data transfers to/from the Council’s SEEMiS system to third parties such as the SQA and the Scottish Government. The data transfer and import to SEEMiS is managed directly by SEEMiS LLP, with Council staff being responsible for various validation and accuracy checks. The files are transferred using secure encryption to and from the file server via the Intranet. An education privacy statement was published on the website when GDPR came into force in 2018. A Data Protection Impact Assessment (DPIA) is a legal requirement for any type of processing to ensure data protection and privacy are considered at all times; and mitigate any risks to privacy that may arise from the system changes. Management advised that a DPIA will be completed as part of the deliverables for the Parents Portal project. 5. Regular reports are produced to ensure data quality for the SEEMiS system and operational and statutory reporting is relevant, accurate and produced on a timely basis. Substantial Statutory reports which include the staff and pupil census are produced and submitted on a timely basis. Regular reports are produced to ensure data quality for the SEEMiS system and an annual check of data held on students takes place. Parents/guardians are asked to confirm, in writing, whether key contact information held is accurate and any updates must be communicated in writing or in person and records are then updated by office staff. There are also provisions in place for parents/guardians to request that schools update records at any time throughout the school year. Regular reports are produced to monitor pupil’s attendance and bespoke reports are also produced which allows the school office to run reports as and when required when data needs to be checked. The Education Performance team runs reports from SEEMiS and presents the data through the Google Dashboard which allows schools to check the data on the reports and ensure information reported is accurate. 6. Appropriate assurances are in place to ensure that there are adequate backup/recovery procedures in place and business continuity plan for SEEMiS. Limited Disaster recovery, backups, and continuity of the system is the responsibility of SEEMiS LLP. Schools have their own business continuity arrangements however these are not formally documented which increases the risk of plans not being accessible if the SEEMiS system is unavailable. Only 1 school had a draft plan in place, but it was still being developed at the time of the audit. A recommendation has been raised in the Business Continuity Audit to ensure that appropriate business continuity plans are in place, reviewed and updated within services. Councils have been briefed by SEEMiS on data centre moves over the pasts few years however, no formal documentation has been provided to evidence this. Also, more clarity is required from SEEMiS with regards to the annual updates undertaken on the Business Continuity Plans and evidence that SEEMiS have appropriately tested their IT disaster recovery plans. Page 124 of 396
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Areas where expected controls are met/good practice No. Areas of Positive Assurance 1. As part of the annual staff census, the Council is required to provide information on individual teaching staff to the Scottish Government. This is checked and signed off on a school-by-school basis to ensure that only current teaching staff are included. 2. Regular reports are produced to monitor pupil’s attendance and custom reports (eg check number of pupils receiving free school meals) are also available which enables the school office to run reports as and when required. 3. SEEMiS can only be accessed through a Midlothian Council PC or laptop connected to the Council network. Access to SEEMiS from the Council network is through a secure VPN. 4. A number of user guides and procedures are available to users. Online system guidance notes are provided by SEEMiS on their website which can be accessed by anyone with a SEEMiS account. The Business Applications Team also offers training and support to schools. 5. Statutory reports which include the staff and pupil census are produced and submitted on a timely basis. Page 125 of 396
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Executive Summary: Education Construction Governance Conclusion: Reasonable Assurance Reasonable assurance is in place over the majority of the areas detailed in the audit scope. However, some weaknesses were identified in governance processes for issue escalation, arrangements for and management of the Project Boards, risk management processes, management of project documentation, and the processes for monitoring External Project Manager performance. Background Following issues with the Beeslack Community High School (BCHS) contract works and Mayfield Learning Community Campus (MLCC) contract costs, which were projects managed by the same external contractor, a review of the control and governance processes concerning these projects was requested. The purpose of the assurance review was to establish if the governance, control, and monitoring processes in relation to these projects were operating effectively and issues are raised through the Council’s governance processes in a timely manner. Summary of findings and recommendations The following key findings and recommendations are highlighted, which have all been agreed by Management: • Although not a breach of the procurement process, by only appointing the top project management framework provider for financially significant, strategic projects, there is a risk that the Council may not achieve best value or appoint an External Project Manager with the best cultural fit using this approach. Management will consider this for the future appointment of Project Managers by September 2025. • The contracts for external project management resource did not formally set out any Midlothian Council specific performance standards, expectations or governance arrangements above the standard framework conditions. Appropriate performance standards will be agreed for future appointments of External Project Managers by September 2025. • Both the BCHS and MLCC Internal Project Managers were not regularly saving all relevant project documentation on to Midlothian systems. Management will ensure that Project Managers follow the relevant service procedures by June 2025. • The Project Board Terms of Reference (ToR) for BCHS does not adequately set out the roles and responsibilities for members and the quorum for decisions. The MLCC ToR does not specify a quorum for decisions, has incomplete sections, and the board meetings for MLCC were subsumed into other meetings following the summer period. Management will update the ToRs and ensure board meetings are reinstated for MLCC by June 2025. • Although risk reporting to the Project Boards is in place, there is no reference to the full project risk registers and the Project Boards are not receiving assurances that the full project risk registers are regularly reviewed. Management will review and update the risk management processes for construction projects by June 2025. Page 127 of 396
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• It is not documented in the Capital Plan & Asset Management Board Terms of Reference that the Chief Executive and the Leader of the Council should be informed of any significant issues. The Terms of Reference for the Capital Plan & Asset Management Board will be updated by June 2025 to address the identified issues. Recommendations Grade High Medium Low Total Current Report - 2 5 - Prior Report (N/A) - - - - Materiality – From the December 2022 Council report, the Mayfield Learning Community Campus (MLCC) project has a budget of £46.469m. From the June 2023 Council report and minutes, the Replacement Beeslack Community High School (BCHS) project including Community Facilities has a budget of £115.811m. Page 128 of 396
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Headlines Objectives Conclusion Comments 1. The procurement process for the appointment of the project management elements of the Beeslack High School and the Mayfield Primary School Developments was in accordance with the Council’s procurement process and provided assurance that an appropriate qualified project management team were available and engaged appropriately for both projects. Reasonable Assurance The Edinburgh City Council Professional Services Framework was used to procure the multi- disciplinary external project management services for both projects. Following this framework, the Council is permitted to make a direct award to the top framework provider. Procurement Services confirmed that the appointed Project Managers were the top framework provider, they had appropriate experience and suitable terms and conditions were in place. Although not a breach of the Council’s procurement process, there is a risk that the Council may not achieve best value or appoint a Project Manager with the best cultural fit using this approach. The call-off order for project management services included the standard scope of services detailed in the framework and did not set out any Midlothian Council specific performance standards, expectations, or governance arrangements. The Development Team utilises agency workers in a variety of roles including the Internal Project Manager for MLCC. Resource has also been procured via a framework contract, for the BCHS and Penicuik High School Internal Project Manager role. There is a risk that the use of agency workers in the same role for long periods of time may result in higher costs for the Council compared to the cost of an equivalent employee. 2. Appropriate processes and resources are available and operating effectively to ensure adequate management of the contracts for project management on both developments. Reasonable Assurance Projects are allocated to Internal Project Managers in the Development Team, and they represent the Council as the main liaison officer, ensuring the Council’s interests are represented through the input of the Project Board, and that the appointed External Project Manager is delivering the work required as per the contract. Appropriately qualified external project management resource was procured through a valid procurement route, and suitably experienced Internal Project Managers have been appointed by the Development Team. The BCHS Project Board ToR does not adequately set out the roles and responsibilities of Board Members and does not specify the quorum for decisions. The MLCC board met frequently over the summer of 2024 however, progress reporting of the MLCC had been subsumed into other related meetings. Although the MLCC Project Board ToR adequately sets out the individual board member roles and responsibilities, the quorum is not defined, and some parts of the ToR are incomplete. Weaknesses were identified in the management and reporting of project risks from the full project risk register and the Internal Project Managers were not regularly updating Council systems with all relevant project documentation. Page 129 of 396
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3. For the Mayfield Primary School project an appropriate, and consistent methodology had been used for identifying the budgeted cost and tender price for the project and that an appropriate value engineering process is in place to reduce costs to an appropriate level to allow for a timely commencement of the project. Reasonable Assurance An external Quantity Surveyor and Cost Manager was appointed as part of the project. The project costs were based on Scottish Futures Trust Learning Estate Investment Programme metrics and adjusted for inflation using the Building Cost Information Service’s index. Following this, abnormal costs were then included to reach the budgeted cost taking into account unique factors relating to the building and the project. This audit has only reviewed the process and has not independently engaged a Quantity Surveyor to review any of the figures reported by the Project’s Quantity Surveyor and Cost Manager. The Stage 2 tender report was reviewed, and it was seen that the majority of sub-contractor returns included a minimum of three quotes indicating that the contractor’s supply chain was appropriately being assessed for the best available prices. For the value engineering process, evidence was provided by the Internal Project Manager of a reasonable risk-based process being applied involving the contractor, the External Project Manager and the Project Board members. 4. The tender process and tender evaluation (based on incorrect scoring) for the Beeslack Community High School contract, was operated in accordance with Council procurement processes and that the oversight of the process was appropriate from Midlothian Council officers. Reasonable Assurance The Procurement information saved in the file directory for the original Beeslack Community High School contract was reviewed and nothing else unusual was noted regarding the tender. The Internal Project Manager and the Procurement Team provided oversight over the process; however, an error was made by the External Project Manager in a response to a contractor query regarding how the tender evaluation should be scored. The error was not identified at the time by Midlothian officers or the Internal Project Manager. The Internal Project Manager advised that the tender documentation was not prescriptive enough in detailing how the evaluation should be scored which allowed the error to occur. This issue has been rectified for the new Beeslack Community High School tender and the Penicuik High School tender, and management have advised that it will be applied for all relevant contracts going forward. 5. When significant issues relating to cost, quality or timeliness of delivery for either project had been identified that there are clear governance processes in place and operating to escalate these issues and that these processes have been followed. Reasonable Assurance The Capital Plan & Asset Management Board (CP&AMB) is in place to provide a monitoring and reporting forum for all of the Council’s capital projects. 5 sub-boards report into the CP&AMB including the Children & Young People Estate Programme Board which is responsible for monitoring the progress of the Children & Young People Estate programme and use of resources as well as provide strategic oversight and technical input into the projects within the programme. Minutes from the CP&AMB are reported to the Corporate Management Team and are therefore made available to the Council’s Chief Executive. However, the Terms of References for the Boards do not state when issues should be escalated to the Council’s Chief Executive and Leader of the Council. Page 130 of 396
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Areas where expected controls are met/good practice No. Areas of Positive Assurance 1. The Council’s procurement process has been followed for the procurement of project management resource utilising a relevant Framework Agreement thus ensuring the appointed Project Managers are suitably qualified. 2 Internal Project Managers with the appropriate experience have been appointed to monitor the Council’s External Project Managers and to manage Midlothian’s construction projects. 3. A consistent methodology was applied for identifying the budgeted costs of MLCC and an appropriate, risk-based process was applied for the value engineering process. 4. Changes have already been applied to tender documentation to prevent the scoring issue that occurred with the original BCHS tender from occurring again. 5 The Council has developed reasonable governance processes to allow for monitoring and oversight of capital projects. Page 131 of 396
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Executive Summary: IT Asset Management Conclusion: Limited Assurance Asset management systems are in place to manage and track IT assets and staff are knowledgeable in how to use their respective systems. Weaknesses were identified in the asset reconciliation process to ensure every IT asset recorded on the asset management system reconciles to the purchases made and the details of the assets have been recorded correctly in the asset management system. The Council’s contract for the disposal of IT assets has been inadequately managed and the financial rebate due to the Council has not been received for a number of years. It was identified that IT assets were not always returned when employees leave the Council - a leavers process is in place to enable Digital Services to disable system access but it is the responsibility of service management to ensure IT equipment is returned. Background The purpose of the audit was to review the processes in place to ensure that IT assets are recorded, managed and maintained in an effective and efficient manner. Digital Services are responsible for the purchase and management of the Council’s corporate IT assets. Digital Inclusion & Learning Technology (DI<) are responsible for the purchase and management of Chromebook devices and Ipads primarily used by teaching staff and pupils in Midlothian’s schools. Digital Services utilise the Service Now IT Service Management System to support the asset management processes. At the time of review, the Service Now asset register had 32,462 assets in circulation (i.e. assets that have not been classified as retired or missing). This included 6,441 monitors, 2,961 laptops, 2,613 docking stations 2,431 PC base units, 2,172 telephones and accessories, 1,732 Netbooks, 1,359 wireless access points and 1,196 interactive screens. DI< use Google Console and Jamf to manage and track Chromebook and Ipad devices respectively. At the time of review there were 13,242 Chromebooks and 3,347 Ipads. Summary of key findings and recommendations The following findings and recommendations are highlighted, which have all been agreed by Management: • There is no formal reconciliation process between what has been purchased and what has been uploaded to Service Now resulting in a number of assets that could not initially be located on the system as part of the audit. Management will develop an appropriate, independent reconciliation process to check that all capital purchases have been logged on Service Now and include all relevant information by December 2025. • Google Console and Jamf hold no reference to the purchase order number or invoice reference number, so it is not possible to reconcile the systems to the purchases made using the purchase order number. Management will ensure that the relevant Integra reference for Chromebooks and Ipads purchased is recorded in the system so the total number in the asset system can be reconciled to purchases made by September 2025. • No payments have been received from the IT asset disposal contractor since November 2018 and the contract is overdue for retendering. Management have agreed with the asset disposal contractor that a payment of £40,000 for the disposal of Council assets is due and an invoice has been raised for this - a new exercise has commenced to tender for a supplier as out of contract by December 2025. • Although a leavers process is in place to disable system access, Digital Services rely on service management for the return of equipment. In the short term, Digital Services will use information from the iTrent HR and Payroll system to support the leavers and staff movers’ process. In the longer term, Digital Services will liaise with relevant management to improve the return rates and explore systems-based solutions to improve asset management information by December 2025. • There is no documented Corporate IT Asset Management Policy, and the written procedures are incomplete and out of date. Management will prepare an IT Assets Strategy that sets out how the service addresses the Council’s Corporate IT Asset needs (by June 2026) and IT asset management written procedures will be updated by December 2025. Page 133 of 396
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• There is no formal manager sign-off of disposals prior to collection by the disposal contractor, the reason for disposal is not documented as part of the disposal process and no notes are added to disposal documentation explaining any differences between the number of assets submitted for collection and the number the contractor has collected. Management will implement an authorisation process, mark the reason for disposal and improve disposal documentation by September 2025. Recommendations Grade High Medium Low Total Current Report - 4 7 11 Prior Report - N/A - - - - Materiality - The Net Book Value of the Council’s tangible IT Assets as at 2023/24 was £9.21m. Digital Services’ capital spend in 2023/24 was £567,106 and £535,483 in 2024/25. DI< Equipped for Learning (EFL) capital spend in 2023/24 was £1,274,788 and 1,704,534 in 2024/25 (higher in 2024/25 due to replenishment of Chromebook devices in the year and upgrade of classroom smart screens). Page 134 of 396
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Headlines Objectives Conclusion Comments 1. Clear, accessible, relevant, and appropriate policies and procedures are in place to manage IT assets effectively. Reasonable Assurance Digital Services use the Service Now system appropriately to support its IT asset management processes. Procedures (dated 2018) are in place, but these are out of date and did not cover the asset disposal process. There is no documented IT asset management policy, e.g. a document outlining what the Council’s IT Asset needs are and how they are addressed. DI< have prepared an appropriate asset management strategy for their assets. 2. A complete and accurate asset register is in place containing all relevant details of IT hardware assets and a process is in place to periodically confirm the accuracy of the register and update as required. Limited Assurance IT assets are tagged with a unique asset number and logged on the Service Now system following delivery. There is no reconciliation between purchases and Service Now uploads. The employee uploading the majority of the asset information to Service Now is also carrying out the majority of the purchasing activity. 19 invoices for the purchase of IT assets were reviewed and for 6 of these invoices the assets ordered could not be fully agreed to the Service Now system; management have now rectified this issue and all of the assets from these invoices have been located. As part of the Windows upgrade and periodic patching requirements, Digital Services carry out reviews to trace IT assets and service desk officers update asset details on the Service Now system following help-desk calls, but periodic asset inspections are not carried out routinely outside of these purposes. DI< manage some Education IT assets specifically Chromebooks and Ipads; Google Console and Jamf are used to manage and track these devices respectively. No reference to the purchase order numbers or invoice reference numbers were held for the assets recorded in either system, as a result it is not possible to reconcile the systems to the purchases made using the purchase order number; during the audit management addressed this issue going forward in Google Console. 3. Procedures are in place to ensure that all equipment is returned to the Council for reuse or disposal when staff, workers and service users (such as school pupils) no longer require the equipment and appropriate, secure asset disposal arrangements are in place. Limited Assurance 51 laptops were identified that appear to be allocated to leavers. If an employee leaves or moves role, it is the manager’s responsibility to ensure their team member returns all equipment. Digital Services and DI< utilise a contractor to securely dispose of IT Assets and are due a rebate for the disposal of assets as part of the contract. There has been inadequate management of the disposal contract in recent years. No payments have been received by the Council since November 2018. In addition, the disposal contract has been due for retendering since March 2023. A payment of £40,000 for the disposal of Council assets has subsequently been agreed by management with the asset disposal contractor and an invoice has been raised for this. There are no written procedures in place outlining the disposal process for Digital Services or DI<. Page 135 of 396
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Objectives Conclusion Comments 4. Adequate procedures are in place to ensure that IT equipment allocated to council officers and schools, teaching staff and pupils is appropriately recorded to the individual holding the equipment and regular reconciliations are carried out to confirm the assets to the asset management system. Reasonable Assurance The Service Now system and Google Console utilise Active Directory to link a user account to all mobile assets such as Chromebooks or laptops; this ensures that there is a contact to trace all assets issued. Microsoft Configuration Manager is used for the patching of Windows devices and further information on the Council’s Windows assets is available through Qualys, the vulnerability and configuration management software. Management have advised that better usage and asset monitoring information would be available in Service Now if information from Qualys could be integrated into Service Now using the Cyber Security Asset Management module provided by Qualys, but there would be a cost for this. For example, details of asset IP addresses or the most recent user to login is available in Qualys but has to be manually added for that information to be available in Service Now. 5. Procedures are in place to record and monitor the loss / breakage of IT assets across the Council (including schools) and potential fraud is reported and investigated on a timely basis. Reasonable Assurance Breakage of Corporate devices appears to be infrequent with only 85 laptops submitted for repair in 2024/25. IT assets reported as stolen are submitted to the Information Compliance Officer and a data breach form is prepared. Thefts of IT assets over the past 3 years are as follows: 2024 – 1 laptop, 2023 – 2 laptops, 2022 – 5 laptops. Other IT assets are recorded as ‘missing’ by Digital Services each year in the Service Now system, but these assets are not subsequently reported to the Information Compliance Officer (2024 – 22 devices, 2023 – 69 devices, 2022 – 36 devices). The Information Compliance Officer advised that these ‘missing’ devices, although relatively lower in risk due to device encryption, are still a potential information breach that should be reported as is currently done for all lost mobile phones. Corporate Fraud are not currently informed of IT asset losses. Reasonable policies and procedures have been developed by DI< for Chromebooks and Ipads issued to schools. Appropriate asset damage tracking processes have been developed and rolled out to all schools and appear to be operating well from the sample of 5 schools reviewed. A form must be prepared for all school leavers, and this includes collecting their device. Since the start of EFL, 803 Chromebook devices have not been returned by pupils (this represents approx. 4.2% of the 19,081 Chromebooks purchased since the start of EFL). Page 136 of 396
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Areas where expected controls are met/good practice No. Areas of Positive Assurance 1. Appropriate asset management systems are in place to allow the Council to manage and track its IT assets. 2 Services are knowledgeable in how to use their respective systems to support the Council’s asset management processes. 3. Mobile IT assets are issued to a named individual and the details of this are logged in the respective asset management system. 4. Comprehensive policies, procedures and processes have been developed to support the Council’s Equipped for Learning Project and significant rollout of Chromebooks to pupils including the tracking of asset damage and leavers’ management. 5 The Council’s IT assets are disposed of using a provider that has been assessed as appropriately secure. 6 Asset management information is provided by DI< to all schools. 8 Processes are in place and are operating effectively to remove systems access for employees that leave the Council. 9 Data breach procedures have been established for reporting asset thefts. Page 137 of 396
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Executive Summary: Revenue Financial Budget Monitoring Conclusion: Reasonable Assurance Revenue budget monitoring processes are in place, regular reports are produced and meetings with budget holders are taking place on a regular basis. However, material variances within Social Care services are not currently included in Council reports. Financial Directives require updating and Finance procedures should be documented. Background The Council has responsibility for setting an annual budget and monitoring expenditure and income against budget allocations. Budget monitoring is carried out by utilising the financial accounting software system, Integra Centros; and there are a range of other management information systems which provide data that is utilised by the Finance team and budget holders to evaluate the financial performance of services. The timing of financial information does not always allow accurate forecasting which creates inaccurate position statements and does not aid management decisions to address any financial issues in a timely manner. The Finance team have a key role in providing advice and analysis to service areas throughout the year on the financial impact of decisions made, to help ensure the Council continues to deliver the highest quality of services in Midlothian. The Medium-Term Financial Strategy (MTFS) details the general fund revenue statement forecast through to 2028/29 and identifies additional revenue savings and income required with the objective of achieving a financial-balanced budget. It also demonstrates assumptions used within budget projections and information from the Scottish Government. The Council had a General Fund Revenue Budget of approximately £295 million for the financial year 2024/25. As part of the budget setting process, Members were presented with a range of savings measures for consideration which were approved by Council. The Business Transformation Steering Group (BTSG) consider the necessary actions required to support the delivery of a balanced MTFS before any policy measures are presented to Council. Summary of findings & recommendations The following key findings and recommendations are highlighted, which have all been agreed by Management: • The Financial Directions require update to provide appropriate procedural instructions and responsibilities to budget holders; and budget monitoring procedures within the Finance team should be documented. Management have agreed to update and review the Financial Directives by December 2025 and have agreed to review good practice and consider establishing budget monitoring procedures within the Finance Team by December 2025. • Material variances within Adult Social Care services are not currently included in Council reports. Management have agreed to report the impact of material variances within Social Care services in Council reports from September 2025. • There is not an agreed / specific material variance amount above which consideration of reporting to Council should be given. Management have agreed to state in the Finance budget monitoring procedures the specific level of material variances which should be considered for reporting to Council by December 2025. • The reasons for any income shortfall identified within the formal budget monitoring are not always documented following budget monitoring meetings. Management have agreed to reinforce this process and include as part of the budget monitoring procedures by December 2025. • There is no documentation of the risk assessment completed of each service to indicate the frequency of budget reporting required. Management advised that there is an ongoing assessment of financial risk and flexing the budget monitoring approach and will implement a documented register of all service areas and their current risk assessments by December 2025. Page 139 of 396
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• Senior management budget monitoring meetings are held to assist with forecasting and budget monitoring, an action log is not always currently being documented. The process is currently being reviewed and any new process will ensure that appropriate documentation is maintained by December 2025. Recommendation Summary Recommendations Grade High Medium Low Total Current Report 3 7 10 Prior Report 3 4 - 7 Materiality As reported in February 2025, the projection of the General Fund balance as at 31 March 2025 was £20.965 million, of which £13.126 million is earmarked for specific use leaving a non-earmarked General Fund Balance of £7.839 million. Page 140 of 396
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Headlines Objectives Conclusion Comments 1. Revenue budgets are controlled in accordance with the Financial Regulations. Reasonable Financial Regulations are in place and any changes require the approval of Council. The Financial Regulations are supported by a series of Financial Directives. The Financial Regulations were approved by Council in June 2022 however the Financial Directives are still under review. There are no documented budget monitoring and reporting procedures within the Finance team. 2. Revenue budget setting is linked to planning processes and budgets are revisited when plans change. Reasonable Budgets are set annually, agreed with budget holders and senior management and are formally approved by Council. Budget reports are not produced on a period-by-period basis in areas considered to be low risk, however there is no documented risk assessment detailing the risk rating of all areas. 3. Revenue budget process and procedures are being completely appropriately by adequately trained officers. Reasonable Informal training is provided to new budget holders however a record is not maintained of the training provided. A questionnaire was issued to 55 budget holders (32 responses were received) and the majority were confident they understand the financial information they are receiving. Some points raised were that budget lines can be confusing and refresher training would be useful. Additional management comments received stated that the timing of financial information does not allow accurate forecasting which creates inaccurate position statements and does not aid management decisions to address any financial issues in a timely manner. 4. Revenue budget monitoring reporting for Elected Member; and senior management level is adequate. Limited Members receive a quarterly financial monitoring report of the general revenue fund however the report for the first quarter of each financial year is not received until August due to the timing of Council meetings. It was reported in February 2025 (end of quarter 3) that there was a projected net overspend of £2.168m which partly or mainly relates to recurring areas of financial pressure or slower than planned delivery of savings measures. The report does not highlight variances within the Adult Social Care areas – a verbal update of the significant overspend was provided to Council during 2024/25 and in formal MIJB reporting which is signposted as part of the reporting to Council. 5. Plans are in place for the monitoring of the achievement of identified savings. Reasonable As part of the budget setting process, Members approved a range of savings measures. Half yearly reports are presented to BTSG providing an update on the delivery of approved savings and this is also included within reports to Council on a quarterly basis. In February 2025, a report to Council stated that there remains £1.34 million of MTFS cost reductions either to be finalised or to be fully implemented and highlighted that a number of these are taking longer than planned to implement. Although income and saving targets within Services are regularly monitored, the reasons for any income shortfall identified within the formal budget monitoring are not documented following budget monitoring meetings. Page 141 of 396
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Areas where expected controls are met/good practice No. Areas of Positive Assurance 1. The Finance team hold regular meetings with budget holders and various budget boards / groups have been set up within Directorates which focus on monitoring of revenue budgets. Regular reports on forecast outturn and budget variances are provided to budget holders, senior management and Members. Material variances are investigated and discussed at the budget board / group meetings and actions are tracked on the material variance statements. In some areas, budget working papers are held on the shared network drive so that relevant budget holders can access them accordingly. 2. Budgets are set annually and include assumptions contained therein. Budgets are agreed with budget holders and senior management. The budget is reviewed and formally approved by Members each year at Council. 3. From our sample of questionnaire responses from budget holders, the majority of budget holders reported that they were satisfied with the completeness and accuracy of budget monitoring information provided to them and the Finance team provides effective ongoing support to budget holders. The Finance team provide one-to-one training for new budget holders. 4. Cost Centres are established to collect costs and incomes for a specific service area. This information is used to prepare / monitor budgets. Page 142 of 396
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Audit Committee Monday 16 June 2025 Item No 5.6 Council Tax Refunds Control Assurance Review Report by Chief Internal Auditor Report for Information 1 Recommendations The Audit Committee is asked to note the Council Tax Refunds Controls Assurance review completed by Internal Audit in June 2025, as a result of the letter from the Chair of the Accounts Commission to all Scottish Local Authority Chief Executives on the 10 January 2025. 2 Purpose of Report/Executive Summary Following receipt of a letter from the Chair of the Accounts Commission the Chief Executive of Midlothian Council requested that Internal Audit review the areas indicated in the letter against the processes for payment of Council Tax refunds in Midlothian Council. The Report concludes that the Council has good procedural controls in place, however there is evidence that compliance with these controls is not always being monitored and are not backed by appropriate systems controls for segregation of duties. Subsequent sample testing identified no evidence of fraud within the 2024/25 financial year Date 4 June 2025 Report Contact: Duncan Stainbank duncan.stainbank@midlothian.gov.uk Page 143 of 396
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2 3 Background 3.1 On 10 January 2025, the Chair of the Accounts Commission sent a letter to all Scottish Local Authority Chief Executives copying the Directors of Finance (see appendix 1). The letter highlighted the consideration that had been given to the report from the 2023/24 year on the significant council tax refund fraud perpetrated against Aberdeen City Council (see appendix 2). The Commission indicated that it was important to share the lessons the sector as a whole can learn from Aberdeen City’s experience. 3.2 Following receipt of this letter the Chief Executive referred this to Internal Audit to undertake an exercise to review if the control weaknesses in place in Aberdeen City Council, as highlighted in the report, also exist in Midlothian Council. This report provides the conclusion to this review 3.3 The review covered the following key areas in relation to Council Tax Refund Processes: • Segregation of Duties; • Systems Controls; • Reconciliations; • Systems Documentation; • Monitoring; and • Counter Fraud Arrangements. 3.4 The report concludes that the Council has good procedural controls in place, however there is evidence that compliance with these controls is not always being monitored and are not backed by appropriate systems controls for segregation of duties. Subsequent sample testing identified no evidence of fraud within the 2024/25 financial year. Implementation of the 3 recommendations made will return the controls in this area to a reasonable state going forward. One recommendation is for the refresh of the Counter Fraud Policies which was already planned for in 2025/26. Page 144 of 396
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3 4 Report Implications (Resource, Digital, Risk and Equalities) 4.1 Resource Resources to implement the recommendations made in the report have been identified by service management as appropriate. 4.2 Digital The systems supplier has already been asked to develop the required solution this as part of an ongoing upgrading project. 4.3 Risk Implementation of the recommendations made in the report will reduce the risk of fraud within the Council Tax Refunds processes. Further consideration of the risks highlighted across the Council will further assist in reducing the Councils risks. 4.4 Ensuring Equalities This report does not relate to a new or revised policy, service or budget change, which affects people (the public or staff), so an Integrated Impact Assessment (IIA) is not an applicable consideration. 4.5 Additional Report Implications (See Appendix A) Page 145 of 396
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4 APPENDIX A – Additional Report Implications A.1 Key Priorities within the Single Midlothian Plan Although this report does not relate directly to the key priorities within the Single Midlothian Plan (Reducing the gap in economic circumstances; Reducing the gap in learning outcomes; Reducing the gap in health outcomes; and Reducing the impact of climate change) Note is made that these key prioities are reflected in the audit plan and any links will be identified as part of each assurance review planning process going forward. A.2 Key Drivers for Change Key drivers addressed in this report: Holistic Working Hub and Spoke Modern Sustainable Transformational Preventative Asset-based Continuous Improvement One size fits one None of the above Midlothian Council is committed to creating a great place to grow supported by the 9 drivers for change. Implementing the 9 drivers for change in practice is applicable to the Council’s Internal Audit service provision to assist the Council in achieving its objectives. A.3 Key Delivery Streams Key delivery streams addressed in this report: One Council Working with you, for you Preventative and Sustainable Efficient and Modern Innovative and Ambitious A.4 Delivering Best Value The definition of Internal Auditing within the Public Sector Internal Audit Standards (PSIAS) is “Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organisation’s operations. It helps an organisation accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes.” Page 146 of 396
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5 Implementation by Management of the actions associated with these consulting recommendations, are designed to improve internal control and governance arrangements and management of risks, underpinning the Council’s own continuous improvement arrangements to enhance its effectiveness, thus supporting the delivery of the Council’s best value duties. A.5 Involving Communities and Other Stakeholders The Chief Internal Auditor is accountable to the Audit Committee which, in fulfilling its governance role, acts as a bridge between the Council and other stakeholders. This report was created with consultation from Service and Senior Management. A.6 Impact on Performance and Outcomes The Findings and Recommendations from Internal Audit work during the year are designed to assist the Council in improving its performance and outcomes. A.7 Adopting a Preventative Approach Internal Audit assurance work includes assessments on when a preventative approach can be adopted. A.8 Supporting Sustainable Development This report does not relate directly to supporting sustainable development. Good governance is important to enable Midlothian Council to achieve its objectives. Page 147 of 396
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Chief Internal Auditor Duncan Stainbank Auditor: Duncan Stainbank Assurance Review To Kevin Anderson, Executive Director Place Saty Kaur, Chief Officer Corporate Solutions Jacqui Dougall, Business Service Manager David Gladwin, Chief Financial Officer and Section 95 Officer On Council Tax Refunds Fraud Control Assurance Review 4th June 2025 Page 149 of 396
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Midlothian Council Internal Audit Assurance Review Council Tax refunds 1 Background 1.1 On 10 January 2025, the Chair of the Accounts Commission sent a letter to all Scottish Local Authority Chief Executives copying the Directors of Finance (see appendix 1). The letter highlighted the consideration that had been given to the report from the 2023/24 year on the significant council tax refund fraud perpetrated against Aberdeen City Council (see appendix 2). The Commission indicated that it was important to share the lessons the sector as a whole can learn from Aberdeen City’s experience. 1.2 The letter further indicates that: “as finances get tighter and decisions are taken to rationalise back-office functions to protect front line services for our communities, it is critical that your staff across all functions have and implement effective financial controls, which safeguard public assets, irrespective of the level of income and expenditure involved.” “While this particular fraud was complex, weaknesses in the council's internal controls allowed the fraud to continue over a prolonged period. Controls exist to safeguard both the employees and the employer. In this case, failure to implement controls and a lack of monitoring enabled an abuse of authority which, when combined with a detailed operational knowledge, provided the opportunity to withdraw funds inappropriately.” 1.3 The Chief Executive referred this to Internal Audit to undertake an exercise to review if the control weaknesses in place in Aberdeen City Council, as highlighted in the report, also exist in Midlothian Council. 2 Findings For the key objectives, the following points were noted: Segregation Of Duties / System Controls 2.1 The Council Tax team have appropriate procedures in place for making credit balance refunds that would indicate that there is a requirement for request and authorisation of any credit balance refund to be completed before the refund has been paid. However, when asked to confirm if the Council Tax system enforces this segregation of duties it was established that this is not the case. 2.2 Testing of a sample of 32 credit balance refunds in 2024/25 established that for 3 cases Revenues Officers were able to issue refunds above their limit (set by the procedures) due to the lack of any system control preventing this action. Reconciliations 2.3 The Finance team complete regular reconciliations of the Council tax system to the financial ledger which cover all payments. Page 150 of 396
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Midlothian Council Internal Audit Assurance Review Council Tax refunds Systems Documentation 2.4 Appropriate procedures and systems documentation are in place for credit balance refunds. There were 11 refunds where a refund memo was not created in accordance with the refund procedures and there were 6 refunds when a refund letter was not sent out confirming the refund made, which would provide assurance that a notification system was in place for refunds. There are some concerns that improvements are still required to ensure that procedural controls are adhered to particularly as the systems controls are not in place. Monitoring 2.5 The level of credit balances is reviewed by the Revenues team on an annual basis and the Council currently has circa £200k of credit balances remaining on council tax accounts. Processes are undertaken to transfer balances to new accounts or refund balances when details of the council taxpayer are known. However, there is no monitoring of the payment of credit balance refunds. This should be put in place particularly to identify transactions that have not followed the appropriate refund procedures including segregation of duties, and to review payments to duplicate bank details on at least a six-monthly basis. Counter Fraud Arrangements 2.6 The Council has robust counter fraud arrangements which include regular Integrity Group meetings, a whistleblowing policy and links to report suspected fraud, whistleblowing, bribery and corruption. A substantial number of reports are made and investigated on an annual basis. There is however a requirement, which was already planned for, to review the Counter Fraud, Bribery and Corruption policies and the Whistleblowing policy during the 2025/26 financial year. These policies will then be presented to the Integrity Group for approval and communicated across the Council to further enhance the controls in place to ensure detection of any issues. 3 Conclusion Based on our review, the Council has good procedural controls in place, however there is evidence that compliance with these controls is not always being monitored and are not backed by appropriate systems controls for segregation of duties. Subsequent sample testing identified no evidence of fraud within the 2024/25 financial year. Implementation of the recommendations made will return the controls in this area to a reasonable state going forward. 4 Recommendations Recommendation 1: The Council tax system supplier should be requested to ensure that the system implements rules for all refund payments that require 2 individual accounts, including the value escalations in accordance with the procedures, to confirm refund payment details before payments are made and this should be progressed to full implementation as soon as possible. Management Response Page 151 of 396
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Midlothian Council Internal Audit Assurance Review Council Tax refunds The systems supplier has already been asked to develop this as part of an ongoing upgrading project. Responsible Officer and Target Date Saty Kaur/Jacqui Dougall: June 2026 Recommendation 2: Revenues Management should implement a systems reporting process to identify all refund details on a monthly basis and review those that have not been completed within the procedures including, but not restricted to, segregation of duties requirements, delivery of letters and correct bank details being used. Management Response There are on average, 250 refunds every month (based on the volume for 2024/25). The system supplier has been requested to implement controls on segregation of duties and values. Once we have had a response as to whether this can be implemented and a timeline for this, then a monthly reporting process will be designed. It will not be possible to manually check every refund transaction however a review of the procedure to reflect the system changes will be made and sample testing will follow thereafter. Responsible Officer and Target Date Saty Kaur/Jacqui Dougall: June 2026 Recommendation 3: Midlothian Council Whistleblowing, Fraud and Bribery and Corruption policies should be updated and approved by the Integrity Group and then communicated effectively across the Council. Management Response This will be completed in line with the planned expectation. Responsible Officer and Target Date Duncan Stainbank/Integrity Group, December 2025. Page 152 of 396
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4th Floor 102 West Port Edinburgh EH3 9DN T: 0131 625 1500 E: info@audit-scotland.gov.uk www.audit-scotland.gov.uk To All Chief Executives 10 January 2025 Copied to: Directors of Finance; External auditors Dear Chief Executive, You may be aware that, on 12 December, the Accounts Commission considered a report from the Controller of Audit (under powers in s102 (1) of the Local Government (Scotland) Act 1973) in relation to a significant council tax refund fraud perpetrated against Aberdeen City Council. In her remarks to the Commission, the Controller made the point that this case should act as a “cautionary tale”. In response, the Commission decided that, in addition to publishing findings (which can be found here), it would be important to share with all Chief Executives, copying in relevant local government professional networks, the lessons the sector as a whole can learn from Aberdeen City’s experience. As finances get tighter and decisions are taken to rationalise back-office functions to protect front line services for our communities, it is critical that your staff across all functions have and implement effective financial controls, which safeguard public assets, irrespective of the level of income and expenditure involved. While this particular fraud was complex, weaknesses in the council's internal controls allowed the fraud to continue over a prolonged period. Controls exist to safeguard both the employees and the employer. In this case, failure to implement controls and a lack of monitoring enabled an abuse of authority which, when combined with a detailed operational knowledge, provided the opportunity to withdraw funds inappropriately. This should serve as a timely reminder for all councils to consider whether the following fundamental internal controls are operating effectively: • segregation of duties: ensuring access to systems are restricted to appropriate levels (to negate the possibility of individuals processing transactions all the way through the payments process). • reconciliations: ensuring feeder systems are effectively reconciled to other systems (e.g. general ledger); using third party information (suppliers’ statements) and reconciling with payment systems. • system documentation: system documentation should be maintained which details key controls to be carried out by staff to prevent fraud or error. • monitoring: scrutiny monitoring should be at a level that would allow managers to identify anomalous payments at an early stage. • counter-fraud arrangements: refresh and promote the counter-fraud policy with staff. Page 153 of 396
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It is your responsibility to ensure that such arrangements are in place to help assure elected members and the public that risks are being identified and managed effectively. I would encourage you all to use the annual governance statement as an opportunity to take stock of the key controls and processes and whether self-assessment procedures are sufficient to provide elected members and officers with the required assurances. Internal and external auditors have an important role to play in helping public bodies assess their control environment and evaluating the effectiveness of controls, but they are not responsible for identifying all instances of fraud. If you have any questions or queries in relation to the report on the Aberdeen City Council case specifically or on any other aspect of the Commission’s work, please do not hesitate to email acsupport@audit-scotland.gov.uk I look forward to engaging with you during 2025. Yours sincerely, Jo Armstrong Chair, Accounts Commission Page 154 of 396
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The 2023/24 audit of Aberdeen City Council Council tax refunds – a significant fraud Prepared by the Controller of Audit January 2025 Page 155 of 396
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The 2023/24 audit of Aberdeen City Council | 2 Contents Commission findings 3 Introduction 5 Timeline of key events 7 Council tax – accounts in credit 9 Strengthening the council’s internal controls 14 The council’s response to taxpayers 19 Conclusions 20 Accessibility You can find out more and read this report using assistive technology on our website www.audit.scot/accessibility. Page 156 of 396
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Commission findings | 3 Commission findings The Accounts Commission accepts the Controller of Audit’s report on a matter arising from the 2023/24 audit of Aberdeen City Council – a significant council tax refund fraud perpetrated against the council. The Commission welcomes that the Controller used her powers to bring this issue, and the council’s response, to the Commission’s attention. Following consideration of the report (presented at page 5) at its meeting on 12 December, the Commission has made the findings presented below: 1 The member of staff who identified this fraud should be commended, for having the confidence to initially raise the issue and to then escalate it when they remained concerned by the response received. The Commission wishes to stress the importance of the council keeping its policies, training, and procedures in relation to counter-fraud and whistleblowing up to date and communicated to all staff. This will ensure that staff continue to have the confidence to raise concerns if they suspect something fraudulent may be happening. 2 The Commission recognises that the council reacted quickly once the suspected fraud was brought to their attention and has made progress to recover lost funds. However, this case exposed real weaknesses in internal controls, allowing the perpetrator’s actions to go unnoticed for 17 years. While controls and policies were in place, reports were not routinely run or reviewed and there was no scrutiny by the council to ensure the effectiveness of controls, something that is of concern to the Commission. 3 The Commission is pleased to see evidence that the council is taking the matters highlighted by this fraud seriously, including the segregation of duties immediately following the issue coming to light, the development of an improvement plan by the service, and the engagement of internal audit to further strengthen key controls. However, controls have yet to be embedded in a way that fully addresses all the issues identified. December 2024 was identified as a key implementation date for improvement actions, but the absence of interim milestones makes it difficult to assess progress on the ground. As a matter of priority, the Commission asks the council’s ‘Task and Page 157 of 396
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Commission findings | 4 Finish’ Group to confirm to elected members and management team when all actions will be complete, given it has now been more than a year since the perpetrator was charged. 4 There is an important obligation on Aberdeen City Council to have and to implement effective financial controls, which safeguard public assets, across all its functions, irrespective of the level of income and expenditure involved. Building on this experience, the Commission would urge the council to ensure that no areas are neglected within their control environment and that the council’s internal audit function regularly considers areas that might be perceived as low risk when developing audit plans. Through governance processes, we expect to see evidence that the council’s management team is acting upon and applying recommendations from both external and internal auditors to address potential weaknesses and risks. 5 The Commission expects all councils in Scotland to ensure that fundamental internal controls are in place and working effectively. Such controls include appropriate segregation of duties, ensuring systems reconciliations are carried out, maintenance of system documentation (detailing key controls), and budget monitoring. All councils should also be self-assessing controls and processes through their annual governance statement. It is also important that across all councils, internal and external auditors raise and discuss any areas of potential concern. Page 158 of 396
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Introduction | 5 Introduction 1. The Code of Audit Practice requires auditors to produce an Annual Audit Report (AAR) summarising the significant matters arising from their audit work. For local authorities, auditors address the AAR to elected members and the Controller of Audit. 2. I have reviewed the 2023/24 AAR for Aberdeen City Council (the council) from the appointed auditor, Michael Oliphant (Audit Services Group, Audit Scotland). The auditor’s AAR was considered by the council’s Audit, Risk and Scrutiny Committee on 27 June 2024. The auditor issued an unmodified opinion on the council’s 2023/24 annual accounts. 3. The auditor reported on a significant fraud identified by the council in September 2023. A former employee had diverted fraudulent payments totalling £1.109 million to his own bank accounts over a period of 17 years. Having plead guilty to criminal charges of embezzlement, the perpetrator received a four-year prison sentence at the High Court in Edinburgh in July 2024. 4. I have decided to use the reporting powers available to me under s102 (1) of the Local Government (Scotland) Act 1973 to bring this issue, and the council’s response, to the Commission’s attention. Background 5. The perpetrator identified council tax accounts with historic credit balances and used their unsupervised authority to issue council tax refunds of up to £3,000, to divert refunds to themselves, often on a weekly basis. 6. There was no major impact on the financial statements during this period, covering financial years 2006/07 to 2023/24 and the payments did not represent a material misstatement in any given year. There was no impact on the council’s budget as the amounts were taken from balances held by the council on behalf of taxpayers who had made overpayments on their council tax accounts. Nevertheless, the funds were held for safekeeping by the council who will need to manage any associated reputational risk and ensure credit balances are restored. The council has reached agreement with the perpetrator to recover funds. In addition, a claim to the council’s insurers is currently under negotiation but is expected to cover the remainder of the loss. Page 159 of 396
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Introduction | 6 7. There were failures in controls within the council that allowed this fraud to continue over a prolonged period. In particular, a lack of segregation of duties and monitoring in relation to council tax refunds allowed the perpetrator to transfer balances between council tax accounts, input bank account details and process refunds without any further checking of processing. Page 160 of 396
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Timeline of key events | 7 Timeline of key events Date Event 1 November 2006 – 6 September 2023 Perpetrator processed 655 payments to himself totalling £1.109 million. 12 September 2023 Staff member identified and investigated an irregular transaction on a council tax account and raised the entry with the perpetrator. The perpetrator subsequently repaid the queried amount into the council tax standing order bank account. 13 September 2023 The perpetrator contacted staff member to discuss irregular transaction, but staff member was not convinced by the explanation offered. 14 September 2023 The perpetrator reversed all entries relating to the last embezzlement transaction. 14 September 2023 Staff member investigated further and raised with Council Tax and Recovery Manager. Senior revenues staff and the council’s counter-fraud team advised. 15 September 2023 The perpetrator was suspended (under a precautionary suspension) and all access to buildings and computer systems was disabled. 21 September 2023 Counter-fraud team contacted Police Scotland following initial investigation. 21/22 September 2023 Chief Officer – Finance advised members of the Corporate Management Team, Internal and External Audit. Director advised Councillor Malik (Audit, Risk and Scrutiny Committee Convener) and Councillor McLellan (Finance and Resources Committee Convener). September/October 2023 Chief Officer – Finance undertook review of systems and processes. Improvement plan produced. 26 November 2023 The perpetrator was arrested and charged by Police Scotland. 12 December 2023 A formal disciplinary meeting was held and the accused was dismissed. 21 December 2023 All elected members advised of the matter and the upcoming court appearance. Page 161 of 396
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Timeline of key events | 8 Date Event 12 February 2024 Report to Audit, Risk and Scrutiny Committee. 17 April 2024 Follow-up report to full council. June 2024 The High Court in Edinburgh found perpetrator guilty of embezzlement of £1.109 million from the council. He was later jailed for four years. July-September 2024 Internal Audit requested to review the implementation of the service’s improvement plan. A review was undertaken and reported to management in September 2024. Page 162 of 396
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Council tax – accounts in credit | 9 Council tax – accounts in credit 8. The council administers the council tax database which includes approximately 124,500 properties and raises annual income in excess of £100 million (Exhibit 1). The database requires to be regularly updated for changes in taxpayers’ circumstances, such as changes in address or other household details. The council offers taxpayers a number of payment options although direct debit is the most popular. 9. Unpaid income is collectable for all prior years and the council pursues outstanding debts for all years until they are either paid or identified as uncollectable. Over the last 17 years, approximately £2 billion of council tax income was administered and collected. Exhibit 1 Council tax credit balances as a percentage of council tax Year Council tax billed (net of discounts) £000 Credit balances at year end £000 Credits as a percentage of council tax billed 2023/24 139,111 366 0.26% 2022/23 130,850 441 0.34% 2021/22 126,185 482 0.38% 2020/21 123,777 454 0.37% 2019/20 120,282 281 0.23% 2018/19 113,871 376 0.33% Source: Aberdeen City Council audited accounts and council tax reports 10. At 31 March 2024, the cumulative value of accounts in credit covering all council tax years was £1.2 million. This comprised 6,600 accounts of which 95 per cent had balances less than £500. Exhibit 1 also gives an indication of the relatively small scale of council tax credit balances when compared with the amount of council tax billed each year. In general, the balances on these accounts are less than 0.5 per cent of billing totals. For example, with reference to financial year 2021/22, council tax billed Page 163 of 396
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Council tax – accounts in credit | 10 amounted to £126.185 million while accounts in credit for that financial year were £482,000 at 31 March 2022. 11. There is no single reason for an account to be overpaid (in credit) but many will arise from a change in address where the taxpayer has not provided a forwarding address. When a taxpayer changes address within the city area, any credit balance is transferred to the new council tax account. If the move is outwith the city, a refund is required. Prior to 2006, this was dependent on taxpayers getting in touch to request a refund. As most amounts are small, this generally did not happen. In 2006, the council introduced a policy to automatically refund paying bank accounts for any overpayments which had arisen by direct debit. Exhibit 2 shows the age of the historical balances held by the council at 31 March 2024 on behalf of taxpayers. Exhibit 2 Age of credit balances at 31 March 2024 Source: Aberdeen City Council reports 12. Where bank details are not held or an address is not known, the council sends a letter to the property address to enable a letter to be forwarded should a mail redirection be in place. There is no time limit for a taxpayer to make contact and seek a refund. Page 164 of 396
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Council tax – accounts in credit | 11 Scale of embezzlement 13. A total of 655 payments amounting to £1.109 million and involving an estimated 5,700 council tax accounts were made to the embezzler’s bank accounts over a 17-year period between November 2006 and September 2023. 14. The total value of the accounts in credit at 31 March 2024 was approximately £1.2 million. Had funds not been withdrawn inappropriately, the level of balances would be £2.4 million. Exhibit 3 shows the combined total of the balances on the accounts in credit for recent years with the amounts embezzled. Exhibit 3 Cumulative fraud and credit balances Source: Aberdeen City Council reports Page 165 of 396
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Council tax – accounts in credit | 12 15. Exhibit 4 provides details of the fraudulent refunds made including the total and average values and the number of refunds on an annual basis. Exhibit 4 Council tax fraudulent payments – number and value by financial year Year Value of fraudulent refunds per year (£) Number of refunds Average Value (£) 2023/24 46,921 16 2,932 2022/23 82,836 29 2,856 2021/22 90,307 31 2,913 2020/21 74,368 26 2,860 2019/20 94,835 36 2,634 2018/19 87,166 33 2,641 2017/18 69,809 26 2,685 2016/17 62,331 25 2,493 2015/16 67,659 31 2,182 2014/15 78,970 38 2,078 2013/14 67,306 38 1,771 2012/13 55,114 40 1,378 2011/12 56,602 46 1,230 2010/11 46,925 57 823 2009/10 32,878 44 747 2008/09 45,499 75 607 2007/08 41,335 53 780 2006/07 8,413 11 765 Total 1,109,274 655 Source: Aberdeen City Council reports Page 166 of 396
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Council tax – accounts in credit | 13 16. The perpetrator, as a team leader, had authority to process refunds for amounts between £500 and £3,000. Accounts in credit are mainly smaller amounts and therefore the perpetrator needed to collate a number of balances together in a single council tax account to produce a total amount in the range he could authorise which were then processed as a refund to his own bank account. 17. Identification of the embezzlement was the result of an officer routinely checking arrears recovery reports with the council tax computer system. Multiple transfers were noticed on an account in credit and not being satisfied with the explanation received from the perpetrator, as team leader, the officer referred the matter to a more senior officer. The perpetrator was promptly suspended thereafter, and investigations commenced. Page 167 of 396
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Strengthening the council’s internal controls | 14 Strengthening the council’s internal controls Council tax refunds 18. The perpetrator was a team leader in the council tax team which forms part of People and Citizens services within the Corporate Services Directorate. While the service and job titles have been restructured on several occasions over the years, the individual held this, or similar roles, within council tax administration since 1988. Key responsibilities included: • supervising council tax and recovery administration • ensuring documentation is accurate and issued on time • contacting customers by means of writing, telephone and visits • undertaking quality checks on council tax and recovery administration • recording performance and producing reports. 19. As part of the team leader role, the individual could authorise refunds of between £500 and £3,000. There were controls in place (Exhibit 5, page 15) which required team leaders to involve another team leader in checking and processing refunds to ensure adequate segregation of duties. While the procedures existed, there were no checks to ensure they were adhered to. It was therefore possible for the perpetrator to process refunds without anyone else being involved. Failure to implement controls enabled an abuse of authority which when combined with a detailed knowledge of council tax administration, obtained over many years of employment, provided the opportunity to withdraw funds inappropriately. 20. Given the number of accounts affected and the number of transfers between accounts for each fraudulent payment, the perpetrator required a degree of planning and fore thought to select council tax accounts, process transfers between accounts and make payments. Page 168 of 396
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Strengthening the council’s internal controls | 15 Exhibit 5 Council’s existing controls for processing refunds Level Processing Tier 1: Refunds up to £500 • Council tax team members have the authority to input bank details and process refunds to customers. Tier 2: Refunds between £500 and £3,000 • Council tax team leaders, to carry out their role, have the authority and system access to input bank details and process refunds to customers without any scrutiny. • Council tax team members pass the refund to a team leader for checking and processing by the team leader on Capita One Revenues & Benefits. • Refunds created by council tax team leaders must be passed directly to another team leader for checking and processing. Tier 3: Refunds over £3,000 • Council Tax and Recovery Manager, to carry out their role, has the authority and system access to input bank details and process refunds to customers without any scrutiny. • Refunds created by council tax team members are passed to team leaders for checking and the refund is then passed to Council Tax and Recovery Manager for processing. • Refunds created by a council tax team leader, are passed directly to Council Tax and Recovery Manager for checking and processing by the Council Tax and Recovery Manager. Source: Aberdeen City Council reports 21. Managing accounts in credit did not feature as a high priority within the council’s internal control systems. The amounts involved were small and, initially, any refund depended on a taxpayer seeking a request. In addition, once automatic direct debit payments were available, it was expected many overpayment issues would be resolved. 22. Controls were in place in the form of authority limits. There were no exception reports for this area of work and reports of refunds paid were not routinely run or reviewed. Had this been the case, the embezzlement would have been identified much earlier. An average council tax bill is currently around £2,000 to £3,000 per annum and while an occasional refund of a whole year’s council tax might arise, several refunds of this scale every month would have attracted attention. 23. At 31 March 2024, there were only 105 accounts (Exhibit 6, page 16) with credit balances over £1,000. By comparison, there were 16 fraudulent refunds in 2023/24 with an average value of £2,932 (Exhibit 4). Page 169 of 396
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Strengthening the council’s internal controls | 16 Exhibit 6 Council tax credit balances at 31 March 2024 Year Number % £0 to £500 6,243 95 £500 to £1,000 245 4 £1,000 to £1,500 49 1 £1,500 to £2,000 27 – £2,000 to £2,500 12 – £2,500 plus 17 – Total 6,593 100 Source: Aberdeen City Council reports The internal control environment 24. In the public sector, there are recognised fraud risks, including those relating to tax receipts, welfare benefits, grants and other claims made by individuals and organisations. Bodies are responsible for implementing effective systems of internal control, including internal audit, which safeguard public assets and prevent and detect fraud, error and irregularities, bribery and corruption. 25. Auditors aim to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes their opinion. Reasonable assurance is a high level of assurance but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. 26. Irregularities that result from fraud are inherently more difficult to detect than irregularities that result from error as fraud may involve collusion, intentional omissions, misrepresentations, or the override of internal control. The capability of the audit to detect fraud and other irregularities depends on factors such as the skilfulness of the perpetrator, the frequency and extent of manipulation, the degree of collusion involved, the relative size of individual amounts manipulated, and the seniority of those individuals involved. 27. As part of the financial statements audit, the external auditor regards council tax income as a material financial system and considers the key controls in place. This focuses on the key aspects of the income accounts including billing (including discounts and exemptions), collection and the adequacy of the provision for non-collection to ensure that council tax income is not materially misstated. Page 170 of 396
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Strengthening the council’s internal controls | 17 28. When planning audit assignments, internal audit consider: • the significant risks to the activity’s objectives, resources and operations and the means by which the potential impact of risk is kept to an acceptable level • the adequacy and effectiveness of the activity’s governance, risk management and control processes compared to a relevant framework or model. 29. Internal audit routinely undertake audits of council tax administration. The scope might focus on one aspect of administration or take a wider view across the service. The last audit which included some consideration of refunds was a review of council tax billing carried out in 2016. This included samples of reliefs, payments and refunds. In respect of refunds, the auditor reported that the sample was correctly calculated, supported by appropriate documentation, authorised and refund payments had been made to the correct bank accounts. Improvements in the council’s internal controls 30. The council was quick to respond once the suspected fraudulent activity was brought to officers’ attention. Internal counter-fraud officers undertook initial enquiries before referring the matter to Police Scotland. Disciplinary proceedings were quickly enacted. This resulted in the individual pleading guilty to the embezzlement of funds and receiving a prison sentence. 31. The Chief Officer – Finance undertook a review of the systems and processes operating around accounts in credit and refunds and provided the Audit, Risk and Scrutiny Committee with an update in February 2024. Immediate action was taken in October 2023 to strengthen segregation of duties between processing and approving refunds and inputting bank details. 32. An improvement plan was prepared by the service covering council tax refunds and wider banking and supplier payment controls. Ten actions were identified for which prompt steps were taken to implement five and the remainder, with one exception due in July 2024, were prioritised for implementation by December 2024. Given the passage of time since the fraud was identified, the inclusion of interim milestones would have been helpful to maintain focus and demonstrate progress. 33. The council’s officer-led risk board monitored progress with the actions between March and October 2024. This responsibility has now passed to a Task and Finish Group which has recently been convened to oversee completion of the actions and provide assurance to the corporate management team. Membership includes a range of finance, council tax and governance officers. 34. In July 2024, the Chief Officer – Finance sought assurance that key control weaknesses had been addressed and engaged internal audit to assess progress with implementation and offer further considerations to Page 171 of 396
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Strengthening the council’s internal controls | 18 strengthen the framework. Work has been undertaken to address the improvement actions identified by the service. In some cases, the associated controls have yet to be embedded in a way that fully addresses the issues identified. The chief internal auditor also identified a number of additional system-wide risks and made further recommendations. 35. In the chief internal auditor’s view, most actions were therefore only partially complete with some expected to take longer than the target dates previously reported by the service. The Task and Finish Group have recently taken ownership of the improvement plan, including the additional recommendations, and now need to increase momentum by prioritising the additional recommendations and allocating clear responsibilities and timescales for action. Lessons for others 36. While the fraud was complex, weaknesses in the council's internal controls facilitated the fraud and meant that it was not detected for some time. In particular, the council had controls in place but there was no scrutiny to ensure the effective operation of these controls. All councils should consider whether the following fundamental internal controls are operating effectively: • Segregation of duties: ensuring access to systems are restricted to appropriate levels (to negate the possibility of individuals processing transactions all the way through the payments process). • Reconciliations: ensuring feeder systems are effectively reconciled to other systems (eg, general ledger); using third-party information (suppliers’ statements) and reconciling with payment systems. • System documentation: system documentation should be maintained which details key controls to be carried out by staff to prevent fraud or error. • Monitoring: scrutiny monitoring should be at a level that would allow managers to identify anomalous payments at an early stage. • Counter-fraud arrangements: refresh and promote the counter- fraud policy with staff. 37. The processes around the annual governance statement also provide a useful opportunity for councils to take stock of the key controls and processes in place and whether self-assessment processes are sufficient to provide elected members and officers with the required assurances. Page 172 of 396
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The council’s response to taxpayers | 19 The council’s response to taxpayers 38. The council is acutely aware that accounts in credit balances belong to taxpayers and that the funds are held for safekeeping by the council. The priority for the council has therefore been to make sure that the individual council tax accounts affected were corrected and credit balances reinstated. 39. Since February 2024, there has been ongoing work to identify all accounts affected by the embezzlement. So far, around 1,400 accounts (25 per cent) have been identified from the estimated 5,700 accounts affected. 40. At this stage, no attempt has been made to contact taxpayers and no refunds have been made. There are practical challenges of providing a refund to taxpayers often years after the event, who had not already been located at the time. 41. The council intends to try to establish contact with the relevant taxpayers and where this is not possible, revised procedures for managing accounts in credit will be applied. When there is no response to follow up correspondence, a credit balance will be cleared by writing the amount back in the council tax system. Should a taxpayer ever identify themselves to the council in the future however, the money remains available for repayment. 42. Provision was made in the 2023/24 annual accounts for the loss of funds. The council expects to recover the loss through a combination of cash from the pension of the perpetrator and a claim on the council’s insurance. Page 173 of 396
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Conclusions | 20 Conclusions 43. There were failures in controls within the council that allowed this fraud to continue over a prolonged period. In particular, a lack of segregation of duties and monitoring in relation to council tax refunds allowed the perpetrator to transfer balances between council tax accounts. 44. Controls exist to safeguard both the employees and the employer. In this case, failure to implement controls enabled an abuse of authority which, when combined with a detailed knowledge of council tax administration, provided the opportunity to withdraw funds inappropriately. 45. In totality, the scale of the fraud was significant. There was no major impact on the individual financial statements from 2006/07 to 2023/24 and the payments did not represent a material misstatement in any given year. 46. The amounts were taken from balances held by the council on behalf of taxpayers who had made overpayments on their council tax accounts. The council recognises its safeguarding role, and to date, has identified around 25 per cent of the accounts affected. No attempt has yet been made to contact taxpayers and make refunds. 47. Once an irregular transaction was identified in September 2023, the council acted quickly to deal with the individual, the situation and take corrective action. Key controls such as segregation of duties were promptly revised and an improvement plan of prioritised actions was developed. Good progress has also been made with processes to recover lost funds. 48. Work was undertaken to address the improvement actions identified by the service but some of the associated controls have yet to be embedded in a way that fully addresses the issues identified. Management requested internal audit review progress being made against the improvement plan and consider controls to further strengthen the framework around accounts in credit and refunds. A number of additional system-wide risks were duly identified and further recommendations were made. 49. In the chief internal auditor’s view, most actions were therefore only partially complete with some expected to take longer than the target dates previously reported by the service. The Task and Finish Group have recently taken ownership of the improvement plan including the additional recommendations and now need to increase momentum. Page 174 of 396
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Conclusions | 21 50. The council generally has a sound system of internal controls in place but should take the opportunity to undertake a risk assessment of its wider internal control and counter-fraud arrangements and use the annual governance statement process to review its self-assessment arrangements across services. Page 175 of 396
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The 2023/24 audit of Aberdeen City Council Council tax refunds – a significant fraud Audit Scotland, 4th Floor, 102 West Port, Edinburgh EH3 9DN Phone: 0131 625 1500 Email: info@audit.scot www.audit.scot ISBN: 978 1 915839 59 6 AS.5.0 Page 176 of 396
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Audit Committee Monday 16 June 2025 Item No 5.7 Internal Audit Annual Assurance Report 2024/25 Report by Chief Internal Auditor Report for Decision 1 Recommendations The Audit Committee is asked to: a) Consider the Internal Audit Annual Assurance Report 2024/25 (Appendix 1), and assurances contained therein; and b) Provide any commentary thereon, including any further actions required by Management. 2 Purpose of Report/Executive Summary The purpose of this report is to present to the Audit Committee the Internal Audit Annual Assurance Report for the year to 31 March 2025 which includes the Chief Internal Auditor’s independent assurance opinion on the adequacy of Midlothian Council's overall control environment. The Public Sector Internal Audit Standards (PSIAS) require that the chief audit executive, the Council’s Chief Internal Auditor, provides an annual internal audit opinion and report on the adequacy and effectiveness of the Council’s governance, risk management and internal controls to support the preparation of the Annual Governance Statement. This is in support of the overall governance arrangements of the Council, as set out in the Local Code of Corporate Governance. To meet the requirements of the PSIAS, the Internal Audit Annual Assurance Report 2024/25 (Appendix 1) includes the Chief Internal Auditor’s annual opinion, provides details of the Internal Audit activity and performance during the year to fulfil its role, and summarises the outcomes of assessments of the Internal Audit service against the PSIAS. Date 1 June 2025 Report Contact: Duncan Stainbank duncan.stainbank@midlothian.gov.uk Page 177 of 396
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3 Background 3.1 The Local Authority Accounts (Scotland) Regulations 2014 that came into force on 10 October 2014 require a local authority to operate a professional and objective internal auditing service. This service must be provided in accordance with recognised standards and practices in relation to internal auditing. Recognised standards and practices are those set out in the Public Sector Internal Audit Standards: Applying the IIA International Standards to the UK Public Sector (PSIAS). The standards require internal audit to have suitable operational independence from the organisation. 3.2 The Public Sector Internal Audit Standards (PSIAS) 2017 require that: “The chief audit executive [MLC’s Chief Internal Auditor] must deliver an annual internal audit opinion and report that can be used by the organisation to inform its governance statement. The annual internal audit opinion must conclude on the overall adequacy and effectiveness of the organisation’s framework of governance, risk management and control. The annual report must incorporate: • the opinion; • a summary of the work that supports the opinion; and • a statement on conformance with the Public Sector Internal Audit Standards and the results of the quality assurance and improvement programme.” 3.3 The Terms of Reference of the Midlothian Council Audit Committee states: • The Audit Committee is a key component of Midlothian Council’s corporate governance. It provides an independent and high-level focus on the audit, assurance and reporting arrangements that underpin good governance and financial standards. • The purpose of the Audit Committee is to provide independent assurance to Elected Members of the adequacy of the risk management framework and the internal control environment. It provides independent review of Midlothian Council’s governance, risk management and control frameworks, and overseas the financial reporting and annual governance processes. It oversees Internal and External Audit, helping to ensure efficient and effective assurance arrangements are in place. 4. Internal Audit Annual Assurance Report 2024/25 4.1 The Internal Audit Annual Assurance Report 2024/25 (Appendix 1) includes the Chief Internal Auditor’s independent and objective opinion regarding the adequacy and effectiveness of internal control within Midlothian Council to fulfil the statutory role of Internal Audit, provides details of the Internal Audit activity that supports the opinion and of the performance during the year, and summarises the outcomes of assessments of the Internal Audit service against the Public Sector Internal Audit Standards (PSIAS). 4.2 The Internal Audit Annual Assurance Report 2024/25 provides assurances in relation to the Council’s corporate governance framework that is a key component in underpinning delivery of the corporate priorities within the Single Midlothian Plan and will be used to inform the Annual Governance Statement 2024/25. Page 178 of 396
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5 Report Implications (Resource, Digital, Risk and Equalities) 5.1 Resource The Internal Audit function reports directly to the Chief Executive (operationally) and the Audit Committee (functionally). The staff resource during 2024/25 was 3.22 FTE, comprising Chief Internal Auditor (0.5 FTE – shared with East Lothian Council; Principal Internal Auditor (0.72 FTE), and Internal Auditor (2.0 FTE). Each member of the Internal Audit team has a professional internal audit or accountancy qualification, and has suitable experience, knowledge, skills and competencies (such as the Code of Ethics set out in PSIAS and the Seven Principles of Public Life) needed to perform the plan. There is a commitment by Midlothian Council to provide resource to the Midlothian Health and Social Care Integration Joint Board (MIJB) as part of the Council’s commitment to partnership working. Separate Plans and Reports are presented to the MIJB Audit and Risk Committee. The audit opinion based on work undertaken during the year to meet that commitment will be presented in a separate Annual Assurance Report to the MIJB Audit and Risk Committee and MIJB to fulfil that role. Budget monitoring of the Service is discussed by the Chief Internal Auditor and the Principal Internal Auditor with the Financial Services Manager on a quarterly basis to address any budgetary pressures. 5.2 Digital There are no digital implications arising from this report. 5.3 Risk The PSIAS require Internal Audit to evaluate the effectiveness of the Council’s Risk Management arrangements and contribute to improvements in the process. The Chief Internal Auditor’s opinion on the systems of internal control, risk management and governance is set out within section 2 of the Internal Audit Annual Assurance Report 2024/25 (Appendix 1). Internal Audit provides assurance to the Corporate Management Team and the Audit Committee on the adequacy and effectiveness of internal controls and governance within the Council, including risk management, and to highlight good practice and recommend improvements. Key components of the audit planning process include a clear understanding of the Council’s functions, associated risks, and range and breadth of audit areas for inclusion within the Annual Plan. It is anticipated that improvements in the management and mitigation of risks will arise as a direct result of Management implementing the Internal Audit recommendations made during the year or outstanding from previous years. Delivery of the Internal Audit services in conformance with the PSIAS will enable the Council to meet the requirements of the Local Authority Accounts (Scotland) Regulations 2014 to consider the findings of assessments as part of the consideration of the system of internal control required by regulation 5. Page 179 of 396
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5.4 Ensuring Equalities This report does not relate to a new or revised policy, service or budget change, which affects people (the public or employees), so an Integrated Impact Assessment (IIA) is not an applicable consideration. The Internal Audit work is carried out in accordance with the appropriate legislation and professional standards. This includes compliance by those within the Internal Audit function with the Code of Ethics, set out in the PSIAS, and the Seven Principles of Public Life (the Nolan Principles), set out in the Employees’ Code of Conduct. This is appropriate for the profession of Internal Audit, founded as it is on the trust placed in its independent and objective assurance about risk management, internal control and governance. 5.5 Additional Report Implications (See Appendix A) Page 180 of 396
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APPENDIX A – Additional Report Implications A.1 Key Priorities within the Single Midlothian Plan Although this report does not relate directly to the key priorities within the Single Midlothian Plan to which Midlothian Council and its Community Planning Partners have made a commitment (Reducing the gap in learning outcomes; Reducing the gap in health outcomes; Reducing the gap in economic circumstances; and Reducing the impact of climate change), by providing an independent and objective annual assessment of the adequacy of the entire control environment, Internal Audit supports the Council to achieve its objectives. A.2 Key Drivers for Change Key drivers addressed in this report: Holistic Working Hub and Spoke Modern Sustainable Transformational Preventative Asset-based Continuous Improvement One size fits one None of the above Midlothian Council is committed to creating a great place to grow supported by the 9 drivers for change. Implementing the 9 drivers for change in practice is applicable to the Council’s Internal Audit service provision to assist the Council in achieving its objectives. A.3 Key Delivery Streams Key delivery streams addressed in this report: One Council Working with you, for you Preventative and Sustainable Efficient and Modern Innovative and Ambitious A.4 Delivering Best Value The definition of Internal Auditing within the Public Sector Internal Audit Standards (PSIAS) is “Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organisation’s operations. It helps an organisation accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes.” Implementation by Management of the actions associated with Internal Audit recommendations, that are designed to improve internal control and governance arrangements and management of risks, underpins the Council’s Page 181 of 396
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own continuous improvement arrangements to enhance its effectiveness, thus supporting the delivery of the Council’s best value duties. A.5 Involving Communities and Other Stakeholders Internal Audit’s purpose is to support the Council in its activities designed to achieve its declared objectives for the benefit of Midlothian’s communities and other stakeholders. The Chief Internal Auditor is accountable to the Audit Committee which, in fulfilling its governance role, acts as a bridge between the Council and other stakeholders. This report has been presented to the Corporate Management Team to outline the key messages of assurance and areas of improvement. Senior Management have been advised to take into account the findings from Internal Audit work during the year when completing their internal control and governance assurance statements as part of the annual self-evaluation and assurance process for the Council’s Annual Governance Statement 2024/25. A.6 Impact on Performance and Outcomes The Findings and Recommendations from Internal Audit work during the year, which are designed to maintain and / or enhance internal controls, governance arrangements and risk management, assists the Council in improving its performance and outcomes. A.7 Adopting a Preventative Approach Having robust internal controls, governance arrangements and risk management in place contributes to safeguarding the Council’s resources for delivery of services, as part of protecting the public purse. Internal Audit assurance and consultancy activity is designed to improve operations and assist the Council in accomplishing its objectives. A.8 Supporting Sustainable Development This report does not relate directly to supporting sustainable development. Good governance, including the provision of an Internal Audit service, is important to enable Midlothian Council to achieve its objectives. Page 182 of 396
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APPENDIX 1 Chief Internal Auditor’s Annual Assurance Report and Opinion 2024/25 for Midlothian Council 1 Introduction 1.1 It is Management’s responsibility to design and maintain proper risk management, governance and internal control processes and systems to ensure probity in systems and operations, including the prevention, detection and resolution of fraud and irregularities. Management is also responsible for checking that the arrangements and controls are operating effectively. These are known as the first and second lines which are not fixed but evolve as the Council changes. 1.2 Internal Audit, as the third line, is an independent appraisal function established for the review of the internal control system as a service to Midlothian Council. It objectively examines, evaluates and reports on the adequacy of internal control as a contribution to the proper, economic, efficient and effective use of resources and the management of risk. 1.3 The Internal Audit activity adds value to the organisation (and its stakeholders) when it considers strategies, objectives, and risks; strives to offer ways to enhance governance, risk management and control processes; and objectively provides relevant assurance. 1.4 The Objectives of Internal Audit are set out in its Charter: “Internal Audit’s responsibility is to report to Midlothian Council on its assessment of the adequacy of the entire control environment, through the Corporate Management Team (‘senior management’) and the Audit Committee (the ‘board’ for the purposes of Internal Audit activity). Internal Audit adds value to the organisation (and its stakeholders) by enhancing governance, risk management and control processes and objectively providing relevant assurance. As part of Midlothian Council’s system of corporate governance, Internal Audit’s purpose is to support the Council in its activities designed to achieve its declared objectives” 1.5 The Public Sector Internal Audit Standards (PSIAS) (2017) requires that: “The chief audit executive must deliver an annual internal audit opinion and report that can be used by the organisation to inform its governance statement. The annual internal audit opinion must conclude on the overall adequacy and effectiveness of the organisation’s framework of governance, risk management and control. The annual report must incorporate: • the opinion; • a summary of the work that supports the opinion; and • a statement on conformance with the Public Sector Internal Audit Standards and the results of the quality assurance and improvement programme.” 1.6 This Annual Assurance Report provides the annual internal audit opinion to fulfil the statutory role of Internal Audit and summarises the work carried out by Internal Audit during the year to 31 March 2025 that underpins the opinion in accordance with the Internal Audit Charter, Strategy and Annual Plan 2024/25. The report also states the outcomes of assessments of the Internal Audit service against the PSIAS. Page 183 of 396
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2 Opinion on the systems of Internal Control, Risk Management and Governance 2.1 My opinion is that, based on our reviews, risk assessments and knowledge, the systems of internal control, risk management and governance are generally adequate. There is more work to be done with the implementation of Internal Audit recommendations made in previous years associated with the strategic governance arrangements that underpin procurement, contract management, and risk management. Internal Audit Reviews throughout the year have provided reasonable assurance against the majority of the areas reviewed, however 2 limited assurance reviews have been completed being Business Continuity and IT Asset Management, with only two High rated recommendations being raised both in relation to Business Continuity. Two further reviews reported limited assurance in at least one area, being: Absence Management and Revenue Financial Budget Monitoring. Recommendations made are being implemented to improve the control environment in these areas. 2.2 The Council’s Local Code of Corporate Governance, updated and approved by Council in March 2021, complies with the CIPFA/SOLACE Framework ‘Delivering Good Governance in Local Government’ (2016). This ensures that this key document continues to be relevant and complete to reflect the appropriate framework for effective governance of the Council’s affairs and facilitate the exercise of its functions to deliver best value. 2.3 The Financial Regulations (approved June 2022), and associated policies, procedures and guidelines have been reviewed, updated and developed, as appropriate, to reflect changes arising from organisation structures and systems, and address recommendations arising from Internal Audit findings. 2.4 The Internal Audit review of Absence Management September 2024 concluded: substantial assurance for policy and procedures. Assurance was limited for the reporting and monitoring of sickness absence, training of managers and absence management documentation. Additional training is being put in place for managers to ensure compliance with the procedures in place and improvements in monitoring and documents storage are being developed to improve these processes. 2.5 The Internal Audit review of Risk Management March 2024 concluded: substantial assurance in relation to the Council’s Risk Management Policy and application of the policy at a strategic level. Assurance was limited over the application of the Risk Management Policy at the service (operational) level, the provision of training and guidance, and service level reporting and monitoring arrangements. In order for management of risks at the strategic level to be fully effective, service risk registers should be up-to-date. It was found that processes have not been established to formally report on risks to DMTs and escalate as required, there is limited risk management resource in place to support the Council, limited training and guidance is in place for risk management. It is noted that whilst improvements in training guidance and processes have been noted during the year and that some services have utilised consultancy resource, the majority of services do not have updated risk registers at a service level - progress in this area is not being regularly reported to the Audit Committee. 2.6 The Procurement function has continued to have resourcing difficulties throughout the year, a Procurement Manager is now in place. Work has commenced on updating and implementing contracts in a number of key areas across the Council. Counter Fraud and Council transformation blueprint work has identified that there are further savings that can be made across the Council with the implementation of enhanced purchasing, procurement and contract management controls. Resources are being identified within the Council Transformation blueprint work to improve these processes. Page 184 of 396
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2.7 Further improvements in internal control, risk management and governance have been agreed by Management, as highlighted in Internal Audit reports and through recommendations made during the year or outstanding from previous years. It is important that Management continue to monitor and oversee the implementation of Internal Audit recommendations on a regular basis to demonstrate continuous improvement and to address identified risks. 3 Internal Audit Annual Plan 2024/25 Delivery 3.1 The Internal Audit team continue to work from home, facilitated by the use of MS Teams and access to network drives and business applications. The team attend Council premises as necessary to obtain information or assurances as required. There has been no impairment to the independence or objectivity of the Internal Audit function arising from deployment to non-audit work or from consulting work during the year. 3.2 The revisions to the Internal Audit Annual Plan 2024/25 were approved by the Audit Committee. The following Audits have been removed from the 2024/25 Audit Plan in February 2025: • Education Additional Support needs was replaced with assurance work on the Renfrewshire Council Bowles report comparing current practice within the Council with that external review of Renfrewshire Council. This work was reported to the September 2024 Audit Committee. • School Funds had issues noted in the Attainment Scotland Funding review reported in November 2024, resulting in further work. More detailed work not being required until the end of 2025/26; • Purchase to Pay has been delayed until 2025/26 as a result of systems upgrades, resource being diverted to the assurance review of Council Tax refunds; • Vehicle Maintenance and Fleet management had aspects reviewed in 2024/25, with a full review to be completed in 2025/26; and • Property assets and property strategy was replaced with Education Construction Governance (reported to the June 2025 Audit Committee) and will be completed in 2025/26. 3.3 A review of Fostering and Adoption is currently ongoing and will be reported to the September Audit Committee. 3.4 The range and breadth of Internal Audit work, which amounts to 86% completion of the revised Internal Audit Plan, performed during the year, which is listed below, is sufficient to inform the Internal Audit assurance opinion. Risk Based Audits & Assurance Exercises 3.5 To provide assurance on the internal controls, risk management and governance arrangements associated with strategic and operational frameworks in place for the efficient and effective delivery of objectives, reviews included (date reported to Audit Committee): • Annual Assessment of Internal Controls and Governance (Continuous audit approach to follow-up on implementation of actions for Areas of Improvement set out in the Annual Governance Statement 2024/25. Annual evaluation against the Local Code of Corporate Governance to determine whether the arrangements are operating as described. Prepare this Annual Assurance Report forming the statutory opinion on the adequacy of the Council’s arrangements for risk management, governance and internal control.) – June 2025. Page 185 of 396
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• Absence Management (Reviewed the operation of the systems in place for monitoring of absence to ensure maintenance of staff wellbeing in new working environments and capacity for service delivery.). – September 2024. • Bowles Report – School Capacity Assurance Review (Considered the failings identified in the Bowles report, together with the associated recommendations and measured them against the governance, risk and control framework within Midlothian Council.) – September 2024. • Midlothian Energy (Reviewed the governance structures, ensure monitoring regimes are in place and operating to ensure long term delivery of outcomes for the Council and control over financial and operational risk). – November 2024. • Attainment Scotland Funding (Reviewed the governance and internal control arrangements in place to support the effective utilisation of Attainment Scotland Funding (Pupil Equity, Strategic Equity and Care Experienced Children and Young People Funding) in line with local Council procedures and the respective National Operational Guidance for each type of funding.) – November 2024. • Business Continuity (Reviewed the Business Continuity processes in place within the Council ensuring that they cover all key risks, including cybersecurity incidents, power/energy losses etc.) – February 2025. • SEEMIS (Reviewed the control process in place to ensure accurate recording and use of management information within the SEEMIS System.) – June 2025. • Education Construction Governance (Established if the governance, control, and monitoring processes in relation to two significant capital projects were operating effectively and issues were raised through the Council’s governance processes in a timely manner when appropriate.) – June 2025. • IT Asset Management (Reviewed the processes in place to ensure that IT assets are recorded, managed and maintained in an effective and efficient manner.) June 2025. • Revenue Financial Budget Monitoring (Review the processes in place to ensure that services and service management are effectively monitoring and managing budgets throughout the financial year and identifying and escalating significant issues through finance and governance structures on a timely basis.) – June 2025. • Commercial Lease Reviews – (Complete an audit review of requested Commercial Lease issues at the request of the Audit Committee.) – March 2024. • Destination Hillend Water Pipe Delays (Review of the revised project processes following the Water Pipe Delays for this project.) – June 24 Consultancy 3.6 In its ‘critical friend’ role, Internal Audit provided an independent view and challenge at various forums including: Capital Planning and Asset Management Board, Learning Estate Board, Information Management Group. Other Audit Work 3.7 During the year, resources were deployed in undertaking the following other audit work in support of the Internal Audit function meeting its wider objectives as set out in the Internal Audit Charter: • PSIAS External Quality assurance review was completed by East Renfrewshire Council following a self-assessment and is being reported to the June 2025 Audit Committee. Page 186 of 396
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• MLC Audit Committee Self-Assessment (Provided assistance to the Chair in undertaking a self-assessment of the Audit Committee against the CIPFA best practice guidance leading to a report to the Audit Committee in September 2024). • MLC Recommendation Follow-Up Reviews (Undertook two reviews. The first included a sample check of Audit Recommendations which are flagged as closed, to check that they have been effectively implemented and to ensure that the new controls had the desired effect on improving internal controls, risk management and governance; and the second assessed performance against closing Audit Recommendations by the agreed due date). • Help Desk Enquiry System (Provided guidance and advice on request to Management and Staff on internal controls and governance). • MLC Administration of Audit Scotland Reports (Monitored publication of Audit Scotland reports and co-ordinated submission by Management of Audit Scotland Reports to the Audit Committee or other Committee as relevant). • Risk Management and Integrity Groups (Attended the forums and provided support in the form of relevant Internal Audit updates and advice to the Groups to fulfil their roles). • MLC Boards / Committees (Prepared for and attended Audit Committee meetings and other Boards/Committees as relevant). • MLC Audit Planning for 2025/26 (Reviewed and updated the Internal Audit Charter and Internal Audit Strategy, preparing for the implementation of GIAS. Reviewed and updated the Audit Universe to develop and consult on the proposed coverage within the Internal Audit Annual Plan for 2025/26). Non MLC Work 3.8 The MLC Internal Audit team has carried out assurance work during the year for the Midlothian Integration Joint Board (MIJB) based on a plan approved by the MIJB Audit and Risk Committee in March 2024. An annual assurance report, including audit opinion on the adequacy of the MIJB’s arrangements for risk management, governance and control of the delegated resources, has been presented to the MIJB Audit and Risk Committee. 4 Public Sector Internal Audit Standards and Quality Assurance & Improvement Plan 4.1 The professional standards as set out in Public Sector Internal Audit Standards (PSIAS) effective 1 April 2013 (updated 2017) include: ➢ Definition of Internal Auditing; ➢ Code of Ethics; ➢ Attribute Standards (Purpose, Authority and Responsibility; Independence and Objectivity; Proficiency and Due Professional Care; Quality Assurance and Improvement Programme); ➢ Performance Standards (Managing the Internal Audit Activity; Nature of Work; Engagement Planning; Performing the Engagement; Communicating Results; Monitoring Progress; Communicating the Acceptance of Risks). 4.2 The annual self-assessment 2024/25 of Internal Audit practices against the Standards, as required by the PSIAS, was carried out in June 2024 taking into account the progress with implementation of improvement actions arising from the previous year’s self- assessment, as set out in the Quality Assurance and Improvement Plan (QAIP).This has been assessed in an external assessment by East Renfrewshire Council which is being reported to the June 2025 Audit Committee as required on a 5 year basis by PSIAS. Page 187 of 396
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4.3 The 2024/25 External Quality Assessment (EQA) completed under the “EQA Peer Review Framework” was developed by the Scottish Local Authorities Chief Internal Auditors Group (SLACIAG). This EQA provided an overall conclusion of ‘Generally Conforms’ with the assessment of fully conforming with 8 of the standards and generally conforming with 6 of the standards the following recommendations have been made and will be progressed during 2025/26. Recommendation Management Response When the Audit Charter is next reviewed it should include: • An expanded section definitively addressing the Internal Audit role in combatting fraud, the role and status of the fraud team, signposting to the counter fraud and anti- corruption policies and the arrangements for fraud to be notified to the relevant officer/team. • A definition of the nature of assurance services • The roles and responsibilities of statutory officers in relation to internal audit. Agreed these will be added when the Audit Charter is reviewed in March 2026. The current charter was based on the model charter for the new GIAS standards as provided by the Chartered Institute for Internal Audit and will be updated to include these additional items. An appropriate methodology to facilitate and document service feedback should be developed and used to inform ongoing service delivery. Agreed a document has been developed in assessing the working papers as part of the implementation of GIAS and in accordance with the approved Quality Assurance Plan in place and will be utilised for audits in the 2025/26 financial year. A performance measurement methodology should be developed to evaluate the internal audit function’s performance against its objectives. Agreed, a review will be undertaken to establish appropriate KPIs in accordance with the GIAS guidance and in benchmarking with other Local Authority audit teams to attempt to find meaningful targets. These will be set and then monitored from the next strategy and plan approval. The Audit Strategy and specifically the planning document for each individual audit should reflect the annual plan link to the overall strategic objectives of the Council. The link to strategy will be included in the individual audit planning document and reflected more specifically in the Internal Audit Strategy prior to its next approval at Audit Committee. The Chief Auditor should consider developing an assurance mapping methodology to provide clarity around the internal audit planning and reporting approach Agreed this was raised with Audit Committee within the Charter paper in March 2025 and will be progressed within the resources available a methodology for developing being in place during 2025/26. The Terms of Reference Document should be expanded to include any exclusions from the scope of the work and consideration of the resources allocated, whilst recognising that the choice of resources is limited. Agreed the TOR was updated for GIAS compliance to include this and will operate for the 2025/26 audits as current resourcing really only allows for a choice of one Auditor or the other one we can record that choice in the TOR. The Chief Auditor should discuss the circulation of audit reports with key stakeholders including the Audit Committee to ascertain their preferred format for example whether they want all reports circulated in full or abridged versions with only key points highlighted. Agreed this will be included in the Audit Committee self-evaluation for reporting to Audit Committee in September 2025. Page 188 of 396
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4.4 As indicated to the Audit Committee in February 2025, the PSIAS have been replaced by the Global Internal Audit Standards. A Self-assessment against these standards will be presented to the Audit committee in March 2026. “EQA Peer Review Framework” was developed by the Scottish Local Authorities Chief Internal Auditors Group (SLACIAG) will again be used to complete an External Quality Assessment against these revised standards in the future. Duncan Stainbank Bsc (Hons) CPFA Chief Internal Auditor 4 June 2025 Page 189 of 396
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Audit Committee Monday 16 June 2025 Item No 5.8 Counter Fraud Annual Report 2024/25 Report by Chief Internal Auditor Report for Decision 1 Recommendations The Audit Committee is asked to: a) Consider the counter fraud work undertaken during the year to 31 March 2025 in support of the Council’s counter fraud policy and strategy; and b) Note the outcomes of the counter fraud activity 2024/25. 2 Purpose of Report/Executive Summary The purpose of the report is to make the Audit Committee aware of the Council’s counter fraud responsibilities and the activities of the Integrity Group and Corporate Fraud team in liaison with other services over the past year as part of the arrangements to tackling fraud at the Council. Having robust fraud prevention and investigation arrangements in place contributes to safeguarding the Council’s resources for delivery of services, as part of protecting the public purse. The Counter Fraud Strategy approved by Council on 25 August 2020 includes: a focus on enhancing fraud prevention and detection to improve Midlothian Council’s resilience to the risk of fraud, theft, corruption and crime; and ensure these are embedded preventative practices. Assurances about the effectiveness of the Council’s existing systems and arrangements for tackling fraud can be taken from the outcomes contained within this report. Date 6 May 2025 Report Contact: Duncan Stainbank duncan.stainbank@midlothian.gov.uk Page 191 of 396
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2 3 Background 3.1 The size and nature of the Council’s services, as with other large organisations, puts the Council at risk of loss due to fraud, theft, corruption and crime. Having robust fraud prevention and investigation arrangements in place contributes to safeguarding the Council’s resources for delivery of services, as part of protecting the public purse. 3.2 The Council approved a Counter Fraud Policy Statement and Counter Fraud Strategy in 2020 including: a focus on enhancing fraud prevention and detection to improve the Council’s resilience to the risk of fraud, theft, corruption and crime; and ensure these are embedded preventative practices. 3.3 The primary responsibility for the prevention, detection and investigation of fraud rests with management. The Integrity Group is an officer forum which has representatives from across the Council’s Services to support management to fulfil their responsibilities in tackling fraud, and it is chaired by the Executive Director Place. The purpose of the Integrity Group is to improve the Council’s resilience to fraud, corruption, theft and crime (including cybercrime and money laundering). It oversees the policy framework, agrees and monitors the implementation of improvement actions, raises awareness as a method of prevention, and performs self-assessments against best practice. 3.4 Part of the Audit Committee’s role is to review the assessment of fraud risks and potential harm to the Council from fraud and corruption, and to monitor the counter fraud strategy, actions and resources. 3.5 Tackling fraud is not a one-off exercise; it is a continuous process across all parts of the Council because the service delivery processes it underpins are continuous. Tackling fraud is an integral part of good governance within the Council and demonstrates effective financial stewardship and strong public financial management. Page 192 of 396
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3 4 Counter Fraud Activity during 2024/25 4.1 The Counter Fraud Annual Plan 2024/25, setting out Corporate Fraud activity at a high level, was approved by the Audit Committee on 18 March 2024. All elements of the Counter Fraud planned work were carried out, relating to activity at a high level as follows: a) Contract Management b) Corporate Fraud Enquiries c) National Fraud Initiative d) Social Housing e) Council Tax f) Corporate Fraud Policy Framework g) Fraud Risk Assessments h) Fraud Awareness Training i) Integrity Group 4.2 As specialist investigators, the Corporate Fraud Officers have conducted significant and comprehensive work in respect of Contract Management, liaised with Scotland Excel and Police Scotland as required, and recommended improvements to reduce risks. Work has identified areas of control concern in relation to end to end procurement processes and contract management, within the Council and Scotland Excel. Improvements are being implemented through improved Procurement staffing and blueprint work to resolve these control issues. 4.3 The Corporate Fraud Team has dealt with 111 enquiries including 32 from the Midlothian Council website page “Report a possible crime, fraud or similar concern” which is available to employees or the public for whistleblowing purposes. Fraud Response Group meetings have been held to share concerns and progress actions with relevant Management. 4.4 Midlothian Council continues to participate in the National Fraud Initiative (NFI) which is a UK wide counter-fraud exercise led by the Cabinet Office and Audit Scotland. It uses data analytic techniques to compare information about individuals held by different public bodies, and on different systems, to identify circumstances (data matches) that might suggest the existence of fraud or error. The Principal Internal Auditor acts as the Council’s Key Contact for NFI and the Corporate Fraud Team has coordinated the submission of the required data sets from various Council systems and responded to the data matches received with input from relevant Services across the Council. 4.5 The Corporate Fraud Team has received referrals from Housing Officers during the year to investigate potential subletting or abandonment of Council owned properties; 48 allegations of potential tenancy fraud were investigated (see 5.2 for outcomes). 4.6 The Corporate Fraud Team responded to 27 notifications of alleged fraud associated with Council Tax Discounts and Exemptions during the year to determine whether these discounts and exemptions are claimed legitimately, including Council Tax Reduction Scheme (CTRS) and Single Person Discount (SPD) (see 5.3 for outcomes). Page 193 of 396
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4 4.7 It is important that associated policies, procedures and guidelines across the Council are regularly reviewed and updated, as appropriate, to ensure that they keep pace with best practice in relation to fraud and corruption prevention and detection. 4.8 The Corporate Fraud Officers are members of the Scottish Local Authority Investigators Group (SLAIG) and represent Midlothian Council. They join SLAIG’s quarterly virtual meetings as a forum for sharing best practice across Councils and the wider public sector, thus ensuring their knowledge of emerging fraud risks and issues is up to date. Any insights on fraud risk assessments are shared on a regular basis with the Integrity Group. The Corporate Fraud Officers liaise throughout the year with the Internal Audit Team to provide their view on the potential fraud risk aspects of areas under review. 4.9 The Integrity Group held 4 meetings during the year 2024/25 to undertake its functions as set out in its Terms of Reference. The Integrity Group is chaired by the Executive Director Place and has representatives from HR, Finance, Legal, IT, Procurement, Internal Audit and Corporate Fraud. 5 Outcomes of Counter Fraud Activity 2024/25 5.1 It has been calculated, using Audit Scotland guidance (where relevant for nominal values), that as a result of counter fraud activity a total savings value of £906,713 has been identified during 2024/25. The types of referrals and the outcomes are summarised in the table in Appendix 1, with details provided below. 5.2 As a result of the collaboration between Housing Officers and the Corporate Fraud Team, 11 of the 48 allegations of potential tenancy fraud that were investigated resulted in the return of a property to the Council’s housing stock, which were subsequently made available to those in genuine need of social housing. For each of the properties identified, the calculation of savings per property (based on NFI Estimates Outcomes Methodologies) is £78,300, thus resulting in a saving of £861,300. However, the key benefit is the ability to provide more homes to those in genuine need of social housing. 5.3 11 referrals of internal fraud allegations have been made during the year - 2 of these have resulted in funds being returned to the Council totalling £22,450. Recovery of a further £22,963 has been made as a result of further action on 2 historic cases one of which remains ongoing. 2 of the investigations undertaken remain in progress through HR processes. 5.4 Outcomes of the Council’s participation in the National Fraud Initiative for 2022/23 resulted in a total saving of £162,387. These outcomes are detailed in Appendix 2. 5.5 In conclusion, the Corporate Fraud Team in collaboration with other Services have been successful in delivering the range of activity set out in the Counter Fraud Annual Plan 2024/25 to support the Council’s Page 194 of 396
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5 objectives. Tackling fraud is an ongoing process as the Council’s internal and external operating environment changes. 6 Report Implications (Resource, Digital, Risk and Equalities) 6.1 Resource The Integrity Group will support Management across the Council with counter fraud management by: overseeing the review of the counter fraud policy framework in line with best practice; highlighting emerging fraud and corruption risks, threats, vulnerabilities; agreeing fraud and corruption mitigation actions; raising awareness of bribery, fraud and corruption in the Council as a method of prevention. The staff resource set out in the Counter Fraud Annual Plan 2024/25 relates to 2 Corporate Fraud Officers, plus some management and supervision provided by the Principal Internal Auditor and the Chief Internal Auditor. The Corporate Fraud Officers collaborate with other managers and employees across the Council to carry out the activity and support the Integrity Group. 6.2 Digital None. 6.3 Risk The size and nature of the Council’s services puts the Council at risk of loss due to fraud, theft, corruption and crime. The Counter Fraud Policy sets out the roles and responsibilities for the prevention, detection and investigation of fraud. The Counter Fraud Strategy provides a shift in approach to focus on enhancing fraud prevention and detection to improve Midlothian Council’s resilience to the risk of fraud. Council service fraud risk register creation is now taking place facilitated by the Counter Fraud team. The steer provided by the Integrity Group and the work undertaken by the Corporate Fraud Team during 2024/25 in collaboration with other services is aligned to the Policy and Strategy. 6.4 Ensuring Equalities An Integrated Impact Assessment (IIA) Form was completed prior to the presentation of the revised Counter Fraud Policy and Strategy that were approved by the Council on 25 August 2020. 6.5 Additional Report Implications (See Appendix A) Page 195 of 396
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6 APPENDIX A – Additional Report Implications A.1 Key Priorities within the Single Midlothian Plan Although this report does not relate directly to the key priorities within the Single Midlothian Plan (Reducing the gap in economic circumstances; Reducing the gap in learning outcomes; Reducing the gap in health outcomes; and Reducing the impact of climate change) by preventing and detecting fraud, additional resources might be available to support the Council’s objectives. Any loss of funds due to fraud, theft, corruption or crime might impact on the ability of Midlothian Council to achieve its key priorities. A.2 Key Drivers for Change Key drivers addressed in this report: Holistic Working Hub and Spoke Modern Sustainable Transformational Preventative Asset-based Continuous Improvement One size fits one None of the above Midlothian Council is committed to creating a great place to grow supported by the 9 drivers for change. Implementing the 9 drivers for change in practice is applicable to the Council’s arrangements for tackling fraud as set out in the Counter Fraud Policy Statement and Counter Fraud Strategy. The shift to the key drivers for change is an intrinsic part of the proposed change in approach and culture for the Council for tackling fraud and corruption. For example: (a) The formal establishment of an Integrity Group with a Terms of Reference (approved by the Audit Committee on 22 June 2020) shifting to more holistic working in multi-disciplinary forums to tackle fraud in a consistent and collaborative way across the Council; (b) A focus on enhancing fraud prevention and detection to improve Midlothian Council’s resilience to the risk of fraud, theft, corruption, and crime and ensure these are embedded preventative practices; (c) Applying the minimum standard within the CIPFA Code of Practice on ‘Managing the Risk of Fraud and Corruption (2014)’ for counter fraud policy, strategy and other practices, and adopting the CIPFA Counter Fraud Maturity Model as a means of self-assessment moving forward will enable continuous improvement to be evaluated, managed and evidenced; and (d) Use of a blend of toolkits such as fraud risk assessments and e- learning packages that can be tailored to specific Services. Page 196 of 396
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7 A.3 Key Delivery Streams Key delivery streams addressed in this report: One Council Working with you, for you Preventative and Sustainable Efficient and Modern Innovative and Ambitious A.4 Delivering Best Value Having robust fraud prevention and investigation arrangements in place contributes to safeguarding the Council’s financial resources, for delivery of services, as part of protecting the public purse. The Counter Fraud Strategy (August 2020) states the Council will measure progress against the CIPFA Counter Fraud Maturity Model as a self-assessment approach to continuous improvement in order to be evaluated, managed and evidenced to demonstrate best value in the use of resources. A.5 Involving Communities and Other Stakeholders Ensuring awareness of the Whistleblowing facility to report areas of concern is important in the approach to tackling fraud. The facility has is being utilised by employees, those within communities or other stakeholders. A.6 Impact on Performance and Outcomes The primary responsibility for the prevention, detection and investigation of fraud rests with Management, supported by the Corporate Fraud team. Internal Audit provides advice and independent assurance on the effectiveness of processes put in place by Management. The Findings and Recommendations from Internal Audit work which are presented to the Audit Committee during the year assists the Council in maintaining and / or enhancing fraud prevention and detection controls. A.7 Adopting a Preventative Approach Having robust fraud prevention and investigation arrangements in place contributes to safeguarding the Council’s financial resources, for delivery of services, as part of protecting the public purse. A focus on enhancing fraud prevention and detection to improve Midlothian Council’s resilience to the risk of fraud, theft, corruption and crime, and ensure these are embedded preventative practices are specific changes associated with the Counter Fraud Strategy. A.8 Supporting Sustainable Development None. Page 197 of 396
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Appendix 1 – Outcomes from Corporate Fraud Team activity on corporate fraud enquiries in 2024/25 Type of Referral No. of Referrals Web Phone Email / letter No. with Potential Fraud Detected Fraud Detected Comments Corporate Fraud (Internal) 11 2 4 5 1 £45,413 Full Investigations undertaken in response to referrals from various sources. • 1 investigation resulted in full recovery of CLLE rent grant payments totalling £21,750 which was paid in error and retained without the knowledge of the organisation. • Full recovery of £700 from an ex-employee. • Recovery of £15,963 in relation to historic School Transport investigation. • historic embezzlement case from 3 years ago is with the Scottish Courts, a guilty plea from one of the accused has been accepted with a £7k compensation order in favour of Midlothian Council. Housing Tenancy Fraud 48 6 3 39 11 £861,300 48 referrals were received by email directly from Housing Officers. All 48 referrals were investigated, resulting in the recovery of 11 Council houses. Value for each property calculated as per Cabinet Office NFI Estimates Outcomes Methodologies guidance (£78,300 per property recovered). Council Tax Discounts & Exemptions & CTRS / SPD/ DWP Benefits 27 17 2 8 8 cases referred to the Department for Work and Pensions to investigate due to benefits in payment DPA/SOCG enquiries 10 10 9 enquiries received from Police Scotland. 1 enquiry received from East Lothian Council. Other 15 7 3 5 Investigations resulting in referrals being submitted to external partners and internal services including Education, Blue Badge, Trading Standards and Economic Development. Total 111 32 12 67 12 £906,713 Page 198 of 396
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9 Appendix 2 – Total outcomes from Midlothian Council’s participation in the National Fraud Initiative 2022/2023 exercise Type No of Matches 22/23 No of matches reviewed Fraud or Errors Detected Outcome (overpayment) Estimated Savings Total Savings Comments Council Tax (SPD) 35 35 £43,824 £22,078 £65,902 Including 5 cases where CTRS was reduced and 4 cases where Housing Benefit was reduced (see below for figures). Housing Benefit 4 4 £57,041 £3,834 £60,875 Council Tax Reduction (CTRS) 5 5 £7,330 £977 £8,307 Small Business Bonus Scheme (SBBS- NDR) 25 2 £13,359 £13,944 £27,303 This data set was reviewed by City of Edinburgh Council as they hold and administer Midlothian Council non- domestic rates (NDR) data. Total savings for 2022/23 NFI exercise in 2024/25 £121,554 £40,833 £162,387 Page 199 of 396
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Audit Committee Monday 16 June 2025 Item No 5.9 External Quality Assessment of Midlothian Council’s Internal Audit Service Report by Chief Internal Auditor Report for Information 1 Recommendations The Audit Committee is asked to note the External Quality Assessment of Midlothian Council’s Internal Audit Service recently completed by Michelle Blair, Chief Auditor East Renfrewshire Council. 2 Purpose of Report/Executive Summary The purpose of the report is to introduce the External Quality Assessment of Midlothian Council’s Internal Audit Service recently completed by Michelle Blair, Chief Auditor East Renfrewshire Council to the Audit Committee for noting. The report is included as Appendix 1 Date 4 June 2025 Report Contact: Duncan Stainbank duncan.stainbank@midlothian.gov.uk Page 201 of 396
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2 3 Background 3.1 Public Sector Internal Audit Standards require an External Quality Assessment of Internal Audit Services is completed every 5 years. The last External Quality Assessment of Midlothian Council’s Internal Audit team was completed by Highland Council in June 2018, delays in completion of this current review were a one year delay accepted due to Covid 19; and a further years delay as a reorganisation of the schedule of reviews was required as a result of the Shared Service Arrangement with East Lothian Council as Midlothian Council had been scheduled to complete the review of East Lothian Council. 3.2 The Report highlights that Midlothian Council’s Internal Audit Service ‘fully conforms’ with 8 of the PSIAS standards and ‘generally conforms’ with the remaining 6 standards. 7 Low graded recommendations have been made and accepted by the Chief internal Auditor, 2 of the recommendations have previously been advised to the Audit Committee and 3 were already in progress as a result of a full review of the Internal Audit documentation in advance of the implementation of Global Internal Audit Standards. 3.3 I note that the report indicates the ‘extensive experience of the Principal Auditor’ and the Chief Internal Auditor ‘and Qualified staff providing a strong team with experience and knowledge to lead the audit service’. The report also recognises ‘the Council actually having a really robust anti-fraud strategy and a strong, separate anti-fraud team linked to and reporting to the Chief Internal Auditor and the work of the Fraud team is reported to Audit Committee annually with a financial value attached to the fraud prevention work.’ 3.4 The next External Quality Assessment (EQA) of the Internal Audit Service is also scheduled to be completed within the next five years. This EQA will also be completed under the “EQA Peer Review Framework” which has been developed by the Scottish Local Authorities Chief Internal Auditors Group (SLACIAG). The next review will be against the Global Internal Audit Standards that came into effect in April 2025 for the UK public sector. These standards for the UK Public Sector are an evolution from the PSIAS standards and therefore the recommendations made in this report will be implemented to meet these standards also. Page 202 of 396
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3 4 Report Implications (Resource, Digital, Risk and Equalities) 4.1 Resource The only resources impacted as Internal Audit resources and have been appropriately discussed as part of the Assessment closure meetings. 4.2 Digital There are no digital implications arising from this report. 4.3 Risk The PSIAS require Internal Audit to evaluate the effectiveness of the Council’s Risk Management arrangements and contribute to improvements in the process. At the start of each audit engagement, to capture potential areas of risk and uncertainty more fully, key stakeholders have been consulted and risk registers have been considered. During each audit engagement the management of risk has been tested. It is anticipated that improvements in the management and mitigation of risks will arise as a direct result of Management implementing the Internal Audit recommendations made. If audit recommendations are not implemented, there is a greater risk of financial loss and/or reduced operational efficiency and effectiveness, and Management may not be able to demonstrate improvement in internal control and governance arrangements, and effective management of risks. 4.4 Ensuring Equalities This report does not relate to a new or revised policy, service or budget change, which affects people (the public or staff), so an Integrated Impact Assessment (IIA) is not an applicable consideration. The Internal Audit work is carried out in accordance with the appropriate legislation and professional standards. The latter includes compliance by those within the Internal Audit function with the Code of Ethics set out in the PSIAS which is appropriate for the profession of Internal Audit founded as it is on trust placed in its independent and objective assurance about risk management, internal control and governance. 4.5 Additional Report Implications (See Appendix A) Page 203 of 396
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4 APPENDIX A – Additional Report Implications A.1 Key Priorities within the Single Midlothian Plan Although this report does not relate directly to the key priorities within the Single Midlothian Plan (Reducing the gap in economic circumstances; Reducing the gap in learning outcomes; Reducing the gap in health outcomes; and Reducing the impact of climate change) Note is made that these key priorities are reflected in the audit plan and any links will be identified as part of each audit planning process going forward. A.2 Key Drivers for Change Key drivers addressed in this report: Holistic Working Hub and Spoke Modern Sustainable Transformational Preventative Asset-based Continuous Improvement One size fits one None of the above Midlothian Council is committed to creating a great place to grow supported by the 9 drivers for change. Implementing the 9 drivers for change in practice is applicable to the Council’s Internal Audit service provision to assist the Council in achieving its objectives. A.3 Key Delivery Streams Key delivery streams addressed in this report: One Council Working with you, for you Preventative and Sustainable Efficient and Modern Innovative and Ambitious A.4 Delivering Best Value The definition of Internal Auditing within the Public Sector Internal Audit Standards (PSIAS) is “Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organisation’s operations. It helps an organisation accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes.” Page 204 of 396
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5 Implementation by Management of the actions associated with Internal Audit recommendations, that are designed to improve internal control and governance arrangements and management of risks, underpins the Council’s own continuous improvement arrangements to enhance its effectiveness, thus supporting the delivery of the Council’s best value duties. A.5 Involving Communities and Other Stakeholders The Chief Internal Auditor is accountable to the Audit Committee which, in fulfilling its governance role, acts as a bridge between the Council and other stakeholders. This report was created with input from previous Chairs of the Audit Committee and various members of Senior Management including the Chief Executive, the Section 95 Officer and the Monitoring Officer. A.6 Impact on Performance and Outcomes The Findings and Recommendations from Internal Audit work during the year are designed to assist the Council in improving its performance and outcomes. The Performance and Outcomes of the Internal Audit Service will be improved by the implementation of the recommendations of this report. A.7 Adopting a Preventative Approach Internal Audit assurance work includes assessments on when a preventative approach can be adopted. A.8 Supporting Sustainable Development This report does not relate directly to supporting sustainable development. Good governance is important to enable Midlothian Council to achieve its objectives. Page 205 of 396
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2 June 2025 Page 1 EXTERNAL QUALITY ASSESSMENT OF MIDLOTHIAN COUNCIL’S INTERNAL AUDIT SERVICE Report Recipients: Grace Vickers, Chief Executive Alan Turpie, Legal and Governance Manager David Gladwin, Chief Financial Officer Duncan Stainbank, Chief Internal Auditor Cllr Derek Milligan Cllr Peter Smaill Page 207 of 396
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EXECUTIVE SUMMARY 2 1. INTRODUCTION 1.1 The mandatory Public Sector Internal Audit Standards (PSIAS), published initially in April 2013 and updated most recently in March 2017, apply to all internal audit service providers in the UK public sector, whether in-house, provided via a shared service arrangement or outsourced. To supplement the PSIAS, and provide specific guidance surrounding its application within a local government setting, the Chartered Institute of Public Finance and Accountancy (CIPFA) compiled a Local Government Application Note, which was last updated in 2019. 1.2 The objectives of the PSIAS are to define the nature of internal auditing within the UK public sector; set basic principles for carrying out internal audit; establish a framework for providing internal audit services, which add value to the organisation, leading to improved organisational processes and operations; establish the basis for the evaluation of internal audit performance and drive improvement planning. 1.3 The PSIAS require the Chief Audit Executive (the Shared Chief Internal Auditor in Midlothian Council) to develop and maintain a quality assurance and improvement programme (QAIP) that covers all aspects of the internal audit activity. The QAIP must include both periodic internal self-assessments and five-yearly external assessments, carried out by a qualified, independent assessor from outwith the organisation, and enable evaluation of the internal audit activity’s conformance with the PSIAS, including the Mission of Internal Audit, Definition of Internal Auditing and Code of Ethics. In addition, the QAIP should also assess the efficiency and effectiveness of the internal audit activity and identify opportunities for improvement. 1.4 To assist its members to meet the five-yearly external assessment requirement, the Scottish Local Authorities Chief Internal Auditors’ Group (SLACIAG) established a collaborative system of formal peer reviews. This approach not only assists with ensuring that independent assessors, and their teams, have appropriate knowledge and experience of the local government internal audit environment but also removes the financial burden from councils, associated with procuring these services externally. The allocation of assessors / assessment teams to councils participating in the peer review process was undertaken autonomously, ensuring that, amongst other governing principles, local authorities with perceived / known conflicts of interest could not review one another. At the outset, assessors were required to formally declare any interests so that these could be appropriately addressed during the allocation process. East Renfrewshire Council was selected to carry out the external assessment in Midlothian Council. 1.5 To support the peer review process, SLACIAG developed a comprehensive External Quality Assessment (EQA) framework, including an EQA Checklist for Assessing Conformance with the PSIAS and the Local Government Application Note (EQA Checklist) and a key Stakeholder Questionnaire proforma. The external assessment of Midlothian Council’s Internal Audit function has been carried out by East Renfrewshire Council’s Chief Internal Auditor utilising this framework. 1.6 This report provides a high level summary of requirements for each standard per the PSIAS and CIPFA Local Government Application Note and sets out the findings, conclusions and recommendations from the external assessment, which involved discussions with key members of staff, including the Chief Internal Auditor, review of the most recent self-assessment carried out utilising the EQA Checklist and consideration of other relevant supporting documentation / information (Evidence Pack) including working paper files and completed stakeholder questionnaires. A comprehensive list of Page 208 of 396
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EXECUTIVE SUMMARY 3 supporting documentation / information and completed stakeholder questionnaires considered as part of the assessment can be found at appendices B and C respectively. 1.7 Whilst it is acknowledged that PSIAS has been replaced from 1 April 2025 by the General Internal Audit Standards (GIAS) it is expected that compliance with PSIAS will still contribute to a good level of compliance with the new standards. Page 209 of 396
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4 2. OVERALL CONCLUSION 2.1 The overall conclusion of the external assessment is that Midlothian Council’s Internal Audit generally conforms with the PSIAS. None of the standards have been assessed as partially or not conforming with PSIAS, however seven recommendations have been made to assist the Internal Audit function, all of which are low graded minor recommendations. A full summary of assessment, per assessment area, can be found at Appendix A. A summary of totals is as follows: Fully Conforms Generally Conforms Partially Conforms Does Not Conform TOTALS 8 6 0 0 2.2 The main areas for improvement highlighted in the report are as follows: • There should be an expanded section within the Audit Charter defining the role of internal audit in any fraud related work. • A performance measurement methodology should be developed to evaluate the internal audit function’s performance against its objectives. • An appropriate methodology to facilitate and document service feedback should be developed. • The Audit Strategy, specifically the audits included in the audit plan, could be more closely linked to the overall strategic objectives of the Council. • An assurance mapping methodology should be developed • The terms of reference document should be expanded to include resources and reflect any limitation in scope. • Key stakeholders including the audit committee should be consulted on their preference on the format of audit reports distributed and the form that this should take. 2.3 Full details of the assessment recommendations and management responses can be found in the Action Plan at Appendix D. Page 210 of 396
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5 3. SECTION A – MISSION OF INTERNAL AUDIT AND CORE PRINCIPLES The PSIAS state that the Mission of Internal Audit articulates what internal audit aspires to accomplish within an organisation, which is ‘to enhance and protect organisational value by providing risk-based and objective assurance, advice and insight’. Taken as a whole, the Core Principles for the Professional Practice of Internal Auditing, as set out in the PSIAS, articulate internal audit effectiveness. For an internal audit function to be considered effective, all Core Principles should be present and operating effectively. Failure to achieve any of the Core Principles would imply that an internal audit activity was not as effective as it could be in achieving the Mission of Internal Audit. 3.1 Evidence obtained from assessing conformance with other standards in the PSIAS has been used, along with specific consideration surrounding the achievement of the Core Principles, to conclude that the Midlothian Councils Internal Audit function fully conforms with accomplishing the Mission of Internal Audit as detailed above. 4. SECTION B – DEFINITION OF INTERNAL AUDITING The PSIAS state that internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organisation’s operations. It helps an organisation accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes. 4.1 Evidence obtained from assessing conformance with other standards in the PSIAS has been used to conclude that Midlothian Councils Internal Audit function fully conforms with the definition of Internal Auditing as detailed above. Evidence provided, principally the Audit Charter and high level approval of this document confirms that the objectives of the Internal Audit function is to “support the Council in its activities designed to achieve its objectives.” It does so by supporting the Councils vision, values and priorities, contributing to the corporate management of risk, ensuring all stakeholders operate within the law and relevant regulations and that public money is safeguarded, accounted for and used efficiently and effectively. 5. SECTION C – CODE OF ETHICS The PSIAS state that the purpose of the Institute of Internal Auditor’s Code of Ethics is to promote an ethical culture in the profession of internal auditing. A code of ethics is necessary and appropriate for the profession of internal auditing, founded as it is on the trust placed in its objective assurance about risk management, control and governance. Internal auditors in UK public sector organisations must conform to the Code of Ethics as set out in the PSIAS. If individual internal auditors have membership of another professional body then he or she must also comply with the relevant requirements of that organisation. 5.1 Evidence obtained from assessing conformance with other standards in the PSIAS, in particular the Attribute Standards 1000 – Purpose Authority and Responsibility, 1100 – Independence and Objectivity, 1200 – Proficiency and Due Professional Care and Professional Standards 2000 – Managing the Internal Audit Activity and 2300 – Performing the Engagement, has been used to conclude that Midlothian Council’s Internal Audit function generally conforms with the requirement to comply with the Code of Ethics given that there are a small number of improvements set out within this report to further enhance compliance with PSIAS. 5.2 As part of the assessment carried out there were several areas of Good Practice identified as below: Page 211 of 396
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6 5.2.1 Fully qualified experienced staff. The Shared Chief Internal Auditor has extensive experience and is supported by an equally experienced Principal auditor and qualified staff – this is a strong team with experience and knowledge to lead the audit service. 5.2.2 The Audit Manual is a comprehensive and supportive document, clearly laying out each stage of a potential audit and with easily understandable and helpful appendices and templates to guide the auditor. 5.2.3 A fully functioning Fraud Prevention team with close links to the Internal Audit function, strengthening controls against the risk of fraud. The work of the Fraud team is reported to Audit Committee annually with a financial value attached to the fraud prevention work. 5.2.4 Strong reporting lines and processes, regular reporting to Audit Committee and the Corporate Management team as appropriate. 6. SECTION D – ATTRIBUTE STANDARDS Attribute Standards apply to organisations and individual internal auditors providing the internal audit services in a local authority. 6.1 1000 - Purpose, Authority, and Responsibility The PSIAS state that the purpose, authority and responsibility of the internal audit activity must be formally defined in an Internal Audit Charter, consistent with the Mission of Internal Audit and the mandatory elements of the International Professional Practices Framework. The chief audit executive must periodically review the internal audit charter and present it to senior management and the board for approval. The internal audit charter must also: • define the terms ‘board’ and ‘senior management’ for the purposes of internal audit activity; • cover the arrangements for appropriate resourcing; • define the role of internal audit in any fraud-related work; and • describe safeguards to limit impairments of independence or objectivity if internal audit or the chief audit executive undertakes non-audit activities. 6.1.1 Midlothian Council’s Internal Audit Charter is periodically reviewed with the most recent review taking place in February 2025, and being approved by the Audit Committee on 24 February 2025. 6.1.2 The Audit Charter is well written and comprehensive. However the section around the role of internal audit in any fraud related work, the arrangements for anti-fraud and anti- corruption polices, and the reporting of fraud to audit is quite small and not as strong as it could be. This is placed in sharper focus by the Council actually having a really robust anti-fraud strategy and a strong, separate anti-fraud team linked to and reporting to the Chief Internal Auditor. Expanding this section to embed the anti-fraud strategy, the work of the anti-fraud team and the operational arrangements for fraud reporting within the Audit Charter would strengthen the position of the work undertaken here. 6.1.3 In addition, the Audit Charter could be further enhanced by specifically clarifying the roles of the statutory officers in relation to internal audit and providing a clear definition of assurance services that are provided. Recommendation 1 When the Audit Charter is next reviewed it should include: Page 212 of 396
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7 • An expanded section definitively addressing the Internal Audit role in combatting fraud, the role and status of the fraud team, signposting to the counter fraud and anti-corruption policies and the arrangements for fraud to be notified to the relevant officer/team. • A definition of the nature of assurance services • The roles and responsibilities of statutory officers in relation to internal audit. 6.1.4 Having considered the findings above, it has been concluded that the Midlothian Council’s Internal Audit function generally conforms with Standard 1000 on Purpose, Authority and Responsibility. 6.2 1100 - Independence and Objectivity The internal audit activity must be independent and internal auditors must be objective in performing their work. Various aspects of independence and objectivity are covered in this standard as well as 1200, including reporting functional lines of the CAE, the relationship between the CAE and the board and any impairment to individual internal auditors’ objectivity or independence. Reporting and management arrangements must be put in place that preserve the CAE’s independence and objectivity, in particular with regard to the principle that the CAE must be independent of the audited activities. 6.2.1 The Shared Chief Internal Auditor reports functionally to the Audit Committee and administratively to the Chief Executive who is a member of the Council’s Senior Management Team. As a further note, in the Service Level Agreement supporting the shared service, the Chief Internal Auditor’s performance is managed by the Executive Director for Council Resources. The Chief Internal Auditor has direct and unrestricted access to the Chief Executive and the Chair of the Audit Committee and this has been confirmed through the completed Stakeholder Questionnaires. These reporting / access arrangements are clearly defined in the Internal Audit Charter, as are safeguards to limit impairment of independence or objectivity. 6.2.2 In support of organisational independence, the Chief Internal Auditor attends Audit Committee meetings to present all internal audit reports (including, for example, the Internal Audit Charter, Annual Report, Internal Audit Plan and reports / executive summaries from the planned audits) to Elected Members. The reports are all submitted in the Chief Internal Auditor’s name. 6.2.3 The Chief Internal Auditor does not have operational responsibility for the activities audited and this is implicit in the documents reviewed. It is noted that this is now explicitly stated in the latest Audit Charter. 6.2.4 All staff within the Internal Audit function and Fraud Team are required to complete a register of interests form (or equivalent) on an annual basis to declare any conflicts of interest. 6.2.5 Midlothian Council’s Internal Audit function fully conforms with Standard 1100 on Independence and Objectivity. 6.3 1200 - Proficiency and Due Professional Care The CAE must be professionally qualified, suitably experienced and responsible, in accordance with the organisation’s human resources processes, for recruiting appropriate staff. He or she is responsible for ensuring that up-to-date job descriptions exist, reflecting roles and responsibilities, and that person specifications define the required qualifications, competencies, skills, experience and personal attributes. The CAE should periodically assess individual auditors’ skills and competencies against those set out in the relevant job descriptions and person specifications. Any training or development needs identified should be included in an appropriate ongoing development programme that is recorded and regularly reviewed and monitored. In Page 213 of 396
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8 addition, all internal auditors have a personal responsibility to undertake a programme of continuing professional development (CPD) to maintain and develop their competence. This may be fulfilled through requirements set by professional bodies or through the organisation’s own appraisal and development programme. Auditors should maintain a record of such professional training and development activities. The internal audit activity should be appropriately resourced to meet its objectives. It should have appropriate numbers of staff in terms of grades, qualifications, personal attributes and experience or have access to appropriate resources in order to meet its objectives and to comply with these standards. The PSIAS states that the CAE must obtain competent advice and assistance if the activity is unable to perform all or part of an engagement. 6.3.1 The Chief Internal Auditor holds a relevant professional qualification, and is suitably experienced, with over 20 years internal audit experience within a public sector environment. The Chief Internal Auditor is a member of SLACIAG and regularly attends and contributes to meetings. In relation to the SLACIAG Computer Audit Sub-Group (CASG) and the Scottish Local Authority Investigators Group (SLAIG), Midlothian Council’s Internal Audit function is regularly represented on both. 6.3.2 There are 3.22 FTE members of staff in the Internal Audit function, including the Chief Internal Auditor (0.5 FTE), Principal Auditor (0.72 FTE) and 2 FTE Internal Auditors. Membership of the Consultative Committee of Accountancy Bodies (CCAB), Chartered Institute of Management Accountants (CIMA) or the Chartered Institute of Internal Auditors (CIIA) is noted as a requirement in each of the job descriptions. The Internal Audit function delivers internal audit services to Midlothian Council. There are also two FTE corporate fraud officers both line managed by the Chief Internal Auditor. 6.3.3 Midlothian Council have a competency framework in place, supported by an Annual Review and Planning process/meeting. It is clear all staff have received an annual review and this process is working effectively. 6.3.4 The Internal Audit function is well represented on a number of corporate groups, including the Children and Young People Estate Board, Capital Plan Asset Management Board, Business Transformation Board, Information Management Group, Risk Management Group and Integrity Group. 6.3.5 The Chief Internal Auditor, Principal Auditor and Internal Auditors all have specific CPD requirements to adhere to, relevant to their own membership institutes. Evidence was provided that all staff participate actively in fulfilling their CPD requirements. 6.3.6 The audit manual and associated templates are comprehensive documents to fully support the exercise of due professional care for planning assurance and consulting engagements. In terms of the team having the relevant knowledge and skills, there is a training budget and there are also some courses which are required to be completed and update annually, for example cyber security. Computer assisted audit techniques are utilised by the team and are considered as part of each audit. 6.3.7 Stakeholder questionnaires confirm that the Chief Internal Auditor demonstrates sufficient knowledge and experience and that all members of the Internal Audit function exercise due professional care. 6.3.8 Midlothian Council’s Internal Audit function fully conforms with standard 1200 on Proficiency and Due Professional Care. 6.4 1300 - Quality Assurance and Improvement Programme Page 214 of 396
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9 The PSIAS state that the Chief Audit Executive must develop and maintain a quality assurance and improvement programme (QAIP) that covers all aspects of the internal audit activity. The QAIP must include both periodic internal self-assessments and five-yearly external assessments, carried out by a qualified, independent assessor from outside the organisation, and enable evaluation of the internal audit activity’s conformance with the PSIAS, including the Definition of Internal Auditing and Code of Ethics. In addition, the QAIP should also assess the efficiency and effectiveness of the internal audit activity and identify opportunities for improvement. The public sector requirement in the PSIAS states that results of the QAIP and progress against any improvement plans must be reported in the annual report. 6.4.1 Internal audit reports are reviewed by the Chief Internal Auditor or Principal Auditor prior to issue. Meetings can be arranged with the Principal Auditor to discuss any issues on a more detailed basis. 6.4.2 Client feedback is not actively pursued by the Internal Audit function for assignments carried out within Midlothian Council, however verbal feedback is provided at Corporate Management Team meetings. The Chief Internal Auditor advised that client surveys are not used due to the inherent flaws in the process and the size of the Council could lead to the same officers being asked to repeatedly supply feedback. 6.4.3 However, the use of survey forms was recommended as part of the action plan flowing from the previous external PSIAS assessment at Midlothian and a feedback mechanism was also raised as part of the internal assessment process as reported in the 2023/24 Annual Assurance Report and Opinion, where an improvement action was highlighted to “Develop appropriate methodology to formally document service feedback.” Recommendation 2 An appropriate methodology to facilitate and document service feedback should be developed and used to inform ongoing service delivery. 6.4.4 The Mid-Year Performance Report and the Annual Assurance Reports are detailed and comprehensive around the regulatory framework and PSIAS requirements and reports on whether an audit is complete, in progress or not started. In the Annual Assurance report, the percentage of work carried out compared to the Internal Audit Plan is reported but there are no Key Performance Indicators or Balanced Scorecards produced around the performance of the Internal Audit Function. 6.4.5 Whilst the use of performance indicators is not explicitly required in PSIAS, the GIAS requires the development of objectives to evaluate the internal audit function’s performance. Recommendation 3 A performance measurement methodology should be developed to evaluate the internal audit function’s performance against its objectives. 6.4.6 Formal PSIAS Self Assessments are carried out each year, and a corresponding QAIP is compiled and reported as part of the Annual Assurance Report along with progress on any actions agreed as part of the previous year’s self assessment. 6.4.7 Midlothian Council’s Internal Audit Function generally conforms with Standard 1300 on Quality Assurance and Improvement Programme. 7. SECTION E – PERFORMANCE STANDARDS Page 215 of 396
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10 Performance Standards describe the nature of the internal audit services being provided and provide criteria against which the performance of an internal audit function can be measured. 7.1 2000 - Managing the Internal Audit Activity The chief audit executive must effectively manage the internal audit activity to ensure it adds value to the organisation. The internal audit activity is effectively managed when it achieves the purpose and responsibility included in the internal audit charter, it conforms with the PSIAS, its individual members conform with the Code of Ethics and the PSIAS and it considers trends and emerging issues that could impact the organisation. The internal audit activity adds value to the organisation and its stakeholders when it considers strategies, objectives and risks; strives to offer ways to enhance governance, risk management, and control processes; and objectively provides relevant assurance. 7.1.1 An annual Internal Audit Plan is compiled by the Chief Internal Auditor outlining the planned programme of work to be undertaken. Audit work during the past 5 years was analysed against the audit universe which had been recently revised to reflect current strategic and operational management arrangements. The Strategic Risk Profile was checked also to ensure coverage on key strategic risks and account was also taken of external audit work and inspection activities to avoid duplication, alongside an annual evaluation of compliance with the Local Code of Corporate Governance. 7.1.2 An audit was undertaken in 2023/24 around Midlothian Council’s Risk Management Framework which concluded there was a substantial level of assurance around the policy at a strategic level but limited assurance at an operational level. 7.1.3 The resources in the team has reduced in recent years and it is acknowledged that this has led to a reduction in the contingency budget and reduces the resilience of the team in terms of being able to fully complete the Audit Plan. 7.1.4 Directors and Chief Officers, alongside the Corporate Management Team (CMT) and the Audit Committee all consider and have input into the Audit Plan before it is approved by Audit Committee and the CMT. 7.1.5 Work by the Internal Audit function towards completion of the assignments included in the Audit Plan is reported to Audit Committee quarterly alongside the salient points from each audit completed. 7.1.6 Four out of five stakeholder questionnaire responses believe that the internal audit function adds value to the Council and that the internal audit plan takes account of the council’s risk management framework and the Chief Auditors assessment of risk. One responder in each of these questions considered it only to be partly true. 7.1.7 Key Priorities within the Single Midlothian Plan and also the Key Drivers for Change are detailed as an appendix in the cover report for the Internal Audit Strategy and Annual Plan. Each audit on the plan is linked to the Council Strategic plan objectives as part of the planning process. However the Internal Audit Strategy could both be linked more closely to the organisational objectives and priorities and this linkage reflected in the individual audit planning document. Recommendation 4 The Audit Strategy and specifically the planning document for each individual audit should reflect the annual plan link to the overall strategic objectives of the Council. 7.1.8 The audit plan should be developed on a risk basis and should take account of other sources of assurance. This should include an assurance mapping exercise and co- Page 216 of 396
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11 ordination of activities with other assurance providers where appropriate. Whilst there is some co-ordination with the external auditors and reviews of some external assurance reports, there is no overall assurance map. Recommendation 5 The Chief Auditor should consider developing an assurance mapping methodology to provide clarity around the internal audit planning and reporting approach. 7.1.9 Midlothian Council’s Internal Audit function generally conforms with Standard 2000 on Managing the Internal Audit Activity. 7.2 2100 - Nature of Work The internal audit activity must evaluate and contribute to the improvement of the organisation’s governance, risk management, and control processes using a systematic, disciplined, and risk-based approach. Internal audit credibility and value are enhanced when auditors are proactive and their evaluations offer new insights and consider future impact. More specifically, the internal audit activity must assess and make appropriate recommendations to improve the organisation’s governance processes, evaluate the effectiveness and contribute to the improvement of risk management processes and assist the organisation in maintaining effective controls by evaluating their efficiency and effectiveness and promoting continuous improvement. 7.2.1 The Internal Audit function has adequate coverage over governance and risk management and control. Stakeholder questionnaires completed for this review generally agreed that the Internal Audit function adds value to the Council and leads to improved organisational processes and operations. Each audit programme for individual assignments lays out in detail relevant risks and legislation applicable to the audit, expected internal controls and any other recent reviews that have taken place and whether there are any fraud risk assessments to consider. 7.2.2 In particular, adequate arrangements are in place to evaluate the risk of fraud and this is considered as part of each audit. Midlothian Council has a separate fraud plan which is submitted to the Audit Committee annually. 7.2.3 Each control objective in each audit forms part of a working paper which is the base for recording all test results and recommendations. The results of each complete audit is then communicated to all relevant staff as appropriate including the Chief Executive, Corporate Management Team and Departmental Management team. 7.2.4 Midlothian Council’s Internal Audit function fully conforms with Standard 2100 on Nature of Work. 7.3 2200 - Engagement Planning Internal auditors must develop and document a plan for each engagement, including the engagement’s objectives, scope, timing and resource allocations. The plan must consider the organisation’s strategies, objectives and risks relevant to the engagement. The CIPFA Local Government Application note states that for each engagement, a brief should be prepared, discussed and agreed with relevant managers. The brief should establish the objectives, scope and timing for the assignment and its resource and reporting requirements. Audit work should be undertaken using a risk-based audit approach. 7.3.1 As detailed above, each audit assignment has a completed terms of reference which details the objectives and estimated timing of the audit, however the resources required giving consideration to knowledge, skills and competencies, whilst reflected in the audit Page 217 of 396
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12 plan should be formally recorded as considered at this stage. It is noted that the resources are limited to the small team available. The scope of the engagement is detailed but not what is excluded and this section could be expanded to incorporate this. This is then linked to a document which sets out the internal control environment expected, alongside risks and relevant legislation and subsequently to working papers containing the details and results of testing against the control objectives. The work carried out for each audit is then reviewed by senior staff before being reported to management. Recommendation 6 The Terms of Reference Document should be expanded to include any exclusions from the scope of the work and consideration of the resources allocated, whilst recognising that the choice of resources is limited. 7.3.2 Midlothian’s Internal Audit function also undertakes audits for the Midlothian Integration Joint Board which involves regular discussion with neighbouring IJBs and NHS Lothian Internal Audit. 7.3.3 There is also an allowance in the Audit Plan to support consulting engagements of which there were two in 2023/24. Each consultancy engagement has a standard brief prepared and is then reported using a standard template. 7.3.4 Midlothian Council’s Internal Audit function generally conforms with Standard 2200 on Engagement Planning. 7.4 2300 - Performing the Engagement Internal auditors must identify, analyse, evaluate and document sufficient information to achieve the engagement’s objectives. At each stage of the audit, auditors should consider what specific work needs to be conducted and evidence needs to be gathered to achieve the engagement objectives and support an independent and objective audit opinion. Systems should be in place to ensure that auditors obtain and record, within the working papers, sufficient evidence to support their conclusions, professional judgements and recommendations. Working papers should always be sufficiently complete and detailed to enable an experienced internal auditor with no previous connection with the audit to ascertain what work was performed, re-perform it if necessary and support the conclusions reached. The CAE should also specify how long all audit documentation should be retained, whether held on paper or electronically. All audit work should be subject to an appropriate internal quality review process. Internal auditors must be alert to the possibility of intentional wrongdoing, errors and omissions, poor value for money, failure to comply with management policy and conflicts of interest when performing their individual audits. They must also have sufficient knowledge to identify indicators that fraud or corruption may have been committed. 7.4.1 The Midlothian Internal Audit Manual is a comprehensive document, a working blue print to be able to conduct all aspects of an effective Internal Audit assignment. 7.4.2 In general, there are very effective standard templates to allow a consistent and methodical approach to be undertaken on audit assignments and for effective peer review, including templates for meeting structures, engagement emails, Terms of Reference, audit programmes, audit working papers and reports. 7.4.3 Working papers are based on a standard template for each objective or expected control. The background to the objective and the risks involved are detailed in each working paper, alongside the tests carried out and detailed findings. All related documents including detailed workings are hyperlinked. Page 218 of 396
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13 7.4.4 The Internal Audit Team meet weekly to discuss progress and any issues being encountered. A review of working paper files demonstrated that audit work is appropriately reviewed at all stages. 7.4.5 Records management arrangements and consideration of GDPR are fully detailed in the audit manual. 7.4.6 Midlothian Council’s Internal Audit function fully conforms with Standard 2300 on Performing the Engagement. 7.5 2400 - Communicating Results The basic aims of every internal audit report should be to: • give an opinion on the risk and controls of the area under review, building up to the annual opinion on the overall adequacy and effectiveness of the organisation’s framework of governance, risk management and control; • prompt management to implement the agreed actions for change leading to improvement in the control environment and performance; and • provide a formal record of points arising from the audit and, where appropriate, of agreements reached with management, together with appropriate timescales. Each report should include the scope and purpose of the audit to help the reader to understand the extent, or limitations, of the assurance(s) provided by the report. During the course of the audit, key issues should be brought to the attention of the relevant manager to enable them to take corrective action and to avoid surprises at the closure stage. Before issuing the final report, the internal auditor should normally discuss the contents with the appropriate levels of management to confirm the factual accuracy, to seek comments and to confirm the agreed management actions. A draft report is useful for this purpose. Recommendations should be prioritised according to risk. The recommendations and the resultant management action plans should be agreed prior to the issue of the final report. Any areas of disagreement between the internal auditor and management that cannot be resolved by discussion should be recorded in the action plan and the residual risk highlighted. Those weaknesses giving rise to significant risks that are not agreed should be brought to the attention of a more senior level of management and the board. As set out in the PSIAS, the CAE must deliver an annual internal audit opinion and report that can be used by the organisation to inform its annual governance statement. This must include the annual internal audit opinion concluding on the overall adequacy and effectiveness of the organisation’s governance, risk and control framework, a summary of the audit work from which the opinion is derived (including reliance placed on work by other assurance bodies); and a statement of conformance with the PSIAS and the results of the internal audit QAIP. 7.5.1 Midlothian Internal Audit function has an effective reporting template which allows the results of the Audit assignment to be clearly communicated to management. A management summary is followed by the findings from the audit with clear links to the recommendations section. There is also room for acknowledging good practice. 7.5.2 The content of the report and its factual accuracy are discussed throughout the engagement and a standard template is in place for exit meetings where positive findings are discussed initially before other findings and recommendations. An exit meeting takes place after every audit and before the draft report is issued. 7.5.3 Within the overall audit opinion there is a summary included of all reports issued during the year and the status of recommendations made. There is a clear link between the audit work completed during the year and the opinion given. Management responses Page 219 of 396
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14 are then received for all recommendations with implementation dates and the names of officers responsible for implementing them. 7.5.4 Audit reports are all given assurance gradings in line with CIPFA public sector guidance. 7.5.5 All of the stakeholder questionnaires responses confirmed that internal audit reports are accurate, objective, clear, concise, constructive, complete and timely. Two of the responses indicated that internal audit reports, whether in full or abridged were not always reported to key stakeholders and audit committee, though it was acknowledged that they were available on request. Recommendation 7 The Chief Auditor should discuss the circulation of audit reports with key stakeholders including the audit committee to ascertain their preferred format for example whether they want all reports circulated in full or abridged versions with only key points highlighted. 7.5.6 Midlothian Council’s Internal Audit function generally conforms with Standard 2400 on Communicating Results. 7.6 2500 - Monitoring Progress The PSIAS place responsibility for monitoring progress with the CAE to ensure that management actions have been effectively implemented or, if not, that senior management have accepted the risk of not taking action. The CAE must, therefore, implement a follow-up process for ensuring the effective implementation of audit results or ensuring senior management are aware of the consequences of not implementing an action point and are prepared to accept the risk of such consequences occurring. The results of this process should be communicated to the board. The CAE should develop escalation procedures for cases where agreed actions have not been effectively implemented by the date agreed. These procedures should ensure that the risks of not taking action have been understood and accepted at a sufficiently senior management level. The effective involvement of the board in the follow-up process is critical to ensuring that it works. The CAE should consider revising the internal audit opinion in light of findings from the follow-up process. The findings of follow-up reviews should inform the planning of future audit work. 7.6.1 Follow up of audit recommendations is made in two ways, a sample check on a risk assessed basis of audit actions flagged as closed by management, and an assessment of performance against audit actions being closed by the due date. 7.6.2 Progress on audit actions is reported to Audit Committee or to the IJB Audit and Risk Committee as appropriate through the year. 7.6.3 Midlothian Council’s Internal Audit function fully conforms with Standard 2500 on Monitoring Progress. 7.7 2600 - Communicating the Acceptance of Risks When the chief audit executive concludes that management has accepted a level of risk that may be unacceptable to the organisation, they must discuss the matter with senior management. If the chief audit executive determines that the matter has not been resolved, they must communicate the matter to the board. It is not the responsibility of the chief audit executive to resolve the risk. 7.7.1 Reports to Audit Committee and CMT are always in the Chief Internal Auditor’s name and reported directly by them. Allied to this, the Chief Internal Auditor has a monthly meeting with the Chief Executive and meets the Audit Committee Chair prior to every Page 220 of 396
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15 audit committee. There were no incidents where a recommendation was not agreed by management and would have required escalation. 7.7.2 The full scope of the internal audit function and its responsibilities are covered comprehensively in the annual report, opinion and appendices. 7.7.3 Midlothian Council’s Internal Audit function fully conforms to the Standard on Communicating the Acceptance of Risk. Michelle Blair Chief Auditor East Renfrewshire Council 2 June 2025 Page 221 of 396
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16 APPENDIX A – SUMMARY OF ASSESSMENT REF PAGE No. ASSESSMENT AREA Fully Conforms Generally Conforms Partially Conforms Does Not Conform Section A Mission of Internal Audit and Core Principles Section B Definition of Internal Auditing Section C Code of Ethics Section D ATTRIBUTE STANDARDS 1000 Purpose, Authority and Responsibility 1100 Independence and Objectivity 1200 Proficiency and Due Professional Care 1300 Quality Assurance and Improvement Programme Section E PERFORMANCE STANDARDS 2000 Managing the internal Audit Activity 2100 Nature of Work 2200 Engagement Planning 2300 Performing the Engagement 2400 Communicating Results 2500 Monitoring Progress Page 222 of 396
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17 2600 Communicating the Acceptance of Risks TOTALS 8 6 0 0 Page 223 of 396
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18 APPENDIX B – EVIDENCE PACK • Completed EQA checklist • Annual Report 2023/24 and 2024/25 and minute • Organisation Chart • Internal Audit Charter and minute • Follow up cover report and supporting papers • Annual Governance Statement • Clearance of objectives examples • Procedures for updating Plan • Annual plan 2023/2024 and minute • Progress report examples • Audit and Scrutiny Committee report and minute • Details of staff qualifications • Confirmation of independence • Best Value Report (2023) • Employee code of conduct and HR Policies and Procedures • Examples of audit reports • Chief Internal Auditor and staff job description • Confirmation of Attendance at Committee • Training records • Review Points • Anti-fraud procedure extract and annual report • External PSIAS assessment audit committee report (2018) • Stakeholder questionnaires • Interview with Auditor Page 224 of 396
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19 APPENDIX C – STAKEHOLDER QUESTIONNAIRES Stakeholder questionnaires were completed by the following key members of staff and Elected Members: • Grace Vickers (Chief Executive) • Alan Turpie (Monitoring Officer, Legal and Governance Manager) • David Gladwin (S95 Officer, Chief Financial Officer) • Cllr Derek Milligan • Cllr Peter Smaill Page 225 of 396
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20 APPENDIX D – ACTION PLAN No. Para Recommendation Management Response Responsible Officer / Agreed Completion Date 1 6.1.3 When the Audit Charter is next reviewed it should include: • An expanded section definitively addressing the Internal Audit role in combatting fraud, the role and status of the fraud team, signposting to the counter fraud and anti- corruption policies and the arrangements for fraud to be notified to the relevant officer/team. • A definition of the nature of assurance services • The roles and responsibilities of statutory officers in relation to internal audit. Agreed these will be added when the Audit Charter is reviewed in March 2026. The current charter was based on the model charter for the new GIAS standards as provided by the Chartered Institute for Internal Audit and will be updated to include these additional items. Chief Internal Auditor March 2026 2 6.4.3 An appropriate methodology to facilitate and document service feedback should be developed and used to inform ongoing service delivery. Agreed a document has been developed in assessing the working papers as part of the implementation of GIAS and in accordance with the approved Quality Assurance Plan in place and will be utilised for audits in the 2025/26 financial year. Chief Internal Auditor July 2025 3 6.4.5 A performance measurement methodology should be developed to evaluate the internal audit function’s performance against its objectives. Agreed, a review will be undertaken to establish appropriate KPI’s in accordance with the GIAS guidance and in benchmarking with other Local Authority audit teams to attempt to find meaningful targets. These will be set and then monitored from the next strategy and plan approval. Chief Internal Auditor March 2026 4 7.1.7 The Audit Strategy and specifically the planning document for each individual audit should reflect the annual plan link to the overall strategic objectives of the Council. The Link to strategy will be included in the individual audit planning document and reflected more specifically in the Internal Audit Strategy prior to its next approval at Audit Committee. Chief Internal Auditor March 2026 5 7.1.8 The Chief Auditor should consider developing an assurance mapping methodology to provide clarity around the internal audit planning and reporting approach Agreed this was raised with Audit Committee within the Charter paper in March 2025 and will be progressed within the resources available a methodology for developing being in place during 2025/26. Chief Internal Auditor March 2026 6 7.3.1 The Terms of Reference Document should be expanded to include any exclusions from the scope of the work and consideration of the resources allocated, whilst recognising that the choice of resources is limited. Agreed the TOR was updated for GIAs compliance to include this and will operate for the 2025/26 audits as current resourcing really only allows for a choice of one Auditor or the other one we can record that choice in the TOR. Chief Internal Auditor July 2025 7 7.5.5 The Chief Auditor should discuss the circulation of audit reports with key stakeholders including the audit committee to ascertain their preferred format for example whether they Agreed this will be included in the Audit Committee self- evaluation for reporting to Audit Committee in September 2025. All Audit Committee members and the Chief Internal Auditor Page 226 of 396
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21 want all reports circulated in full or abridged versions with only key points highlighted. September 2025 Critical Significant Routine Page 227 of 396
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Audit Committee Monday 16 June 2025 Item No 5.10 Draft Annual Governance Statement 2024/25 Report by Chief Executive Report for Decision 1 Recommendations The Audit Committee is asked to: a) Consider the details of the draft Annual Governance Statement 2024/25 at Appendix 1 to ensure it reflects the risk environment and governance in place to achieve objectives, and acknowledge the actions identified by Management to improve internal controls and governance arrangements; and b) Approve that it be published in the Council’s Statement of Accounts 2024/25, noting the requirement for the final Annual Governance Statement to be signed by the Chief Executive and Leader of the Council at the conclusion of the external audit process. 2 Purpose of Report/Executive Summary The purpose of this report is to propose that the Audit Committee considers and approves the draft Annual Governance Statement that will be published in the Council’s Statement of Accounts 2024/25. Midlothian Council is responsible for ensuring that its business is conducted in accordance with the law and proper standards, and that public money is safeguarded and properly accounted for, and used economically, efficiently and effectively. The Council’s Local Code of Corporate Governance that was approved by Council on 23 March 2021 was used to assist with the annual assurance process 2024/25. The draft Annual Governance Statement 2024/25, which is appended to this report as Appendix 1 for consideration, is the output from the annual assurance process and review against the Local Code. Date 2 June 2025 Report Contact: Duncan Stainbank duncan.stainbank@midlothian.gov.uk Page 229 of 396
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2 3 Background 3.1 Midlothian Council is responsible for ensuring that its business is conducted in accordance with the law and proper standards, and that public money is safeguarded and properly accounted for, and used economically, efficiently and effectively. 3.2 Fundamentally, Corporate Governance is about openness, integrity and accountability. It comprises the systems and processes, and cultures and values by which the authority is directed and controlled and through which it accounts to, engages with and, where appropriate, leads its communities. 4 Annual Assurance Process 2024/25 4.1 The CIPFA/SOLACE Framework urges local authorities to review the effectiveness of their existing governance arrangements against their Local Code and prepare a governance statement and report compliance on an annual basis. 4.2 The Audit Committee is integral to overseeing independent and objective assurance and monitoring improvements in internal control and governance. Its Terms of Reference includes ‘To review the Annual Governance Statement prior to approval and consider whether it properly reflects the risk environment and supporting assurances’. 4.3 The Internal Audit function undertook an assessment of the Local Code of Corporate Governance and identified areas of further improvement to enhance the effectiveness of internal control and governance arrangements and compliance against the Local Code. 4.4 Progress with implementation of actions regarding previously identified improvement areas of governance has also been evaluated. 4.5 The draft Annual Governance Statement 2024/25 at Appendix 1, in compliance with the CIPFA/SOLACE Framework, provides details of the Council’s Governance Framework, the annual Review of Framework undertaken, Improvement Areas of Governance, and Overall Opinion. 4.6 It is the Chief Executive’s opinion that reasonable assurance can be placed upon the adequacy and effectiveness of Midlothian Council’s systems of internal control and governance. Although areas for further improvement have been identified, the annual review demonstrates sufficient evidence that the Council’s Local Code of Corporate Governance is operating effectively, and that the Council complies with that Local Code in most respects to meet its principal objectives. Systems are in place to regularly review and improve governance arrangements and the system of internal control. 4.7 The draft Annual Governance Statement 2024/25 is informed by the assessment of compliance against the Local Code, written assurance statements from the Executive Directors, Internal Audit annual opinion and findings and recommendations, and comments and Page 230 of 396
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3 recommendations made by External Auditor and other external scrutiny bodies and inspection agencies. 5 Report Implications (Resource, Digital, Risk and Equalities) 5.1 Resource The overall aim of the CIPFA/SOLACE Framework ‘Delivering Good Governance in Local Government’ (2016), on which Midlothian Council’s Local Code of Corporate Governance is framed, is to ensure that: • resources are directed in accordance with agreed policy and according to priorities; • there is sound and inclusive decision making; and • there is clear accountability for the use of those resources in order to achieve desired outcomes for service users and communities. Core principle of good governance “E. Developing the entity’s capacity, including the capability of its leadership and the individuals within it” is included within the CIPFA/SOLACE Framework. Workforce and elected member development are a key part of the good governance framework within the Council’s Local Code of Corporate Governance. 5.2 Digital There are no digital implications arising from this report. 5.3 Risk The Local Code of Corporate Governance ensures that internal controls, risk management and other governance arrangements reflect the arrangements in place on an evidence-basis. The draft Annual Governance Statement 2024/25 details areas where additional work would further enhance the internal control environment or improve risk management and corporate governance arrangements. Core principle of good governance “F. Managing risks and performance through robust internal control and strong public financial management” is included within the CIPFA/SOLACE Framework. Midlothian Council’s Local Code of Corporate Governance sets out evidence of systems, processes and documentation to demonstrate local compliance with this core principle of good governance. 5.4 Ensuring Equalities This report does not relate to a new or revised policy, service or budget change, which affects people (the public or staff), so an Integrated Impact Assessment (IIA) is not an applicable consideration. The application of equalities legislation within practices is set out in Midlothian Council’s Local Code of Corporate Governance to demonstrate compliance of core principle of good governance “A. Behaving with integrity, demonstrating strong commitment to ethical values, and respecting the rule of law”. Page 231 of 396
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4 5.5 Additional Report Implications (See Appendix A) APPENDIX A – Additional Report Implications A.1 Key Priorities within the Single Midlothian Plan Good governance is important to enable Midlothian Council to deliver its key priorities in support of achieving the Council’s objectives as set out in the Single Midlothian Plan (Reducing the gap in economic circumstances; Reducing the gap in learning outcomes; Reducing the gap in health outcomes; and Reducing the impact of climate change). A.2 Key Drivers for Change Key drivers addressed in this report: Holistic Working Hub and Spoke Modern Sustainable Transformational Preventative Asset-based Continuous Improvement One size fits one None of the above Midlothian Council is committed to creating a great place to grow supported by the 9 drivers for change. Implementing the 9 drivers for change in practice is embedded in the Council’s Local Code of Corporate Governance to assist the Council in achieving its objectives. A.3 Key Delivery Streams Key delivery streams addressed in this report: One Council Working with you, for you Preventative and Sustainable Efficient and Modern Innovative and Ambitious A.4 Delivering Best Value The overall aim of the CIPFA/SOLACE Framework ‘Delivering Good Governance in Local Government’ (2016), on which Midlothian Council’s Local Code of Corporate Governance is framed, is to ensure that: resources are directed in accordance with agreed policy and according to priorities; there is sound and inclusive decision making; and there is clear accountability for the use of those resources in order to achieve desired outcomes for service users and communities. Page 232 of 396
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5 This will enable the Council to fulfil its obligations to provide best value service delivery to its citizens. A.5 Involving Communities and Other Stakeholders Core principle of good governance “B. Ensuring openness and comprehensive stakeholder engagement” is included within the CIPFA/SOLACE Framework. Midlothian Council’s evidence of systems, processes and documentation to demonstrate local compliance with this core principle of good governance is set out in its Local Code of Corporate Governance. The Council’s Corporate Management Team was engaged in the review and finalisation of the updated Local Code of Corporate Governance (approved by Council on 23 March 2021), and the update of the evidence to demonstrate good governance which reflects the current operating environment. A.6 Impact on Performance and Outcomes The annual self-assessment and the identification of improvement actions as evidenced through the draft Annual Governance Statement 2024/25 are designed to enhance the internal control environment, and risk management and corporate governance arrangements. This demonstrates the core principle of good governance “G. Implementing good practices in transparency, reporting, and audit to deliver effective accountability” included within the CIPFA/SOLACE Framework. A.7 Adopting a Preventative Approach Core principle of good governance “D. Determining the interventions necessary to optimise the achievement of the intended outcomes” is included within the CIPFA/SOLACE Framework. Prevention governance arrangements are a key part of the good governance framework within the Council’s Local Code of Corporate Governance. A.8 Supporting Sustainable Development Core principle of good governance “C. Defining outcomes in terms of sustainable economic, social, and environmental benefits” is included within the CIPFA/SOLACE Framework. Midlothian Council’s evidence of systems, processes and documentation to demonstrate local compliance with this core principle of good governance is set out in its Local Code of Corporate Governance. Page 233 of 396
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Draft Annual Governance Statement 2024/25 Introduction The Annual Governance Statement explains how the Council has complied with the terms of the CIPFA/SOLACE Framework (2016) for the year ended 31 March 2025, sets out the Council’s governance arrangements and systems of internal control, and reports on their effectiveness. The statement also covers relevant governance matters as they affect those entities included as part of the Council’s Group Accounts. Scope of Responsibility Midlothian Council is responsible for ensuring that its business is conducted in accordance with the law and proper standards, and that public money is safeguarded and properly accounted for. The Council also has a statutory duty of Best Value under the Local Government in Scotland Act 2003 to make arrangements to secure continuous improvement and performance, while maintaining an appropriate balance between quality and cost; and in making these arrangements and securing that balance, to have regard to economy, efficiency and effectiveness. In discharging this overall responsibility, elected members and senior officers are responsible for putting in place proper arrangements for the governance of Midlothian Council’s affairs and facilitating the exercise of its functions in a timely, inclusive, open, honest and accountable manner. This includes setting the strategic direction, vision, culture and values of the Council, effective operation of corporate systems, processes and internal controls, engaging with and, where appropriate, lead communities, monitoring whether strategic objectives have been achieved and services delivered cost effectively, and ensuring that appropriate arrangements are in place for the management of risk. The system can only provide reasonable and not absolute assurance of effectiveness. Framework for Good Governance The overall aim of the CIPFA/SOLACE Framework ‘Delivering Good Governance in Local Government’ (2016) is to ensure that: resources are directed in accordance with agreed policy and according to priorities; there is sound and inclusive decision making; and there is clear accountability for the use of those resources in order to achieve desired outcomes for service users and communities. The Framework defines the seven core principles of good governance, namely: A. Behaving with integrity, demonstrating strong commitment to ethical values, and respecting the rule of law; B. Ensuring openness and comprehensive stakeholder engagement; C. Defining outcomes in terms of sustainable economic, social, and environmental benefits; D. Determining the interventions necessary to optimise the achievement of the intended outcomes; E. Developing the entity’s capacity, including the capability of its leadership and the individuals within it; F. Managing risks and performance through robust internal control and strong public financial management; and G. Implementing good practices in transparency, reporting, and audit to deliver effective accountability. The Council’s Local Code of Corporate Governance, which is consistent with the principles and recommendations of the CIPFA/SOLACE Framework and the supporting guidance notes for Scottish authorities (November 2016), was approved by Council in March 2021. Page 235 of 396
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The Council’s Governance Framework The key elements of the Council’s governance arrangements, as set out in the Council’s Local Code of Corporate Governance, include: A. Behaving with integrity, demonstrating strong commitment to ethical values, and respecting rule of law The roles and responsibilities of elected members and officers and the processes to govern the conduct of the Council’s business are defined in the Elected Members Code of Conduct, standing orders and scheme of delegation for officers, scheme of administration, and financial regulations. Codes of conduct are in place for and define the high ethical values and standards of behaviour expected from elected members and officers to make sure that public business is conducted with fairness and integrity. The Monitoring Officer is responsible for ensuring that agreed procedures are followed and that all applicable statutes and regulations are complied with. The Standards Committee is responsible for dealing with matters relating to conduct and ethical standards. The Council seeks feedback from the public through its complaints and complements procedures for all of the Council which responds to the outcomes, as appropriate, and reports the results annually. Professional advice on the discharge of statutory social work duties was provided during the year to the Council by the Chief Social Work Officer (CSWO). The CSWO promotes values and standards of professional practice and acts as the 'agency decision maker' taking final decisions on a range of social work matters including adoption, secure accommodation, guardianship, etc. The CSWO reports annually on the statutory work undertaken, regulation and inspection, workforce issues and significant social policy themes. B. Ensuring openness and comprehensive stakeholder engagement All meetings of the Council and its Committees are held in public with the exception of items for discussion that are exempt under the Local Government (Scotland) Act 1973. All Council and Committee meetings are hybrid and webcast to ensure public access, and recordings can be accessed from the Council’s website. Unless confidential, decisions made by Council or other Committees are documented in the public domain. All decisions are explicit about the criteria, rationale and considerations used. The impact and consequences of all decisions are clearly set out. The Council seeks community views on a wide range of issues and undertakes regular consultation and engagement with citizens and service users, including the public consultation on the Medium Term Financial Strategy 2025/26 to 2028/29 reported to the December 2024 Council meeting. C. Defining outcomes in terms of sustainable economic, social, and environmental benefits The Council’s vision, strategic objectives and priorities are set out in the Single Midlothian Plan developed through the Community Planning Partnership (of which the Council is a partner). The Council’s Medium Term Financial Strategy and Service Plans outline how Midlothian Council will deliver its contribution to the Single Midlothian Plan. In June 2023 the Council also approved a Transformation Blueprint 2023-2028 to support the Medium Term Financial Strategy and help bridge a projected five-year funding gap. Progress against this blueprint is reported to Council on a quarterly basis along with progress on the Medium Term Financial Strategy which was updated for the period 2025/26 to 2028/29 in October 2024.Progress is also reviewed at 4 weekly BTB’s and reported to BTSG as a Standing Item. Capital investment at a strategic level is structured to consider and balance the combined economic, social and environmental impact of policies and plans when taking decisions about service provision. Asset management planning is being developed to support this, although it is recognised that this process needs to be accelerated to meet the needs of the growing Council area. The Council considered the recommendation of the February 2024 Aether Climate Action Support Report in November 2024 and has instructed a refresh of the Council’s Climate Change Strategy. The Council approved the Economic Growth Strategy 2025-30 in November 2024, which has been reviewed to align with the Scottish Government National Strategy for Economic Transformation and the Edinburgh and South East Scotland City Region Deal Regional Prosperity Framework. The Council supports community empowerment and recognises the importance of building community capacity and volunteering as a key factor in building stronger, safer, and supportive communities. Page 236 of 396
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Implications are considered during the decision-making process within the standard report template covering Resources, Risk, Single Midlothian Plan and Key Priorities, Impact on Performance and Outcomes, Adopting a Preventative Approach, Involving Communities and Other Stakeholders, Ensuring Equalities, Supporting Sustainable Development, and IT issues. D. Determining the interventions necessary to optimise the achievement of the intended outcomes Decision makers receive detailed information indicating how intended outcomes would be achieved together with the risks, financial and other implications associated with the proposals, by way of the compulsory sections of the Committee report template. In determining how services and other courses of action should be planned and delivered, the Council is increasingly engaging with internal and external stakeholders. The Council fosters effective relationships, collaborative working and contractual arrangements with other public, private, and voluntary organisations in delivering services that meet the needs of the local community including the achievement of ‘social value’ (community benefits) through service planning and commissioning. E. Developing the entity’s capacity, including the capability of its leadership and the individuals within it The roles of officers are defined in agreed job descriptions. Staff performance is reviewed on an annual basis in accordance with the relevant appraisal processes in place during the year. In December 2024, the Council approved the Midlothian Council Workforce Strategy 2024 to 2034 developed using an evidence-based management approach engaging with stakeholders and employees via an employee survey. The Chief Executive is responsible and accountable to the Council for all aspects of management including promoting sound governance, providing quality information/support to inform decision making and scrutiny, supporting other statutory officers, and building relationships with all Councillors. The Elected Members Induction Programme took place following elections in May 2022 and is periodically supplemented by training events, seminars and briefings. Members appointed to certain committees have also received specific training related to the responsibilities on these committees e.g. licensing, planning, audit. F. Managing risks and performance through robust internal control & strong public financial management The Council has overall responsibility for directing and controlling the organisation. The Cabinet is the principal decision-making committee of the Council. The Performance, Review and Scrutiny Committee is responsible for reviewing performance against policy objectives and commenting on decisions and policies and their impact. The Council updated its Risk Management policy and strategy in August 2022 whose main priorities are the robust systems of identification, evaluation and control of risks which threaten the Council’s ability to meet its objectives to deliver services to the public. Internal Audit’s assessment in March 2024 was that assurance is substantial in relation to the Council’s Risk Management Policy and application of the policy at a strategic level, however significant further progress is required on the Service level risk management framework. The Chief Financial Officer (the Section 95 officer) is responsible for the proper administration of all aspects of the Council’s financial affairs including ensuring appropriate advice is given to the Council on all financial matters. The Council’s system of internal financial control is based on a framework of financial regulations (updated in June 2022), regular management information, administrative procedures (including segregation of duties), management supervision and a system of delegation and accountability. This remains reliant on the staff within the framework to ensure management supervision and accountability are diligently enforced. The Council has an approved strategy to tackling fraud, theft, corruption and crime, as an integral part of protecting public finances, safeguarding assets, and delivering services effectively. A revised Medium Term Financial Strategy continues to be monitored and updated on a regular basis with the latest 2025/26 to 2028/29 strategy being approved by Council in February 2025. Given the significant fiscal challenges which lie ahead, the Council continues to regularly monitor the Transformation Blueprint workstreams aligned to the Medium Term Financial Strategy. This will then inform the revised service plans, workforce plans and the long term sustainability of services. A Balanced budget was set by Council in February 2025 for the 2025/26 financial year by increasing Page 237 of 396
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Council tax by 10% and utilisation of £4.1 million of reserves, with indicative increases of Council tax of, 9%, 8% and 5% in the following 3 financial years and continued utilisation of reserves of £4.1milllion in the following 2 years the budget gap by 2028/29 becomes £8.9million. Highlighting the unprecedented financial pressure on the Council and some of the difficult decisions to be made in relation to both Capital and Revenue Budgets to establish a sustainable financial position. The previous Chief Officer Corporate Solutions carried out a self-assessment against the CIPFA FM code and reported the findings of this to CMT in September 2021 and this was subsequently reported to Audit Committee in December 2021. The Chief Officer Corporate Solutions identified six areas requiring improvement from his review of the CIPFA FM code. Actions identified included improving the resourcing of the Procurement team (ongoing), updating the Council’s Financial Regulations and Directives (complete – approved at June 2022 Council), putting in place a multi-year financial plan (ongoing – action relevant to two sections of the FM Code), improving the Council’s approach to lessons learned from completed projects (ongoing), and improving the Council’s risk management arrangements (ongoing). No further Committee update has been provided within the 2024/25 financial year. Revenue and Capital Budget Monitoring reports are presented to the Council on a quarterly basis for monitoring and control purposes including the annual outturn. The Management Commentary in the Statement of Accounts provides financial and other performance information regarding the operation of the Council, its wider achievements and areas for development. The Internal Audit of Budget Monitoring highlighted that the Council element of the IJB spend, being adult social work expenditure, needed to be included in the revenue budget monitoring figures and whilst this had been verbally updated to Council during the 2024/25 financial year, and formally reported to the Midlothian IJB Board with links provided to this publicly available information within the quarterly reports, these figures will now be included in the monitoring for the 2025/26 financial year. On 10 January 2025, the Accounts Commission wrote in a letter to all Chief Executives of Scottish Local Authorities, copying in Directors of Finance and external auditors highlighting the report of 12 December 2024 relating to a significant council tax fraud perpetrated against Aberdeen City Council. Highlighting the Chief Executive’s responsibility to ensure arrangements are in place to help assure elected members and the public that risks are being identified and managed effectively. The letter encouraged all Chief Executives to use the annual governance statement as an opportunity to take stock of the key controls and processes and whether self-assessment procedures are sufficient to provide elected members and officers with the required assurances. A review of the Council Tax processes within Midlothian Council has been completed and highlighted that in relation to Council Tax refunds the system did not provide adequate segregation of duties controls and there was not an appropriate monitoring regime in place. Subsequent sample testing identified no evidence of fraud within the 2024/25 financial year. Work is now ongoing with the supplier and within the service to rectify these issues. G. Implementing good practices in transparency, reporting, & audit to deliver effective accountability The independent and objective audit opinion of the Chief Internal Auditor (Chief Audit Executive) is stated within the Internal Audit Annual Assurance Report 2024/25. This is based on work carried out by an in-house team, including shared service resources from East Lothian Council for the Chief Internal Auditor, in conformance with the Public Sector Internal Audit Standards to fulfil statutory Internal Audit provision. The Council responds to the findings and recommendations of Internal Audit, External Audit, Scrutiny and Inspection bodies including associated Action Plans for improvement. The Audit Committee is integral to overseeing independent and objective assurance and monitoring improvements in internal control and governance. Quarterly Performance Reports were presented to Cabinet and the Performance, Review and Scrutiny Committee for monitoring the achievement of strategic priorities and key performance indicators. The Annual Accounts and Report sets out the financial position in accordance with relevant accounting regulations. Review of Adequacy and Effectiveness of the Council’s Governance Framework An annual review of the adequacy and effectiveness of the Council’s overall governance framework has been carried out. The output is this Annual Governance Statement which is presented to the Audit Committee. Page 238 of 396
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The review was further informed by assurances from: assessment of compliance against the Local Code; written assurance statements from the Executive Directors; Internal Audit annual opinion, findings and recommendations; and comments and recommendations made by External Auditor and other external scrutiny bodies and inspection agencies. Improvement Areas of Governance The collective review activity outlined above has identified the following areas where improvement in governance arrangements can continue to be made to enhance compliance with the Council’s Local Code of Corporate Governance and to demonstrate Best Value: 1) The previous Chief Officer Corporate Solutions carried out a self-assessment against the CIPFA FM code and reported the findings of this to CMT in September 2021 and this was subsequently reported to Audit Committee in December 2021. One of the actions identified was putting in place a multi-year financial plan. The Council subsequently approved a 2023-2028 Strategic Blueprint in June 2023, aligned to the Medium Term Financial Strategy. The Medium Term Financial Strategy 2025/26 to 2028/29 approved in October 2024 highlighted that the budget gap for 2025/26 incorporating planned use of service concession retrospection and a 5% Council Tax increase was projected to £9.4million rising to £20.6million by 2028/29. A Balanced budget was set by Council in February 2025 for the 2025/26 financial year by increasing Council tax by 10% and utilisation of £4.1 million of reserves, with indicative increases of Council tax of, 9%, 8% and 5% in the following 3 financial years and continued utilisation of reserves of £4.1milllion in the following 2 years the budget gap by 2028/29 becomes £8.9million. Working towards that sustainable position has been significant during the year, however further ongoing work is required and there were also 15 risks noted to this strategy that could impact on the current position, including the MIJB finances with management highlighting that the level of financial resource available to both partners is not reflective of the current level of demand to maintain services on a sustainable basis. Work will continue during 2025/26 towards a sustainable financial position over a multiyear period. 2) The Procurement Service continues to face recruitment challenges and despite multiple recruitment attempts was unable to secure a permanent Procurement Manager for 2024/25. A permanent Procurement Manager was appointed at the end April 2025, and the work plan is being developed for improvements to the service for the 2025/26 reporting year. Issues arising from the reduced team capacity are the off contract spend, and non-contracted spend within the organisation, chief officers are continuing to report impacts to the delivery of services. Expired contracts and off contract spend is being managed through regular review at Budget Boards to ensure that the risk is managed, and the appropriate remedial action is being taken, with oversight from the Executive Director and Chief Officers. In addition, commissioning and contract management are both focused areas of the Transformation Blueprint. 3) Capital plan affordability continues to be worked through as part of the Capital Plan prioritisation exercise, which was considered by Council in February 2025, alongside approval of new projects to the General Services Capital Plan and noting the expenditure and funding levels shown in the GSCP for 2024/25 to 2028/29 prior to reaching a financially sustainable outcome. Within that paper, it is noted that in developing the strategy and taking cognisance of the longer term affordability gap, it is clear that a number of potential projects which are currently included will only be able to be progressed if they can be delivered on a spend to save basis or where they can be delivered on a cost neutral basis or through alternative funding mechanisms. Whilst approval for fully funded learning estates projects has been progressed, delays in decision to critical projects may result in breaches of capacity to provide education provision across the Council area. The condition of certain schools is deteriorating, and significant investment is required in order to ensure all schools meet at least condition B standard. Changes to the leadership and management of the learning estate delivery programme are being worked through. It is also noted that there is ongoing development of the Council’s asset management across fleet, property and infrastructure to manage and invest in the portfolios effectively. 4) During the year there has been insufficient recording and reporting by services on service level risk registers and business continuity plans. There is a requirement to ensure that there is a one system approach to aligning business continuity planning across NHS and Midlothian Council including cybersecurity planning to ensure all critical services can be maintained at times of incidents. Training is being delivered to staff within services in relation to risk management and there has been involvement of contracted resource in the Children, Young People and Partnerships directorate. Outstanding Internal Audit recommendations to report to Audit Page 239 of 396
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Committee on the delivery of service risk registers and the review of business continuity resourcing, and completion of plans should result in an improvement in the control environment. 5) Deficiencies in the control environment for Council Tax within systems controls and monitoring of refunds are being resolved in conjunction with the systems supplier and ongoing monitoring will be implemented. The Counter Fraud team are intending to establish a risk assessment process for the Council to identify areas of risk and work with services for them to implement appropriate mitigations across the Council, specifically on the risk of fraud. Prior Year Improvement Areas of Governance Implemented The 2023/24 Annual Governance Statement for Midlothian Council contained the following areas of improvement all of which have been taken forward: 1) It was highlighted that the Council over the next 5 years required an approved multi-year financial plan key to developing the Council on a sustainable basis. The Medium Term Financial Strategy 2025/26 to 2028/29 approved in October 2024 highlighted that the budget gap for 2025/26 incorporating planned use of service concession retrospection and a 5% Council Tax increase was projected to £9.4million rising to £20.6million by 2028/29. A Balanced budget was set by Council in February 2025 for the 2025/26 financial year by increasing Council tax by 10% and utilisation of £4.1 million of reserves, with indicative increases of Council tax of, 9%, 8% and 5% in the following 3 financial years and continued utilisation of reserves of £4.1milllion in the following 2 years the budget gap by 2028/29 becomes £8.9million. Working towards that sustainable position has been significant during the year, however further ongoing work is required and there were also 15 risks noted to this strategy that could impact on the current position. 2) Improvements in Procurement Service Capacity have been enacted within the 2024/25 financial year, however obtaining and maintaining resources within the Procurement team remains a workforce challenge. A solution is currently in place however services have highlighted that the procurement workload has increased, and a planned approach will now need to be implemented over a significant period of time, which will require support across the Council. 3) Capital plan affordability continues to be worked through as part of the Capital Plan prioritisation exercise, which was considered by Council in February 2025, alongside approval of new projects to the General Services Capital Plan and noting the expenditure and funding levels shown in the GSCP for 2024/25 to 2028/29 prior to reaching a financially sustainable outcome. Within that paper it is noted that the in developing the strategy and taking cognisance of the longer term affordability gap, it is clear that a number of potential projects which are currently included will only be able to be progressed if they can be delivered on a spend to save basis or where they can be delivered on a cost neutral basis or through alternative funding mechanisms. A Capital plan prioritisation paper with options for consideration was also considered at the February 2025 Council and further work will be required to deliver a long-term sustainable solution. 4) In December 2024, the Council approved the Midlothian Council Workforce Strategy 2024 to 2034 developed using an evidence-based management approach engaging with stakeholders and employees via an employee survey. Additional resources were deployed during 2024/25 to improve the Council’s position in relation to Council Tax and Housing Benefit processing and within the compliance environment to meet statutory reporting responsibilities, work is ongoing to provide long term sustainable staffing in this area. The Council is currently subject to a Level 2 intervention from the Scottish Information Commissioner (SIC) in respect of its response rates for Freedom of Information requests. An action plan has been created and being delivered to improve the current position, with regular reporting to the Corporate Management Team (CMT). The Chief Officer Corporate Solutions, the Legal and Governance Manager and the Lead Performance and Improvement Officer (Place) meet the SIC on a monthly basis to monitor and evaluate progress on the improvement plan. Feedback from the SIC is that significant sustained improvement is demonstrated, and it is expected that the intervention will be removed Summer 2025. Conclusion and Opinion on Assurance The conclusion from the review activity completed and subject to the successful progression of the areas for improvement highlighted above, our opinion is that reasonable assurance given financial constraints can be placed upon the adequacy and effectiveness of Midlothian Council’s systems of Page 240 of 396
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governance, risk management and internal control. Although areas for further improvement have been identified, the annual review demonstrates sufficient evidence that the Council’s Local Code of Corporate Governance is operating effectively and that the Council complies with that Local Code in most respects to meet its principal objectives. Systems are in place to regularly review and improve governance arrangements and the system of internal control. _______________________ ______________________ Dr Grace Vickers Kelly Parry Chief Executive Leader of the Council ** September 2025 ** September 2025 Page 241 of 396
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Audit Committee Monday 16 June 2025 Item 5.11 Risk Management Update – Strategic Risk Profile Quarter 4, 2024-25 Report by Derek Oliver, Chief Officer Place Report for Information 1 Recommendations Audit Committee is recommended to: • Note the current risk landscape and organisational response to the most significant risks in Quarter 4, 2024-25 (1st Jan to 31st March 2025). 2 Purpose of Report/Executive Summary The purpose of this report is to provide Audit Committee with: • An update on the risk responses Midlothian Council has implemented during Q4 2024/25 to respond to the current risk climate • Assurance that Midlothian Council took a proportionate and planned approach to prepare and respond to the current risk climate • The risk evaluation of current strategic risks and opportunities for the Council 31st May 2025 Report Contact: Derek Oliver, Chief Officer Place Derek.Oliver@midlothian.gov.uk Page 243 of 396
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2 3 Q4 Risk Management Overview 3.1 Midlothian Council has delivered a wide range of services to the people of Midlothian throughout Quarter 4, 2024-25. 3.2 The Council continues to manage and review risks recorded within the Strategic Risk Profile. The work required to maintain the necessary corporate oversight over the broader strategic landscape continues through the Risk and Resilience Chief Officer Group and Corporate Management Team (CMT). 3.3 Audit Committee should note that there were no new risks added from the previous Quarter however, as per the request from Audit Committee, the Strategic Opportunities section was revised to include Strategic Projects. The Projects included have a Red category across their respective Risk Evaluation. Updates on actions taken are included in the full strategic risk profile (Appendix B). 3.4 Strategic Risk Profile (SRP) The SRP is split into three sections: • Strategic issues • Strategic risks • Opportunities 3.5 STRATEGIC ISSUES - SUMMARY Strategic issues Likelihood Impact Score Evaluation Q4 Q3 The Change Programme 5 5 25 Critical Critical Financial Sustainability 5 5 25 Critical Critical 3.6 The Change Programme The Change Programme remains evaluated at Critical. The financial challenges of the forecasted budget gap pose a significant challenge for benefits realisation. Council agreed to a Transformation Blueprint in June 2023 which is a 5-year transformation plan. 3.7 Financial Sustainability The scale of the financial challenge continues to be reported to the Business Transformation Steering Group and Council. Page 244 of 396
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3 3.8 STRATEGIC RISKS – SUMMARY Strategic Risks Likelihood Impact Score Evaluation Q4 24-25 Q3 24-25 Climate Change 5 5 25 Critical Critical Financial Sustainability in future years 5 5 25 Critical Critical The Long-Term Change Programme 5 5 25 Critical Critical Legal and Regulatory compliance 5 5 25 Critical Critical UK decision to leave the EU 4 5 20 High High Scottish Child Abuse Inquiry 4 4 16 High High Growing Council 4 4 16 High High Cost of Living Crisis 3 5 15 Medium Medium Asset Management 3 5 15 Medium Medium Cyber Security 3 5 15 Medium Medium Health and Safety 3 5 15 Medium Medium Care at Home 3 4 12 Medium Medium Employee performance 3 4 12 Medium Medium Emergency planning and business continuity 3 4 12 Medium Medium Governance and Standards 2 4 8 Low Low Internal control environment 2 3 6 Low Low Corporate policies and strategies 2 3 6 Low Low 3.9 STRATEGIC RISKS – RATED CRITICAL/HIGH 3.10 Climate Change Councillors were presented with a briefing on the Climate Action Plan in Q2 24-25 as committed to through the Transformation Blueprint. With a report presented to October Council, Councillors approved, given the challenges (particularly financial), the realignment of the target deadline of 2030 for net zero emissions from the Midlothian Council estate to 2045. . Page 245 of 396
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4 In light of this, a refresh of the Council’s Climate Change Strategy, approved by Council in August 2020, is progressing. 3.11 Financial Sustainability in future years The scale of the financial challenge continues to be reported to Business Transformation Steering Group and Council. 3.12 The Long-Term Change Programme The Change Programme has remained at Critical for the last 2 years. The financial challenges of the underlying budget gap pose a significant challenge. Council agreed to a Transformation Blueprint in June 2023 which is a 5-year transformation plan. 3.13 Legal and Regulatory compliance Significant resourcing pressures have impacted on risk evaluation. Work is ongoing with the Scottish Information Commissioner and National Records of Scotland to develop and deliver improvement plans. 3.14 UK decision to leave the EU The rate of inflation is impacting on the cost-of-living crisis for Midlothian residents and posing significant risk to a number of Council Capital Programme work streams. This was reported to the Business Transformation Steering Group (BTSG) and also through progress reports on programmes to Council. A new Economic Strategy was approved by Council in October. This risk evaluation remains High. 3.15 Scottish Child Abuse Inquiry (SCAI) The SCAI risk evaluation remains High as the Inquiry continues. 3.16 Growing Council The risk evaluation remains High in Q4 2024-25. This is in response to the current financial challenge as described above and the increased pressure the Council faces with growth. Some current examples of this include: • Inflationary impact on the delivery of the capital programme • Cost of living crisis • Pressure on the care sector as people are living longer and require more care provision • General population growth places additional demand on infrastructure such as GPs, schools, waste services etc. Page 246 of 396
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5 3.17 Work is ongoing to review the Learning Estate Strategy and a reprioritisation of the Capital Programme. 3.18 STRATEGIC OPPORTUNITIES 3.19 Capital Projects - Housing Projects impacted with 26% reduction in Affordable Housing Supply Programme grant to Midlothian and continued high build costs. Phase 5 housing programme has been reviewed to ensure affordability within the Housing Revenue Account, allowing for reduced levels of grant. Projects highlighted with specific Red Risk Evaluation(s) and detailed within the SRP are Edmonstone Road, Shawfair and Newton Church Road, Danderhall, with the latter having now commenced. 3.20 Capital Projects – Transport, Net Zero & Infrastructure Cost of delivering enabling infrastructure projects has risen, resulting in significant funding gap emerging and impacting on progress of A701 Relief Road, Sustainable Transport Corridor and Straiton Junction Improvements, which are detailed within the SRP. 3.21 Capital Projects – Children, Young People & Partnerships Estates Programme: Primary Five specific projects identified within the SRP: 1. Mayfield/St Lukes PS New Build: Programme delayed for project revision. 2. Mauricewood PS Extension & Refurbishment: Rising roll and catchment review requires investment in school to address capacity and suitability. Limited budget available. 3. Bilston PS Extension: Rising roll and catchment review requires investment in school to address capacity and suitability. Limited budget available. Design team appointed to develop investment in school that aligns with budget available from Developer Contributions. 4. Relocation of Mount Esk Nursery/Hawthornden Extension: Rising roll and catchment review requires investment in school to address capacity and suitability. Limited budget available. Design team appointed to develop investment in school that aligns with budget available from Developer Contributions. 3.22 Capital Projects – Children, Young People & Partnerships Estates Programme: Secondary Three specific projects identified within the SRP: 1. Beeslack HS Replacement: Site acquisition being progressed. 2. Shawfair All Through: Site acquisition complete. School location fixed with design team. Remediation programme being revised. Seeking to make efficiencies in remediation programme. Page 247 of 396
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6 3. Penicuik HS New Build: LEIP target for delivery is December 2026, however programme for occupation is July 2027. Cost reports tracking higher and risks identified in refurbishment works. SFT advising if additional LEIP funding available. 3.23 Capital Projects – Regeneration Three specific projects identified within the SRP: 1. Vogrie Changing Places. 2. Destination Hillend: Alpine Coaster delivered with access and parking infrastructure. Project absorbed risk and contingency. Next Phase to be recast. Interim works on water supply and drainage required. 3. Hopefield Industrial Estate: Updated financial model required. 4. Dalkeith Asset Rationalisation Programme: Budget approved by Council. 3.24 City Region Deal Edinburgh and South East Scotland City Region Deal - bid for funding to Scottish and UK Governments to accelerate economic growth through investment in infrastructure/ housing/ skills and innovation was agreed by Council in June 2018. Projects continue to be progressed with realisation of regional enhancements and connectivity. 4 Report Implications (Resource, Digital and Risk) 4.1 Resource There are no direct resource implications indicated in this report, although individual risks have associated resource implications. 4.2 Digital None 4.3 Risk The risks reported in this report are understood with the Council able to demonstrate the current risk controls and actions being taken in response to these. The report provides an overview of the significant risks faced by the Council during Quarter 4 2024-25 and should act to provide assurance that Midlothian Council took a proportionate and planned approach to prepare and respond to each of these risks. 4.4 Ensuring Equalities (if required a separate IIA must be completed) There are no direct equalities issues arising from this report. 4.5 Additional Report Implications (See Appendix A) Page 248 of 396
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7 See Appendix A Appendices Appendix A – Additional Report Implications Appendix B – Strategic Risk Profile Page 249 of 396
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8 APPENDIX A – Report Implications A.1 Key Priorities within the Single Midlothian Plan This report provides an overview of the Strategic Risk Profile of Midlothian Council at a defined point in time. The issues, risks and opportunities affecting or supporting delivery of the council priorities are set out within the Strategic Risk Profile. A.2 Key Drivers for Change Key drivers addressed in this report: Holistic Working Hub and Spoke Modern Sustainable Transformational Preventative Asset-based Continuous Improvement One size fits one None of the above A.3 Key Delivery Streams Key delivery streams addressed in this report: One Council Working with you, for you Preventative and Sustainable Efficient and Modern Innovative and Ambitious None of the above A.4 Delivering Best Value The Council’s commitment to best value and securing continuous improvement can best be delivered when decisions are made against a backdrop of understanding the risks and opportunities before an organisation. This report seeks to provide assurance that the current risk environment is understood and that Midlothian Council is taking appropriate action in response to those identified risks. A.5 Involving Communities and Other Stakeholders This Strategic Risk Profile report has been compiled with input from a range of internal key stakeholders. Page 250 of 396
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9 A.6 Impact on Performance and Outcomes This report seeks to provide an overview of the challenging risk environment within which the Council is operating at this time. Being in a risk aware position helps to inform current and future decision making, with the intention of enhancing decision making and the associated performance and outcomes which flow from well informed decision making. A.7 Adopting a Preventative Approach The Risk Management approach being taken by the Council is founded on a preventative approach to managing risks, where appropriate and more generally to decision making with far greater risk awareness. A.8 Supporting Sustainable Development Senior Managers must ensure the sustainability of the Council, which entails identifying, understanding and managing Strategic and Service level risks and opportunities. Page 251 of 396
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STRATEGIC RISK PROFILE, Q4 Jan-Mar 2025 v1.2 STRATEGIC RISK PROFILE, Q4 January-March 2025 SRP STRATEGIC RISK PROFILE SRP This risk register captures the main strategic issues, risks and opportunities that are corporate in nature. It identifies the nature of the risks, measures required to control the risks and their evaluation. It also details what further actions are required to reduce the likelihood and impacts of those risks to more acceptable and manageable levels with timescales. Strategic Issues SRP.IR.02 The Change Programme Risk Code Risk Identification Managed by Risk Control Measures Likelihood Impact Risk Evaluation SRP.IR. 02 Risk cause The pace of transformation strands of activity, reporting to the Business Transformation Board, does not secure service transformation, delivery of outcomes or benefit realisation. Risk event Delayed progress or non-achievement of outcomes and benefits. Risk effect Slow or delayed financial benefits arising from service redesign, requiring the adoption of recovery plans or requiring short term service reductions which impact on the Council’s ability to deliver against its priorities. Head of *Adult and Social Care; Chief Operating Officer *Education; Chief *Executive; Director *Health and Social Care; Chief Officer *Place; Executive Director *Place; Chief Officer Corporate Solutions; Chief Finance Officer; Chief Officer Young People and Partnerships 1. Transformation Blueprint agreed at Council June 2023 which is a 5- year transformation plan. Revised governance for transformation agreed and revised Terms of Reference in place for the Business Transformation Board to oversee progress on change programme. 2. Regular reporting to Council setting out scale of financial challenge ahead with recurring expenditure for current service delivery projected to exceed recurring income. 3. Cross Party Business Transformation Steering Group are given updates on the progress of the Transformation programme. 4. Financial monitoring reports and work of the Corporate Management Team evidence continued financial sustainability, in so far as services are delivered within the overall budget in year. 5 5 Page 253 of 396
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STRATEGIC RISK PROFILE, Q4 Jan-Mar 2025 v1.2 Related Action Code Related Action Related action latest note Managed By Due Date Status SPR.R A-02.08 Transformation Blueprint 2023-28 delivery Q4 24/25: As Q3 24/25 Q3 24/25: As Q2 24/25. Q2 24/25: Progress with sprints is reported to BTB at every meeting via the dashboard and also in detailed reports at some points. BTSG are provided with an updated dashboard every cycle and receive focused reports on individual sprints and also funding requests to release BT funds to support project work. Q1 24/25: As Q4 23/24. Q4 23/24: Work on sprints continues with some reporting to BTSG in the run up to June Council with the majority of others scheduled for August. BTB is now meeting fortnightly to encourage and closely monitor progress. To support monitoring of progress a dashboard has been developed and this is shared with CMT and BTSG as a standing item. Chief *Executive; Chief Officer *Place; Chief Officer Corporate Solutions; Chief Finance Officer; 30-Jun-2028 20% SRP.R A.02.03 Develop Medium Term Financial Strategy with greater oversight, clearer responsibility and accountability. Q4 24/25: MTFS projections to 2028/29 were presented to Council in February 2025 as part of setting the 2025/26 budget and accompanying Council Tax levels. A further update will be provided to Council during Q1 of 25/26. Q3 24/25: An update on the MTFS was presented to Council in December along with outcomes from the public consultation. Detailed analysis of emerging national budget positions for 2025/26 was presented and discussed at the Business Transformation Group. Q2 24/25: Further update on the MTFS was presented to Council in October and a public consultation was launched on 9th October running to 20th November. Q1 24/25: An update on the MTFS was presented to Council in June 2024. This identifies immediate actions required, in addition to those in the Transformation Blueprint, to bridge the gap between recurring expenditure and recurring income and to allow the setting of a balanced budget for 2025/26. Q4 23/24: An update on the MTFS with refreshed projections and a clear plan to address financial sustainability will be presented to Council in June 2024. Chief *Executive; Chief Finance Officer; 30-June-2024 100% Page 254 of 396
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STRATEGIC RISK PROFILE, Q4 Jan-Mar 2025 v1.2 SRP.IR.07 Financial Sustainability Risk Code Risk Identification Managed by Risk Control Measures Likelihood Impact Risk Evaluation SRP.IR. 07 Risk cause Scottish Government Grant settlements fall short of the resources needed to sustain core services. Core funding falling short of inflation pressures, pay awards and demographic pressures arising from an Increasing ageing population of over 75’s. Increasing population of 0-15 age group and at a time when there are rising customer expectations. Risk event Transformation activity and the flexibility available to Councils as part of the grant settlement does not address future years projected budget gaps. Risk effect Inadequate government funding makes securing balanced budgets challenging. This in turn erodes the Council’s ability to deliver services to the community and potentially means that resources available fall short of those the Council assess as required to meet its statutory obligations. Whilst transformation activity can help reshape services and ensure best value in the delivery of services it is not a solution to continued erosion of core funding. Head of *Adult and Social Care; Chief Operating Officer *Education; Chief *Executive; Director *Health and Social Care; Chief Officer *Place; Executive Director *Place; Chief Officer Corporate Solutions; Chief Finance Officer; Chief Officer Young People and Partnerships 1. There is an approved Capital Strategy and Reserves Strategy in place. The Capital Strategy is being updated in the context of ongoing and significant infrastructure pressures. 2. There is an approved budget for 2024/25. Services are delivered within the totality of that budget. 3. Enhanced monitoring arrangements have been agreed for service areas that are regularly showing overspends. 4. Directorates have budget boards in place to monitor and agree actions for those items which are identified as needing specific attention or present a risk to the financial position of services. 5. Strategic Boards in place and BTB focus and attention on driving transformation to support future year’s financial sustainability. 6. Working through COSLA to influence government spending decisions to influence Scottish Government’s budget allocation to Councils. 7. Capital Plan and Asset Management Board will scrutinise and challenge slippage on capital programmes recognising that slippage can have an adverse impact on financial sustainability and also the delivery on assets required to support capital growth. 8. Chief Executive continues to emphasise the need for effective financial control and underlined the benefit to the organisation of such an approach. 9. Scottish Governments May 2022 Resource Spending Review provided planning parameters for term of parliament, albeit these are challenging and present a real terms reduction in grant funding of circa 7% over the period. 10. Report to Council February 2024 sets out scale of financial challenge ahead with recurring expenditure for current service delivery projected to exceed recurring income. Updated MTFS projections presented in June 2024 with a further update presented in February 2025. 11. Cross Party Business Transformation Steering Group engaged in consideration of measures to secure balanced budgets alongside the development of a Strategic Plan to support decisions about what services, beyond those which are statutory can be provided. 5 5 Page 255 of 396
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STRATEGIC RISK PROFILE, Q4 Jan-Mar 2025 v1.2 Related Action Code Related Action Related action latest note Managed By Due Date Status SPR.R A-02.09 Transformation Blueprint 2023 to 2028 Q4 24/25: Refer to SRP.RA-02.08 Q3 24/25: Refer to SRP.RA-02.08 Q2 24/25: Refer to SRP.RA-02.08 Q1 24/25: As Q4 23/24. Q4 23/24: Work on sprints continues with some reporting to BTSG in the run up to June Council with the majority of others scheduled for August. BTB is now meeting fortnightly to encourage and closely monitor progress. To support monitoring of progress a dashboard has been developed and this is shared with CMT and BTSG as a standing item. Chief *Executive; Chief Finance Officer; 30-Jun-2024 20% SRP.R A.02.03 Develop Medium Term Financial Strategy with greater oversight, clearer responsibility and accountability. Q4 24/25: Refer to SRP.RA-02.03 Q3 24/25: Refer to SPR.RA-02.03 Q2 24/25: Refer to SPR.RA-02.03 Q1 24/25: An update on the MTFS was presented to Council in June 2024. This identifies immediate actions required, in addition to those in the Transformation Blueprint, to bridge the gap between recurring expenditure and recurring income and to allow the setting of a balanced budget for 2025/26. Q4 23/24: An update on the MTFS with refreshed projections and a clear plan to address financial sustainability will be presented to Council in June 2024. Chief *Executive; Chief Finance Officer; 30-June-2024 100% SRP.R A-02.10 Capital Plan Prioritisation Q4 24/25: Council in February received an update on Capital Plan Prioritisation work and made a decision on an updated Learning Estate Strategy. The extent and affordability of work flowing from building condition surveys is being assessed and will be concluded and reported to Elected Members early in 2025/26. Q3 24/25: Work continues on Capital Plan Prioritisation Q2 24/25: Work continues on Capital Plan prioritisation Q1 24/25: Work continues on Capital Plan prioritisation Chief Finance Officer; Executive Director – Place; Executive Director - Education 31-Oct-2024 0% SRP.IR.11 National Care Service Page 256 of 396
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STRATEGIC RISK PROFILE, Q4 Jan-Mar 2025 v1.2 Risk Code Risk Identification Managed by Risk Control Measures Likelihood Impact Risk Evaluation SRP.IR. 11 Risk cause In August 2022 the Scottish Government launched a 12-week consultation on the way in which social care is delivered in Scotland. The consultation followed recommendations made in the Independent Review of Adult Social care. The independent analysis of responses was published in February 2022. On 20 June 2022 the Scottish Parliament published the National Care Service (NCS) Bill which will provide the foundation for the NCS. Risk event The Bill is currently in Stage 1 of the process. The most significant part of the legislation which poses the most risk is the intention to transfer social care responsibility from local authorities to a new, national service. Risk effect The details of the logistics of any transfer are not yet provided within the Bill. It is not clear the extent to which powers will be removed from local authorities or what the provision or delivery of services will or will not be. At this stage, the risk effect is anticipated to be significant financial impact to local authorities and IJBs, as well as the potential for impacts on staffing, transfer of property and facilities and the reshaping of the delivery of care. It should be noted that the initial impact on the Council is staff time to contribute to the ongoing discussions and understanding of the impact of the Bill. Head of *Adult and Social Care; Chief *Executive; Director *Health and Social Care; Executive Director *Place; Chief Officer Young People and Partnerships As of 14 November 2024, a pause has been placed on the delivery of NCS legislation by the Scottish Government. NOTE: As of Jan 2025, the National Care Service proposal is now not proceeding. N/A N/A N/A Related Action Code Related Action Related action latest note Managed By Due Date Status Page 257 of 396
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STRATEGIC RISK PROFILE, Q4 Jan-Mar 2025 v1.2 SRP.R A.11.1 Officer Working Group Q3 24/25: Scottish Government announced in January 2025 that they will not be proceeding with the National Care Service. Q2 24/25: As of 14 November 2024, the Scottish Government has paused legislation on the creation of a NCS. Q1 24/25: The Bill is at Stage 2 Q4 23/24: The Bill is at Stage 2. Chief *Executive; 31-Dec-2024 100% Strategic Risks SRP.RR.01 Financial Sustainability in Future Years Risk Code Risk Identification Managed by Risk Control Measures Likelihood Impact Risk Evaluation SRP.R R.01 Risk cause: Scottish Government Grant settlements fall short of the resources needed to sustain core services. Core funding falling short of inflation pressures, pay awards and demographic pressures arising from an Increasing ageing population of over 75’s. Increasing population of 0-15 age group and at a time when there are rising customer expectations. Policy decisions by UK & Scottish Governments which are not fully funded. Changes to the responsibilities of Local Government and the funding implication that arise from that, particularly in respect of the creation of a National Care Service. Future year pay award settlements. Risk event: Real terms reduction in core grant settlements. Head of *Adult and Social Care; Chief Operating Officer *Education; Chief *Executive; Director *Health and Social Care; Chief Officer *Place; Executive Director *Place; Chief Officer Corporate Solutions; Chief Finance Officer; Chief Officer Young People and Partnerships 1. Development of Strategic Plan, Transformation Blueprint and MTFS projections which come together to provide a framework to effect change and to move the Council to a position of financial sustainability. 2. Maintaining a level of reserves to deal with unforeseen or one-off cost pressures. 3. Capital and Reserves Strategies in place. The Capital Strategy is being updated in the context of ongoing and significant infrastructure pressures. 4. Working through COSLA to influence government spending decisions to influence Scottish Government’s budget allocation to Councils. 5. Implement a lobbying strategy with government to recognise the unique position Midlothian Council is in. 6. Best Value Audit report actions. 7. Strategic Boards in place to drive transformation in line with the Transformation Blueprint. 8. Dedicating capacity to understand impact of NCS Bill, but limited details mean this is challenging and many unanswered questions (refer to specific risk on NCS for further detail). 5 5 Page 258 of 396
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STRATEGIC RISK PROFILE, Q4 Jan-Mar 2025 v1.2 Policies decisions at Government level not fully funded to Council's. Implementation of a National Care Service and impact on grant settlements. Securing the extent of change required in order to deliver financial sustainability and a change program that recognises the size of the challenge. Cost pressures exceeding budget estimates. Risk to not achieving financial sustainability is a failure to deliver cost reductions / service change embedded in the blueprint and also supplementing the blueprint. Related Action Code Related Action Related action latest note Managed By Due Date Status SRP.RA .02.03 Develop Medium Term Financial Strategy with greater oversight, clearer responsibility and accountability. Q4 24/25: Refer to SRP.RA-02.03 Q3 24/25: Refer to SRP.RA-02.03 Q2 24/25: Refer to SRP.RA-02.03 Q1 24/25: An update on the MTFS was presented to Council in June 2024. This identifies immediate actions required, in addition to those in the Transformation Blueprint, to bridge the gap between recurring expenditure and recurring income and to allow the setting of a balanced budget for 2025/26. Q4 23/24: An update on the MTFS with refreshed projections and a clear plan to address financial sustainability will be presented to Council in June 2024. Chief *Executive; Chief Finance Officer; 30-June-2024 100% SRP.RA .02.04 Transformation Blueprint 2023 to 2028 Q4 24/25: Refer to SRP.RA-02.08 Q3 24/25: Refer to SRP.RA-02.08 Q2 24/25: Refer to SRP.RA-02.08 Q1 24/25: As Q4 23/24. Q4 23/24: Work on sprints continues with some reporting to BTSG in the run up to June Council with the majority of others scheduled for August. BTB is now Chief *Executive; Chief Finance Officer; 30-Jun-2028 20% Page 259 of 396
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STRATEGIC RISK PROFILE, Q4 Jan-Mar 2025 v1.2 meeting fortnightly to encourage and closely monitor progress. To support monitoring of progress a dashboard has been developed and this is shared with CMT and BTSG as a standing item. SRP.RA .02.06 Capital Plan prioritisation Q4 24/25: Council in February received an update on Capital Plan Prioritisation work and made a decision on an updated Learning Estate Strategy. The extent and affordability of work flowing from building condition surveys is being assessed and will be concluded and reported to Elected Members early in 2025/26. Q3 24/25: Work continues on Capital Plan Prioritisation Q2 24/25: Work continues on Capital Plan prioritisation Q1 24/25: Work continues on Capital Plan prioritisation Q4 23/24: Work continues on Capital Plan prioritisation. Head of *Development; Executive Director *Place; Chief Finance Officer; 31-Oct-2024 0% SRP.RR.02 The Long-Term Change Programme Risk Code Risk Identification Managed by Risk Control Measures Likelihood Impact Risk Evaluation SRP.R R.02 Risk cause: A MTFS that does not address the projected budget shortfall or contextual factors relating to the Midlothian area. Reduced resources Leadership fit for the future. Lack of clarity or clear compelling vision for the future Delay or shortfall in securing savings Lack of or not securing transformational change in service provision Risk event: Delayed progress in applying various strands of the Change Programme including Delivering Excellence Framework Head of *Adult and Social Care; Chief Operating Officer *Education; Chief *Executive; Director *Health and Social Care; Chief Officer *Place; Executive Director *Place; Chief Officer Corporate Solutions; Chief Finance Officer; Chief Officer Young People and Partnerships 1. Development of Strategic Plan, Transformation Blueprint and MTFS projections which come together to provide a framework to effect change and to move the Council to a position of financial sustainability. 2. Leadership from all Elected Members, Executive Team and Senior Leadership Group. 3. Appropriate governance in place across the BTB Strategic Boards 4. Resilience planning. 5. Capacity to deliver change. 6. Dedicating capacity to understand impact of NCS Bill, but limited details mean this is challenging and many unanswered questions (refer to specific risk for NCS Billl). 7. High level priority is given to blueprint work. 5 5 Page 260 of 396
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STRATEGIC RISK PROFILE, Q4 Jan-Mar 2025 v1.2 Slow benefits realisation and budget savings. Cuts in service provision rather than service transformation Risk effect: Objectives of change not actually met or progress too slow. Adverse impact on services Slow or delayed proposals/savings arising from service redesign. Potentially further eroding reserves or requiring short term service reductions which impact on Council's ability to deliver against its priorities. Staff morale negatively affected, Government step-in short term savings instead of transformation Related Action Code Related Action Related action latest note Managed By Due Date Status SRP.R A.02.03 Develop Medium Term Financial Strategy with greater oversight, clearer responsibility and accountability. Q4 24/25: Refer to SPR.RA-02.03 Q3 24/25: Refer to SPR.RA-02.03 Q2 24/25: Refer to SPR.RA-02.03 Q1 24/25: An update on the MTFS was presented to Council in June 2024. This identifies immediate actions required, in addition to those in the Transformation Blueprint, to bridge the gap between recurring expenditure and recurring income and to allow the setting of a balanced budget for 2025/26. Q4 23/24: An update on the MTFS with refreshed projections and a clear plan to address financial sustainability will be presented to Council in June 2024. Chief *Executive; Chief Finance Officer; 30-June-2024 100% SRP.R A.02.04 Transformation Blueprint 2023 to 2028 Q4 24/25: Refer to SRP.RA-02.08 Q3 24/25: Refer to SRP.RA-02.08 Q2 24/25: Refer to SRP.RA-02.08 Q1 24/25: As Q4 23/24 Q4 23/24: Work on sprints continues with some reporting to BTSG in the run up to June Council with the majority of others scheduled for August. BTB is now Chief *Executive; Chief Finance Officer; 30-Jun-2028 20% Page 261 of 396
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STRATEGIC RISK PROFILE, Q4 Jan-Mar 2025 v1.2 meeting fortnightly to encourage and closely monitor progress. To support monitoring of progress a dashboard has been developed and this is shared with CMT and BTSG as a standing item. SRP.RR.03 Legal and Regulatory Compliance Risk Code Risk Identification Managed by Risk Control Measures Likelihood Impact Risk Evaluation SRP.R R.03 Risk cause Current or new legislation applying to Midlothian Council. Lack of capacity to resource statutory obligations around GDPR, data protection, records management, information requests and statutory regulatory functions. Risk event Council and or Services not identifying all applicable legislation impacting Council activities and Service requirements. Risk effect Council failing to meet its statutory obligations resulting in a potential negative impact for service users or employees. Reputational impact of not meeting statutory obligations. Head of *Adult and Social Care; Legal *and Governance Manager; Chief Operating Officer *Education; Chief *Executive; Director *Health and Social Care; Chief Officer *Place; Executive Director *Place; Chief Officer Corporate Solutions; Chief Finance Officer; Chief Officer Young People and Partnerships 1. Executive Directors, Chief Officer(s) and Head(s) of Service responsible for identifying applicable legislation and propose Council or Service responses to CMT and Cabinet/Council as required. 2. Annual Assurance Statement. 3. Internal Audit testing of internal controls as part of risk-based audit plan. 4. External Audit. 5. Range of external inspection. 6. BTSG oversight of new legislation 7. Central repository of applicable legislation. 5 5 Related Action Code Related Action Related action latest note Managed By Due Date Status SRP.R A.03.02 Rights of the Child Bill Q4 23/24: Bill now adopted. Policy to be presented to Council May/June 2024. Q4 Council wide group established and developing a plan that ensures we are all aware and adhering to UNCRC. Executive Director – People 31-Dec-2024 0% SRP.R A.03.03 National Care Service Q3 24/25: Scottish Government announced in January 2025 that they will not be proceeding with the National Care Service. Chief *Executive; 31-Dec-2024 0% Page 262 of 396
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STRATEGIC RISK PROFILE, Q4 Jan-Mar 2025 v1.2 Q2 24/25: As of 14 November 2024, the Scottish Government has paused legislation on the creation of a NCS. Q1 24/25: The Bill is at Stage 2. Q4 23/24: Q4 National Care Service is at stage 2 and we await decisions around what next. SRP.R A.03.05 Review of Standing Orders, Scheme of Administration and Scheme of Delegation Q4 24/25: Standing Orders and Scheme of Administration updated and approved at Feb 2025 Council Q4 23/24: Workplan presented and agreed by SOWG in April 2024. Some changes to SOs and Scheme of Administration presented and approved by Council in May 2024 (this is technically Q1 2024/25 update). Legal & Governance Manager; Executive Director *Place; Chief Officer Corporate Solutions; 28 Feb 2027 40% SRP.R A.03.07 Review of policy and creation of a policy register Q4 24/25: Policy list presented to CMT May 2025 for CMT to review and feedback Q4 23/24: Work to develop policy register ongoing. Chief Officer Corporate Solutions 31-Dec-2025 40% NEW Compliance with statutory duties Q4 24/25 : Resourcing proposal for a new Compliance Team being agreed by Corporate Management Team. Funding to be identified through existing Corporate Solutions budgets with implementation on a phased basis. Now proceeding to final stages of Managing Change process Q1 24/25: Records Management Officer in post and reviewing the Records Management Plan, Corporate Retention Policy and Schedule and supporting the development of retention framework for M365 rollout. Q4 23/24: Work is ongoing with the Scottish Information Commissioner and National Records of Scotland to develop and deliver improvement plans. Ongoing recruitment for Records Manager. Rationale report for resourcing in development. Significant resourcing pressures contribute to the increase in scoring for Q4. Chief Officer Corporate Solutions, Legal and Governance Manager 31-Dec-2025 10% SRP.RR.04 Employee performance Page 263 of 396
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STRATEGIC RISK PROFILE, Q4 Jan-Mar 2025 v1.2 Risk Code Risk Identification Managed by Risk Control Measures Likelihood Impact Risk Evaluation SRP.R R.04 Risk cause Employees not suitably trained/developed for the roles required of them. Limited availability of qualified practitioners in certain sectors. Change program not informed by all key stakeholders. Ageing work force. Employees unclear on expected behaviours. Employees constrained to innovate as a result of management practice. Employee productivity rate below the required level because of ineffective use of the People Policies particularly Maximising Attendance. Salaries in some functional areas lower compared to other LA’s resulting in recruitment issues particularly with trying to recruit experienced staff. Risk event Employees not engaged/consulted as part of organisational transformation. Experienced employees leaving the organisation. Inability to recruit suitably qualified / trained staff to fill vacancies negatively impacting on remaining workforce. Unacceptable behaviours demonstrated by employees. Stated organisational culture not consistently reinforced by managers. Poor employee performance will stifle transformational change. Risk effect Difficulties recruiting the right staff. Challenges retaining quality staff. Low skill levels. Low morale, especially during change. High absence rates, loss of experience in service areas. Head of *Adult and Social Care; Chief Operating Officer *Education; Chief *Executive; Director *Health and Social Care; Chief Officer *Place; Executive Director *Place; Chief Officer Corporate Solutions; Chief Finance Officer; HR Strategic Lead; Chief Officer Young People and Partnerships Over-riding risk control measure = Focus on having the right people, here, healthy, performing, behaving and well led via effective utilisation of the workforce strategy and accompanying action plan. Approval of the Council’s Workforce Strategy 2024-2034 which focuses on the thematic areas below: Attendance / Wellbeing 1. Continuing implementation of the Wellness@Midlothian agenda. 2. Creation of an Employee Health and Wellbeing Strategy and supporting policy. 3. Maintaining the Healthy Working Lives Gold Award. 4. Proactive use of Occupational Health, Midlothian Physiotherapy, Employee Assistance Programme and the Workplace Chaplaincy Service. 5. Change of EAP supplier to ensure provision of best possible service. 6. Development of progressive People Policies. 7. Roll-out of mental health training for staff and managers. Performance 1. Service-level workforce plans. 2. Structured, robust, well established ‘Making Performance Matter’ Framework where expected standards of behaviour and Council values are re-enforced. 3. Continued re-enforcement of all People Policies involving various communication methods. 4. Development of a suite of management information to ensure Service Managers are informed e.g., turnover, absence levels/reasons etc. Organisational Change 1. Policy for Organisational Change includes strong emphasis on early engagement of employees. 2. Redeployment Procedure to ensure maximum chance of successful redeployment. Conduct 1. Resolution Policy encourages early intervention of workplace issues. 2. Professional standards and values build into the induction process and management development programme. Communication 1. A range of initiatives to keep staff informed of change (Chief Executive’s weekly email, Connect, All staff emails, tailored team briefings etc. 3 4 Page 264 of 396
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STRATEGIC RISK PROFILE, Q4 Jan-Mar 2025 v1.2 ‘A Great Place to Grow’ our values including respect, collaboration, pride and ownership not realised, potentially resulting in missing the opportunity to capitalise on the abilities, experience and ideas of team members. Poor employee performance will Exacerbate the financial challenge. Related Action Code Related Action Related action latest note Managed By Due Date Status SRP.RA .02.04 Development and Delivery of the Council’s Workforce Strategy 2024-34 including analysis of future workforce requirements, gap analysis and gap closing strategies, and performance measures and target setting. Q4 24/25: Council approved the Workforce Strategy 2024-2034 in December 2024. Work progressing on the delivery of the first three years through an agreed action plan. Acting HR Strategic Lead appointed. Two interim posts from BTB funding are being progressed for Talent and Reward. Q1 24/25: Workforce Strategy in development and expected to be presented to December Council with Action Plan for approval. Audit Scotland external audit on workforce and digital to be presented to Audit Committee September 2024. Q4 23/24: Ongoing work nationally to review workforce planning which Midlothian is contributing to. Best Value focus this year is on workforce planning – awaiting outcome of external audit to identify improvement plan for 24/25. Chief Officer Corporate Solutions 31 Dec 2027 25% NEW Recruitment challenges in Procurement Service leading to contract management pressures and backlog in procurement exercises Q4 24/25: Procurement Manager appointed to start on 1 June 2025. Chief Officer Corporate Solutions to implement an improvement plan and revised work plan for the service and develop business case for appropriate resourcing. Chief Officer Corporate Solutions 31 Dec 2025 10% SRP.RR.07 Care at Home Risk Code Risk Identification Managed by Risk Control Measures Likelihood Impact Risk Evaluation Page 265 of 396
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STRATEGIC RISK PROFILE, Q4 Jan-Mar 2025 v1.2 SRP.R R.07 Risk cause Internal and External providers of Care at Home services unable to meet service and quality requirements as a result of a lack of capacity. Risk event Capacity of Community Support outstripped by demand. Risk effect There is a risk that patients will have their discharge delayed because there is insufficient community supports to enable timely discharge leading to deterioration in their health, beds being blocked and elective operations potentially being cancelled. Head of *Adult and Social Care; Director *Health and Social Care 1. Care at Home winter assurance plan and business continuity plan complete 2. Development of Care at Home Service Improvement action plan near completion 3. External commissioning complete and ongoing contract monitoring in place 4. External provider audits complete 5. Re-established Multi-Agency Quality in Care at Home quarterly review meetings jointly with East Lothian 6. Weekly provider meetings in place 7. Additional locum team members and contracts with agency staff in place 8. Daily discharge meeting with Multidisciplinary and Multi-agency team planning to plan and coordinate discharge to ensure care at hone support in place 3 4 Related Action Code Related Action Related action latest note Managed By Due Date Status SRP.R A.07.01 Independent review of adult and social care Q3 24/25: Scottish Government announced in January 2025 that they will not be proceeding with the National Care Service. Q2 24/25: The Scottish Government has initiated a pause on the development of the NCS. Q1 23/24: Pause remains in place. Head of *Adult and Social Care; Chief *Executive; 31-Jan-2024 100% SRP.RR.08 Asset Management – buildings, vehicles, roads and Digital assets/networks Risk Code Risk Identification Managed by Risk Control Measures Likelihood Impact Risk Evaluation Page 266 of 396
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STRATEGIC RISK PROFILE, Q4 Jan-Mar 2025 v1.2 SRP.R R.08 Risk cause Many of the assets the Council own by their nature are in a position of ongoing deterioration through their normal use, e.g., roads - normal wear and tear, streetlights and vehicles & buildings used to deliver services. Risk event Many assets will deteriorate under normal conditions although buildings, roads and streetlights as an example can be damaged during more extreme weather events or as a result of a lack of maintenance. Risk effect In the case of Roads Services there is a real risk of increased potholes and insurance claims, reduced skid resistance leading to higher accident potential and building up of higher costs in the future. In respect of vehicles, increased breakdowns, service failures, greater maintenance inevitable, higher short-term hire costs. In terms of property, health and safety issues arise, failure to meet current standards and higher running costs. There is also the risk of two-tier accommodation, some high quality, some low. Head of *Adult and Social Care; Head of *Development; Chief Operating Officer *Education; Chief *Executive; Director *Health and Social Care; Chief Officer *Place; Executive Director *Place; Chief Officer Corporate Solutions; Chief Finance Officer; Chief Officer Young People and Partnerships 1. There is provision in place within the capital plan for investment in the asset base. 2. Asset register 3. Condition Survey 4. Understanding of future asset needs 5. Asset Strategy: . Roads . Land . Fleet . Digital Service Network . Digital Service hardware 6. Capital programme - investment in estate. 7. Ongoing monitoring of properties by: Maintenance Surveyors, Facilities Management and Property Users. 8. Established Capital Plan and Asset Management Board and dedicated Asset Management Board 9. Establishment of 7 thematic Estate Safety and Management Groups chaired by Chief Officer Place 10. Building Accessibility Strategy 3 5 Related Action Code Related Action Related action latest note Managed By Due Date Status SRP.R A.08.02 Plan for appropriate investment in capital works and remedial maintenance over the lifespan of each property asset. Q3 24/25: Condition Surveys of Learning Estate (excl PPP) has concluded. Q4 presentation to Elected Members. Backlog repairs continue. Q1 24/25: Condition Surveys continue, with Learning Estate (excl PPP) expected to be concluded by end December 2024 to inform capital investment proposal. Chief Officer *Place; 30-Apr-2025 33% Page 267 of 396
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STRATEGIC RISK PROFILE, Q4 Jan-Mar 2025 v1.2 Q4 23/24: Backlog maintenance repairs being undertaken across the estate on a prioritised basis. SRP.R A.08.05 Learning Estate Strategy Q3 24/25 Learning Estate Strategy Update paper due to go February Council, this includes a progress report on status of all approved and ‘approved in principle’ projects. Edge analytics have also completed their validation of the School Roll Projections. Q4 23/24: All Priority 1 and 2 projects are progressing. In terms of all of the capacity breaches that were detailed in Priority 2 of the LES, investment was made to provide a solution. Head of *Development; 30-Apr-2025 50% SRP.R A.08.06 Asset Management systems Q4 23/24: Identified for implementation through Transformation Blueprint and The Change Programme. Chief Officer *Place; 31-Mar-2025 0% SRP.RR.09 Emergency Planning and Business Continuity Management Risk Code Risk Identification Managed by Risk Control Measures Likelihood Impact Risk Evaluation SRP.R R.09 Risk cause The Council not preparing or timeously reviewing Emergency Plans and testing arrangements to respond to Civil Contingencies Incidents Risk event There are a wide range of potential events the Council may be expected to respond to e.g., Severe weather incident, Pandemic, Utility disruption etc. Risk effect Censure through non-compliance with the Civil Contingencies Act Not adequately recovering from the loss of major accommodation (e.g., secondary school, main offices), computer systems and staff Not able to respond to a major emergency in the community Fatal Accident Inquiries Head of *Adult and Social Care; Head of *Development; Chief Operating Officer *Education; Chief *Executive; Director *Health and Social Care; Chief Officer *Place; Executive Director *Place; Chief Officer Corporate Solutions; Chief Finance Officer; David Robertson; Chief Officer Young People and Partnerships 1. Civil Contingencies Risk Register used to highlight key risks and record response, - Council’s plans developed and maintained in response to identified risks, - Risk and Resilience Group support development, peer review and roll out of plans. 2. Establishment based incident response plans in place and maintained locally. 3. Emergency response plan setting out general approach to respond to a major emergency in-line with key partner organisations. 4. As part of the Council’s Emergency response the importance of recording decisions made and information available at the time is highlighted as this would be scrutinised in the event of an FAI. 05 – Care for People Group: Afghan, Ukrainian and UASC support programmes 3 4 Page 268 of 396
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STRATEGIC RISK PROFILE, Q4 Jan-Mar 2025 v1.2 Related Action Code Related Action Related action latest note Managed By Due Date Status SRP.R A.09.02 Development of Emergency Plans Q4 24/25: The service review for the Health, Safety and Resilience Team Service, which includes Contingency Planning, requires to progress to implementation stage. Ongoing challenges continue, preventing notable progress. Plans and Procedures updated this quarter: Emergency Contacts Directory (reflecting staff changes) Business Continuity Planning: The Internal Audit Team conducted an audit of Business Continuity (BC) across the organisation. There were specific recommendations for the Health, Safety and Resilience Team. Some of these actions were already in progress prior to the Audit, following a series of activities raising awareness of Business Continuity in 2024. In summary, these are to: • Revise the Corporate BC Policy (in progress) • Revise the word BC template for completion by services • Explore the viability of rolling out a BC software system. The main factors for consideration are: • The current system now has a limited lifespan so an alternative would need to be sourced • Resourcing of a system – cost and staffing resource • Provide training for nominated BC leads (nominations to be done by services). This is to include an e-learning module • Establish a forum for BC leads to share good practice and ensure consistency of approach • Establish a system to monitor service compliance with BC requirements. Practical demonstration of Business Continuity tested in recent storm Éowyn (Jan 25). There are target dates associated with the Audit recommendations. The report does note that to meet the recommendations, additional resource may be required - as identified by the service review. As at the end of this Q4 24/25 reporting period, the outcome of the service review is still waited. Furthermore, one of the team members will be reducing hours by 20% from May 2025. Other Plans/Procedures: As well as the need to focus on the outcome of the BC Audit, generic “emergency planning” activities require to be undertaken as resources permit, Chief Officer *Place; Senior Manager Protective Services; David Robertson 30 September 2025 75% Page 269 of 396
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STRATEGIC RISK PROFILE, Q4 Jan-Mar 2025 v1.2 including reviewing and updating existing procedures. Work is also ongoing regarding learning from Storm Éowyn. As well as considering our own procedures, liaison is taking place with neighbouring local authorities and Scottish Power Energy Networks to better understand their responsibilities towards customers and to improve communications across the piece. The results of these discussions will be reflected in documentation in due course. CONTEST/Prevent: Support is offered to the CONTEST and Prevent SPOC on an ongoing basis. This includes attending relevant briefing sessions, multi-agency CONTEST Groups (internal and external) and training events as applicable. Assistance has also been given this quarter in the preparation of Midlothian Council’s submission to the Prevent Assurance process carried out by the Home Office. Ongoing monitoring and circulation of information on Martyn’s Law (Terrorism (Protection of Premises) Bill). Collaborated with Business Services (Operational Support) to have updated Prevent and Action Counters Terrorism (ACT) modules available on our e- learning platform. These are both national products. Next steps were discussed at the January CONTEST meeting and are to be introduced in Q1 of 25/26. Q3 24/25: The service review for the Health, Safety and Resilience Team Service, which includes Contingency Planning, has not yet concluded. This means ongoing challenges continue, preventing notable progress. Plans and Procedures updated this quarter: • Midlothian Council Severe Weather Plan • Emergency Contacts Directory (reflecting staff changes) • Support to the Executive PA Place with the Festive Period Service Arrangements document. Plan updates/procedures in progress: • Midlothian Council Emergency Plan (generic). This document outlines internal emergency management arrangements and multi-agency partnership relationships. • Operation UNICORN (and associated arrangements). Scottish Government have advised that national planning arrangements are underway and where relevant to Midlothian, will be incorporated in the Midlothian Council guidance document. • Corporate Business Continuity (BC) Plan has been drafted. Multi-agency Exercises, Training, Presentations, Work streams: Page 270 of 396
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STRATEGIC RISK PROFILE, Q4 Jan-Mar 2025 v1.2 • Participated in a Cyber Security training exercise organised by Digital Services in liaison with an external partner. This is a further example of collaborative working with Digital Services in order to improve Business Continuity Planning across the organisation. • Supporting School Business Managers in the development of their School Incident Plans, in collaboration with Police Scotland colleagues. Q2 24/25: Service review for the Health, Safety and Resilience Team Service, which includes Contingency Planning, is still in progress. Plans/plan updates include: • Midlothian Pipelines Emergency Plan (required under the Pipelines Safety Regulations 1996). • Emergency Contacts Directory (reflecting staff changes) • Provision of Business Continuity guidance notes to service managers. Plan updates/procedures in progress: • Midlothian Council Emergency Plan (generic). This document outlines internal emergency management arrangements and multi-agency partnership relationships. • Operation UNICORN (and associated arrangements). Scottish Government have advised that national planning arrangements are underway, and we will tie in with those. Meantime, we have the basics in place, based on previous experience. • Corporate Business Continuity (BC) Plan. An update to the Corporate Business Continuity Policy was provided to Corporate Management Team members in Q4 23/24. However, learning from a Cyber Security event facilitated by Scottish Government in June 2024 and September 2024 and the experiences of other organisations will be incorporated into an expanded document, which will also link in with the work being done by Digital Services on the technical response to a cyber-attack. • Draft action plan in relation to the revised Prevent Duty Guidance to measure our compliance. (In support of the Prevent SPOC.) • Support to the Executive PA Place with the Festive Period Service Arrangements document. Multi-agency Exercises, Training, Presentations, Work streams: • Debrief for the multi-agency Exercise Puma (Torness related exercise) held in June 2024. • Supporting School Business Managers in the development of their School Incident Plans, in collaboration with Police Scotland colleagues. Page 271 of 396
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STRATEGIC RISK PROFILE, Q4 Jan-Mar 2025 v1.2 • Familiarisation training exercise using Airwave handsets (held by Police Scotland for partner use in emergencies). These short sessions are organised by the Scottish resilience community on a regular basis throughout the year. • A number of national presentations relating to Prevent (extremism) Q1 24/25: Exercise (simulated cyber attack) took place at the Leadership Forum June 2024 with the session facilitated by Scottish Government and LRP Colleagues. The session was designed to remind services managers of the importance of having , maintaining and exercising their Business Continuity Planning arrangements. Plans/plan updates include: • Midlothian Council generic Emergency Plan. This document outlines internal emergency management arrangements and multi-agency partnership relationships. • Operation UNICORN (and associated arrangements). Scottish Government have advised that national planning arrangements are underway. Meantime, we have the basics in place, based on previous experience. • Corporate Business Continuity (BC) Plan. An update to the Corporate Business Continuity Policy was provided to Corporate Management Team members in Q4 23/24. However, learning from a Cyber Security event facilitated by Scottish Government in June 2024 and the experiences of other organisations will now be incorporated into an expanded document, which will also link in with the work being done by Digital Services on the technical response to a cyber attack. Multi-agency Exercises, Training, Presentations, Work streams: Team Members also participated in the following where appropriate to their areas of work, invitations were extended to colleagues in other services and partners: • Planning for and participation in a Torness related exercise in June 2024. • Lothian and Borders Local Resilience Partnership non-routine inputs including Met Office Extreme Heat Awareness Q4 23/24: Work on flooding across the county and its risks has commenced, with a report to Council scheduled for post-recess. CMT desktop exercise undertaken. SRP.R A.09.03 Business Continuity Software System Chief Officer *Place; Senior Manager 31-Dec-2025 25% Page 272 of 396
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STRATEGIC RISK PROFILE, Q4 Jan-Mar 2025 v1.2 Q4 24/25: Consideration currently being given to the option of using Teams/Sharepoint as a solution/replacement for existing software, the contract for which ends in Dec 2025. Q3 24/25: Any new system requires resource to roll out across the organisation. Q1 24/25: The Health, Safety & Resilience Service review is progressing and has identified staffing shortages to meet obligations. Q4 23/24: Report in early draft, to be completed once Health, Safety & Resilience service review completed (SRPO.RA.09.02). BCPs in the event of power outage to be incorporated. Protective Services; David Robertson SRP.RR.10 Governance and Standards in Public Life Risk Code Risk Identification Managed by Risk Control Measures Likelihood Impact Risk Evaluation SRP.R R.10 Risk cause Code of conduct for Members and employees’ actions falling short of International Standards. Risk event Failure in openness, accountability, clarity. Risk effect Service, partnerships and project outcomes not achieved. Non- compliance with conduct standards and reduction in standards in public life. Legal *and Governance Manager; Chief *Executive; Chief Officer *Place; Executive Director *Place; Chief Officer Corporate Solutions 01 Annual Assurance Statement. 02 Standing Orders 03 Scheme of Administration 04 Scheme of Delegation 05 Elected Member Code of Conduct 06 Induction programme for new members and ongoing learning and development programme 07 Employee Code of Conduct 2 4 Related Action Code Related Action Related action latest note Managed By Due Date Status SRP.RA .03.05 Review of Standing Orders, Scheme of Administration and Scheme of Delegation Q4 24/25: Standing Orders and Scheme of Administration updated and approved at Feb 2025 Council. Legal *and Governance Manager; Chief 28 Feb 2027 20% Page 273 of 396
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STRATEGIC RISK PROFILE, Q4 Jan-Mar 2025 v1.2 Q1 24/25: Workplan presented and agreed by SOWG in April 2024. Some changes to SOs and Scheme of Administration presented and approved by Council in May 2024. Officer Corporate Solutions; SRP.RA .10.03 Review of the employee onboarding and induction programme Q4 24/25: Work ongoing to finalise the refreshed induction programme and onboarding process Q3 2023/24: CMT agreed to a refresh of the staff induction programme which include a compliance section. It is anticipated that the new programme will be fully completed by end Dec 2024, with a phasing of improvement actions being delivered throughout 2024. HR Strategic Lead 31-Dec-2025 5% SRP.RR.11 Corporate Policies and Strategies Risk Code Risk Identification Managed by Risk Control Measures Likelihood Impact Risk Evaluation SRP.R R.11 Risk cause Policies may not match the aspirations of the Council's Strategic priorities or cultural perspective. Risk event Policies not monitored may become out of date. Policies not reviewed to ensure alignment with strategic priorities. Risk effect Policies not monitored could result in non-compliance with legislation Policies not aligned to strategic priorities will inhibit rather than support implementation of strategic priorities. Head of *Adult and Social Care; Chief Operating Officer *Education; Chief *Executive; Director *Health and Social Care; Chief Officer *Place; Executive Director *Place; Chief Officer Corporate Solutions; Chief Finance Officer; Chief Officer Young People and Partnerships 1. Single Midlothian Plan providing overarching direction 2. Service plans aligned to Single Midlothian Plan. 3. Leadership team to ensure correct approaches are adopted to get the right results. 4. Strategic housing investment plan, submitted to Scottish Government. 5. Capital Strategy 6. Integrated Joint Board (IJB) Plan 7. IJB Strategic needs assessment 8. Midlothian Local Development Plan 2017 – the Council’s corporate spatial strategy. 2 3 Related Action Code Related Action Related action latest note Managed By Due Date Status Page 274 of 396
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STRATEGIC RISK PROFILE, Q4 Jan-Mar 2025 v1.2 SRP.RA .02.04 Transformation Blueprint 2023 to 2028 Q4 24/25: Refer to SRP.RA-02.08 Q3 24/25: Refer to SRP.RA-02.08 Q2 24/25: Refer to SRP.RA-02.08 Q1 24/25: As Q4 23/24. Q4 23/24: Work on sprints continues with some reporting to BTSG in the run up to June Council with the majority of others scheduled for August. BTB is now meeting fortnightly to encourage and closely monitor progress. To support monitoring of progress a dashboard has been developed and this is shared with CMT and BTSG as a standing item. Chief *Executive; Chief Finance Officer; 30-Jun-2028 20% SRP.RA .03.07 Review of policy and creation of a policy register Q4 24/25: Policy list presented to CMT May 2025 for CMT to review and feedback Q4 23/24: Work to develop policy register ongoing. Chief Officer Corporate Solutions 31-Dec-2025 10% SRP.RA .11.05 Antisocial Behaviour Policy Q1 24/25: Member Briefing on Housing and Antisocial Behaviour to be prepared and presented during Q2, with report to Council to follow. Q4 23/24: Midlothian Community Action Team SLA 2024-25 contains tackling ASB as a strategic objective. Chief Officer *Place; 31-Dec-2024 0% SRP.RR.12 Internal Control Environment Risk Code Risk Identification Managed by Risk Control Measures Likelihood Impact Risk Evaluation SRP.R R.12 Risk cause Work procedures/process inadvertently create the capacity for fraud and waste to occur. Internal Controls requiring more time, effort or cost than the risk being managed. Head of *Adult and Social Care; Chief Operating Officer *Education; Chief *Executive; 1. Services have been prompted to consider fraud and waste within Service Risk Registers. 2. Risk Management Guide provides direction on the need to balance time, effort and cost against benefit of risk controls. 3. Internal Audit examine internal control arrangements based largely on the risk registers. 2 3 Page 275 of 396
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STRATEGIC RISK PROFILE, Q4 Jan-Mar 2025 v1.2 Mangers failing to follow procedures and keep systems updated with accurate information. Risk event Persons exploiting opportunities to commit fraud. Waste and errors Changing risk landscape associated with remote working solutions. Risk effect Waste and loss Risks over managed with risk controls costing more than the potential loss being managed. Increased opportunity for fraud or financial loss has direct impact on management information. Has adverse effect on service performance. Director *Health and Social Care; Chief Officer *Place; Executive Director *Place; Chief Officer Corporate Solutions; Chief Finance Officer; Chief Officer Young People and Partnerships 4. Corporate Fraud team in place who assist managers to undertake fraud risk assessments in their areas (focused on priority areas) and provide advice and guidance on fraud related matters. Active participation in the National Fraud Initiative to investigate matches. 5. Whistleblowing Policy and Counter Fraud Policy in place (subject to review) with whistleblowing channels available to report concerns (anonymously if required). 6. Internal and external assurance. Annual Governance Statement which involves obtaining assurance from Management over controls in their Service. 7. E-learning for staff to complete mandatory training for fraud awareness. 8. Regular updates to Audit committee on progress with recommendations made by Internal Audit. 9. Remind staff to declare secondary employment/outside interests and gifts & hospitality 10. Induction for all new employees (with service exceptions), including legal, HR, procurement, health and safety. Control at entry to organisation. 11. The Integrity Group continues to meet to improve the Council’s resilience to fraud, corruption, theft and crime (including cybercrime), maintaining proper risk management, governance and internal control processes and systems to ensure probity in systems and operations, and mitigation of risks, including the prevention, detection and resolution of fraud and irregularities. Management is also responsible for checking that the arrangements and controls are operating effectively and obtaining assurances from internal compliance, risk, inspection, quality, and control functions. Related Action Code Related Action Related action latest note Managed By Due Date Status SRP.R A.12.04 Review of Serious Organised Crime (SOC) group Q3 24/25: Draft Strategy devised. Regulatory safeguards/actions progressing through Licensing. Q1 24/25: Initial meeting with Police is planned to discuss strategy. Q4 23/24: Chief Officer Place on national SOC working groups and utilising forums to inform strategy. Chief Officer *Place; Health, Safety & Resilience Manager 31-Mar-2025 50% Page 276 of 396
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STRATEGIC RISK PROFILE, Q4 Jan-Mar 2025 v1.2 SRP.RR.13 Climate Change Risk Code Risk Identification Managed by Risk Control Measures Likelihood Impact Risk Evaluation SRP.R R.13 Risk cause Council Services not adequately engaged, resourced or directed to fulfil the requirements of the Climate Change Act. Risk event Council Services not responding to the Climate Change Act with sufficient pace. Risk effect Council failing to meet its obligation under the Climate Change (Scotland) Act 2009 and incurring the associated reputational damage. Chief *Executive; Executive Directors and Chief Officers. 1. Statutory requirement to report on compliance with climate change duties. 2. Council Carbon Management Plan 3. Approval of a Corporate Climate Change Strategy and action plan 4. CPP Board for Climate Change to bring strategic focus and oversight of plans and progress. 5. Resilience Seminars 5 5 Related Action Code Related Action Related action latest note Managed By Due Date Status SRP.RA .13.04 Delivery of the BTB Board Carbon Neutral by 2030 Q3 24/25: Council approved realignment of Net Zero target from 2030 to 2045. Q2 24/25: Member Briefing delivered. Q1 24/25: Member Briefing on Climate Action Plan being prepared for presentation in Q2/3. Q4 23/24: Climate Action Plan finalised and will be presented to Council in 2024/25. Planning, Sustainable Growth and Investment *Manager; Chief Officer *Place; 31-Mar-2030 0% SRP.RA .13.05 Development of the Strategic Plan 2023- 27 Q3 24/25: Council approved realignment of Net Zero target from 2030 to 2045. Climate Action Strategy refresh to follow. Q4 23/24: Climate Action Plan finalised and will be presented to Council in 2024/25. Planning, Sustainable Growth and Investment *Manager; Chief Officer *Place; 31-Mar-2025 90% Page 277 of 396
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STRATEGIC RISK PROFILE, Q4 Jan-Mar 2025 v1.2 SRP.RR.14.1 Scottish Child Abuse Inquiry Risk Code Risk Identification Managed by Risk Control Measures Likelihood Impact Risk Evaluation SRP.R R.14.1 Risk Cause: Midlothian Council and its legacy organisations, predating the creation of Midlothian Council in 1996, have been involved in the provision of care of children going back to living memory. During this time there is the likelihood that the care children received fell below standards of care now in place. There is the further potential that some people in the care of Midlothian Council and its legacy organisations were subject to abuse by those who were employed to care for them. Risk Event: The Scottish Government began an Inquiry into cases of Child Abuse occurring prior to 17 December 2014, the intention of this enquiry is to identify historic case of abuse which have to date gone unreported. The most recent Section 21 notice around the Foster Care Case Study is a significant piece of work. The request for information from 1930 to date is very challenging given the volume of files that require to be read and analysed. Risk Effect: If the inquiry finds historic cases of abuse in Midlothian this could damage the reputation of the Council and could place doubt in the eyes of the public as to the safety of these currently in care. There is significant scope for a substantial financial impact arising from claims of historic abuse. Some existing employees may be affected by the inquiry and subsequent claims of abuse. We have requested an extension for Parts B, C & D of the last Section 21 to April 2020, which has been granted. To date there has been no evidence from the Chief *Executive; Chief *Social Work Officer The Council initially set up an Inquiry Project Team, however this is no longer required as we have an experienced worker overseeing all requests for the Scottish Child Abuse Inquiry Team. Work is ongoing and we have the additional tasks of supporting and responding to enquiries from the redress team. The Inquiry Team have established a Project Plan covering: 1. Residential establishments, List D Schools and Foster Carers: identifying Children’s homes, Foster Carers and any List D Schools in Midlothian over the last 100 years and researching historic records. 2. Record Audit: reviewing the Council’s existing paper and electronic recordkeeping systems to identify relevant records and map them to residential establishments. This also includes, where possible, noting the Council’s historic recordkeeping policies, such as retention schedules. 3. Cataloguing/Indexing: checking and updating existing recordkeeping systems for accuracy and consistency, enabling effective information retrieval when requested by the Inquiry. The Project Team have established a Project Plan covering: 4. Ascertaining the succession and insurance position in relation to potential historic child abuse claims. 5. Ascertaining and agreeing Midlothian Council’s legal position/ approach in dealing with the potential historic child abuse claims. 6. Identifying the need for guidance, protocol, templates etc. should/if any claims be made against the council. 7. Consideration to identifying if additional staffing will be required as expected deluge of FOI’s SARs in 2018 from solicitors of potential claimants. 8. Project team is in place with project plan with a range of identified actions which are being progressed. Monthly meetings to progress project plan. 9. The SCAI Social Worker is very competent and experienced in this area of work and provides quarterly updates on their findings from the file read. This is a real strength within this area of work. The CSWO and Principal Solicitor meet regularly with the social worker to discuss findings from the file read. 4 4 Page 278 of 396
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STRATEGIC RISK PROFILE, Q4 Jan-Mar 2025 v1.2 extensive file read to suggest there has been systemic abuse within our foster care system. Related Action Code Related Action Related action latest note Managed By Due Date Status SRP.R A.14.03 Foster Care and Residential Care File Review Q3 24/25: Phase 10 is now in progress with investigation of residential care homes run by local authorities. We will comply with all s21 requests. Q4 23/24: Foster care enquiry completed. Childrens Services Management Team; Chief *Social Work Officer; Chief Officer Young People and Partnerships 31-Mar-2024 100% SRP.RR.16 Growing Council Risk Code Risk Identification Managed by Risk Control Measures Likelihood Impact Risk Evaluation SRP.R R.16 Risk cause Population growth in Midlothian over the next 10 to 15 years will see Midlothian become the fastest growing Council in Scotland. Between 2014 and 2039, ages 0-15yrs, population is projected to increase by 20% and for ages 75+ population projected to increase by 100%. Risk event Failure to resource and plan for these rises will significantly impact the Councils ability to fulfil its statutory obligations in relation to these groups. Risk effect Inadequate capacity within the school estate to cope with the projected increase in pupil numbers. In sufficient provision to support an aging population Head of *Adult and Social Care; Chief *Executive; Executive Director *Place; Fiona *Robertson; Chief Officer Young People and Partnerships 1. Local development plan and supplementary guidance on developer contributions. 2. Services planning future service provision on the basis of anticipated service demands 3. The change programme 4. Learning Estate Strategy 5. Capital Plan Prioritisation 6. Strategic Housing Investment Strategy 7. Rent Review Strategy 8. Joint needs assessment used to develop - IJB Strategic Plan 9. Capital Plan and Asset Management Board will scrutinise and challenge slippage on capital programmes recognising that slippage can have an adverse impact on financial sustainability and also the delivery on assets required to support capital growth. 10. City Deal provides the opportunity to support inclusive growth. 4 4 Page 279 of 396
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STRATEGIC RISK PROFILE, Q4 Jan-Mar 2025 v1.2 placing costly inefficiencies on other parts of the care sector. General population increase placing additional demand on infrastructure including GP services. Increased pressure on infrastructure, services e.g., waste collection and growth of road network as new development roads are adopted. Related Action Code Related Action Related action latest note Managed By Due Date Status SRP.RA .02.06 Capital Plan prioritisation Q4 24/25: Council in February received an update on Capital Plan Prioritisation work and made a decision on an updated Learning Estate Strategy. The extent and affordability of work flowing from building condition surveys is being assessed and will be concluded and reported to Elected Members early in 2025/26. Q3 24/25: Work continues on Capital Plan prioritisation. Q2 24/25: Work continues on Capital Plan prioritisation. Q1 24/25: Work continues on Capital Plan prioritisation. Q4 23/24: Work continues on Capital Plan prioritisation. Head of *Development; Executive Director *Place; Chief Finance Officer; 31-Oct-2024 75% SRP.RR.17 UK Decision to leave the EU Risk Code Risk Identification Managed by Risk Control Measures Likelihood Impact Risk Evaluation SRP.R R.17 Risk cause UK vote to leave the European Union Risk event UK leaving the European Union Risk effect The impacts associated with the UK's decision to leave the UK have yet to be realised and will only become clear Head of *Adult and Social Care; Chief Operating Officer *Education; Chief *Executive; Director *Health and Social Care; Chief Officer 1. Risk and Resilience Group 2. Taking a risk management approach to identifying and assessing anticipated impacts 3. Working with a range of national and local bodies to inform preparatory arrangements. 4. EU Settlement scheme promoted on Council Internet to support those living and working in Midlothian to access the Home Office scheme. 4 5 Page 280 of 396
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STRATEGIC RISK PROFILE, Q4 Jan-Mar 2025 v1.2 once the final terms of the UK's departure are finalised. There are some direct potential impacts such as an end to EU funding of Council co-ordinated projects and indirect impacts on industries undertaken within the geographical area which have relied on EU funding, such as agriculture. There are wider potential implications arising from uncertainty regarding the resident status of EU nationals, post any exit agreement, and the availability of workers from outside the UK accessing the job market here in the future. These factors have the potential to impact on the availability of the right people with the right skills being available to help grow the economy here in Midlothian. One area this could affect the Council could be in the delivery of future building projects within Midlothian which could curtail further economic growth. *Place; Executive Director *Place; Chief Officer Corporate Solutions; Chief Finance Officer; Chief Officer Young People and Partnerships Related Action Code Related Action Related action latest note Managed By Due Date Status SRP.R A.17.01 Refresh of Economic Strategy Q3 24/25: Council approved new Midlothian Strategy for Inclusive Economic Growth 2025-2030. Q2 24/25: Member Briefing delivered on Midlothian Strategy for Inclusive Economic Growth, with report prepared for Council in November. Q1 24/25: Member Briefing scheduled for 3rd October 2024. Chief Officer *Place; 30-Jun-2024 100% SRP.RR.19 Health & Safety Risk Code Risk Identification Managed by Risk Control Measures Likelihood Impact Risk Evaluation SRP.R R.19 Risk cause Failing to identify and rectify non- compliance with Health and Safety regulations. Head of *Adult and Social Care; Chief Operating Officer 1. Health Safety and Wellbeing Strategy & Service Plan 2. Suite of Health and Safety Management Arrangements developed setting out council response to statutory obligations 3 5 Page 281 of 396
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STRATEGIC RISK PROFILE, Q4 Jan-Mar 2025 v1.2 Risk event Employees required to undertake tasks they are not competent to. Statutorily driven health and safety protective arrangements for service users and employees not implemented correctly. Non-compliance with policy and procedure Not undertaking audits and inspections to confirm adherence to policy and legislative requirements. Risk effect Serious injury of ill health impact on employees and or service users. Negative impact on outcomes for customers/service users. Service users and employees exposed to hazards where statutory requirements exist. Statutory health and safety - duty of care over services users and employees not met. Criminal prosecution of the Corporate body and or individuals through Corporate Homicide (Corporate Manslaughter) Significant financial penalties from Criminal Prosecution. *Education; Chief *Executive; Director *Health and Social Care; Chief Officer *Place; Executive Director *Place; Chief Officer Corporate Solutions; Chief Finance Officer; David Robertson; Chief Officer Young People and Partnerships 3. Comprehensive range of Health & Safety Management & Assessment based development opportunities for line managers 4. Use of Health & Safety Management Information System (SPHERA) to enhance information transfer and organisational efficiency 5. Comprehensive training programme in place to support those with responsibility for managing health and safety. 6. Use of comprehensive audit programme to confirm the application of agreed management Arrangements and Council Policy. Related Action Code Related Action Related action latest note Managed By Due Date Status NEW Health, Safety & Resilience Service Review Q4 24/25: Position unchanged from Q3 The service review for the Health, Safety and Resilience Team Service requires to progress to implementation stage. Q3 24/25: Service review completed, pending action. Q2 24/25: Service Review progressing and developing (completed Sept 2024). Q1 24/25: The Health, Safety & Resilience Service review is progressing and has identified staffing shortages to meet obligations. The report will be submitted in Q2 for consideration. Q4 23/24: Service review in progress. Chief Officer *Place; Senior Manager Protective Services; David Robertson 31/10/2025 100% Page 282 of 396
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STRATEGIC RISK PROFILE, Q4 Jan-Mar 2025 v1.2 SRP.R A.19.01 Delivery of Health, Safety and Wellbeing Service Plan Q4 24/25: Position unchanged from Q2. Awaiting outcome before service plan for 25/26 can be fully drafted. Q3 24/25: Position unchanged from Q2. Q2 24/25: Awaiting outcome of service review before reviewing service plan. Q1 24/25: Implementation of the Protective Services Health, Safety & Resilience Service Plan continues. The plan will be reviewed at conclusion of the service review. Chief Officer *Place; Senior Manager Protective Services; David Robertson 31-Mar-2025 50% SRP.R A.19.07 H&S fire safety audit across all Council estate Q4 24/25: New Fire Safety Adviser now recruited. To begin work on 28th April 2025. Meanwhile, require contractor backfill to help deal with fire risk assessment backlog. Q3 24/25: Departure of Fire Safety Adviser in Nov 2024 has adversely affected implementation of audit programme and reactive responses. Another member of staff is temporarily dealing with priority work until a replacement is recruited. Q2 25/25: As Q1 24/25. Q1 24/25: Fire Risk Assessments/Audits progressing. A number of Zurich Insurance audits have also taken place. Q4 23/24: Fire Risk Assessments/Audits are currently priority. Chief Officer *Place; Senior Manager Protective Services; David Robertson 31-Mar-2026 33% SRP.RR.21 Cyber Security Risk Code Risk Identification Managed by Risk Control Measures Likelihood Impact Risk Evaluation SRP.R R.21 Risk Cause Malicious attempts to damage, disrupt or gain unauthorised access to Council computer systems, networks or devices. Risk Event The cyber threat is severe and advancing quickly.The Council is at significant risk of Head of *Adult and Social Care; Cyber Security Information Governance and *Compliance Manager; Head of *Development; 1. Implementation of and compliance with the Scottish Government Cyber Resiliency Public Sector Action Plan 2. Cyber Essentials Plus Certification 3. Public Sector Network Certification 4. Regular Audits and Inspections 5. Appropriate technical and organisational measures deployed to reduce the likelihood and impact of an attack 6. Having adequate skills and knowledge in the organisation 3 5 Page 283 of 396
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STRATEGIC RISK PROFILE, Q4 Jan-Mar 2025 v1.2 cyber-attack from Ransomware Phishing Emails, Advanced Persistent Threats (APT) and Distributed Denial of Service Attacks (DDOS) attacks. Hacking and Social Engineering. Risk Effect Access to Council systems by cyber criminals and foreign intelligence agencies for financial, commercial or information gathering reasons. This could lead to significant financial losses, data compromise and subsequent regulatory sanction if our technical and organisational measures are deemed insufficient. Severe business disruption including the almost total loss of critical IT systems and networks leading to significant service delivery challenges. Chief Operating Officer *Education; Chief *Executive; Director *Health and Social Care; Chief Officer *Place; Executive Director *Place; Chief Officer Corporate Solutions; Chief Finance Officer; David Robertson; Chief Officer Young People and Partnerships 7. Implementing Scottish Government Cyber Security Action Plan 8. Adoption of the NCSC (National Cyber Security Centre) Active Cyber Defence programme 9. Technology upgrades 10. Incident Response plans and exercises Related Action Code Related Action Related action latest note Managed By Due Date Status SRP.R A.21.1 Appropriate Technical and Organisational Measures Q4 24/25 1. Delivered a week-long cyber security awareness campaign (24 February – 2 March), using email, posters, intranet news, social media, and updates from the Chief Executive 2. Secured a £7,000 grant from the Scottish Government to support cyber security training for Digital Services staff 3. Provided support for the 2025 Audit Scotland audit, focusing on key financial systems and cyber security controls 4. Successfully defended the organisation against multiple cyber attacks 5. Provided security oversight for the onboarding of new applications and technical services Q3 24/25 - Action/mitigation includes: - 1. Quorum cyber security tabletop exercise completed 2. Successfully defended the organisation from several cyber incidents 3. Provided significant Information Governance and Security advice for the continued deployment of M365 and Google Workspace 4. Audit on business continuity 5. Ran successful phishing exercises Cyber Security Information Governance and *Compliance Manager; Chief *Digital Officer; 31-Mar-2025 75% Page 284 of 396
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STRATEGIC RISK PROFILE, Q4 Jan-Mar 2025 v1.2 Q1 24/25 - Action/mitigation includes: - 1. Achieved Cyber Essentials Plus Certification 2. Achieved PSN Certification from the Cabinet Office 3. Organised and facilitated a leadership forum exercise on cyber resilience 4. Successfully responded to 15 significant cyber security events 5. Provided significant Information Governance and Security advice for the continued deployment of M365 and Google Workspace Q4 23/24: Ongoing review of cyber incident response plans. Information Governance and Security processes for M365 deployment ongoing and a number of milestones achieved to progress further rollout of applications within M365 environment. Leadership Forum tabletop session scheduled June 2024. SRP.RR.22 Cost of Living Crisis Risk Code Risk Identification Managed by Risk Control Measures Likelihood Impact Risk Evaluation SRP.R R.22 Risk cause The UK is currently facing an unprecedented storm of increasing prices, bills and tax. The 40-year high inflation rate of 9% is the main driver of the cost of living crisis which has outstripped wage and benefit increases. Risk event Rapid ongoing rise of energy prices as well as food and drink prices. Risk effect The impact on households is already being noted with 87% of adults in the UK reported an increase in their cost of living in April 2022 (Office for National Statistics; Francis-Devine et al, 2022). The price rises will impact low-income households the hardest as a larger proportion of their bills are on energy and Chief *Executive; Director *Health and Social Care; Executive Director *Place 1. Council Cost of Living Task Force to oversee the Council’s response to the crisis 2. Allocation of LACER funding to support those most affected 3. Strategic Evaluation Partner appointed to create poverty profile 4. Community Planning Partnership has established a Midlothian Strategic Poverty Prevention Group co-chaired by Council Leader and Director of Public Health 5. New Child Poverty chair and lead appointed (Executive Director Children, Young People and Partnerships) 6. Child Poverty self-evaluation underway with Improvement Service 3 5 Page 285 of 396
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STRATEGIC RISK PROFILE, Q4 Jan-Mar 2025 v1.2 food. The Resolution Foundation estimates an extra 1.3 million people will fall into absolute poverty in 2023, including 500,000 children. Related Action Code Related Action Related action latest note Managed By Due Date Status SRP.R A.22.1 Cost of Living Task Force Q1 23/24: Meetings continuing. Chief *Executive; 31-Mar-2024 100% SRP.R A.22.2 LACER funding Q2 22/23: Identification of 15 trusted partners to distribute funding in communities for food and fuel, wash and dry provision and support to establish reheatable food initiatives. Lifelong Learning and Employability; 31-Mar-2023 100% Page 286 of 396
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STRATEGIC RISK PROFILE, Q4 Jan-Mar 2025 v1.2 Strategic Opportunities SRP.OP.08 Capital Projects - Housing Risk Code Risk Identification Managed by Risk Commentary Risk Evaluation SRP.O P.08 Cost of delivering Affordable Housing Supply Programme has risen at faster rate than available grant to Midlothian and continued high build costs will affect ability to deliver housing programme. Projects progressing, with Timeline, Budget, Risk and Resource categorised as parameters on a RAG status, with any Red classifications identified and reported. Executive Director *Place; Head of Development 1. Edmonstone Road, Shawfair – Timeline, Budget and Risk impacted with Stewart Milne entering administration. Midlothian Council now in contract with Dundas Building and will be on site in May 2025. 3. Newton Church Road, Danderhall – Start on site delayed due to commercial negotiation with Ogilvie. On site March 2025. Phase 5 housing programme has been reviewed to ensure affordability within the Housing Revenue Account. Grant level now restored to 2023/24 level with core RPA £10.534m and additional grant uplift from £40m of £1.062m, which is to be used for acquisitions to address temporary accommodation pressures. Timeline Budget Risk Resource R A A G R A A G SRP.OP.09 Capital Projects – Transport, Net Zero & Infrastructure Risk Code Risk Identification Managed by Risk Commentary Risk Evaluation SRP.O P.09 Cost of delivering enabling infrastructure projects has risen, resulting in significant funding gap emerging. Projects progressing, with Timeline, Budget, Risk and Resource categorised as parameters on a RAG status, with any Red classifications identified and reported. Executive Director *Place; Head of Development 1. A701 Relief Road 2. A701 Sustainable Trasport Corridor 3. A701 Straiton Junction Improvements For all highlighted projects, estimated cost significantly exceeds budget available to deliver project. For all highlighted projects, addressing requirement for investment in A701 corridor in phases with prioritisation applied. Bush Loan Junction progressing ahead of remaining programme fully funded by ESESCRD funding. Timeline Budget Risk Resource A R R G A R R G A R R G Page 287 of 396
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STRATEGIC RISK PROFILE, Q4 Jan-Mar 2025 v1.2 SRP.OP.10 Capital Projects – Children, Young People & Partnerships Estates Programme: Primary Risk Code Risk Identification Managed by Risk Commentary Risk Evaluation SRP.O P.10 Projects progressing, with Timeline, Budget, Risk and Resource categorised as parameters on a RAG status, with any Red classifications identified and reported. Executive Director *Place; Executive Director CYPP; Head of Development 1. Mayfield/St Lukes PS New Build: Programme delayed for project revision. Mayfield School pupils were decanted to the new Easthouses PS in December. Budget gap has lowered due to intensive cost reduction exercise. 2. Mauricewood PS Extension & Refurbishment: Rising roll and catchment review requires investment in school to address capacity and suitability. Limited budget available. Funding insufficient as some contributions were withdrawn for pay for costs of previous extension. 3. Bilston PS Extension: Rising roll and catchment review requires investment in school to address capacity and suitability. Limited budget available. Design team appointed to develop investment in school that aligns with budget available from Developer Contributions. 4. Relocation of Mount Esk Nursery / Hawthorden Extension: Rising roll and catchment review requires investment in school to address capacity and suitability. Limited budget available. Design team appointed to develop investment in school that aligns with budget available from Developer Contributions. Stage 2 design and costs complete. Timeline Budget Risk Resource R R R A R R R A A A A A A A A A SRP.OP.09 Capital Projects – Children, Young People & Partnerships Estates Programme: Secondary Risk Code Risk Identification Managed by Risk Commentary Risk Evaluation SRP.O P.09 Projects progressing, with Timeline, Budget, Risk and Resource categorised as parameters on a RAG status, with any Red classifications identified and reported. Executive Director *Place; Executive Director CYPP; Head of Development 1. Beeslack HS Replacement: Site acquisition being progressed. Planning consent now in place. . Preferred contractor appointed under two stage process. 2. Shawfair All Through: Site acquisition complete. School location fixed with design team. Remediation programme underway by Shawfair LLP. Shawfair All Thorugh Campus budget approved at Council. 3. Penicuik HS New Build: LEIP target for delivery is Dec 2026, however programme for occupation is July 2027. Cost reports tracking higher and risks identified in refurbishment works. SFT Timeline Budget Risk Resource A A A G R A A A A A A G Page 288 of 396
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STRATEGIC RISK PROFILE, Q4 Jan-Mar 2025 v1.2 advising if additional LEIP funding available to address abnormal costs. Contractor, Morrison Construction appointed Jan’25. SRP.OP.09 Capital Projects – Regeneration Risk Code Risk Identification Managed by Risk Commentary Risk Evaluation SRP.O P.10 Projects progressing, with Timeline, Budget, Risk and Resource categorised as parameters on a RAG status, with any Red classifications identified and reported. Executive Director *Place; Head of Development 1. Vogrie Changing Places: issues with contractor and obtaining buliding warrant, however due to go on site this summer. 2. Destination Hillend: Alpine Coaster delivered with access and parking infrastructure and Coaster now open. Project absorbed risk and contingency. Next Phase to be recast. 3. Hopefield Industrial Estate: Updated financial model required. Cost plan for upgrade to infrastructure being developed 4. Dalkeith Asset Rationalisation Programme: Decant of staff to Fairfield House underway and planning application for works to Midlothian House to be submitted in June 2025 following public consultation . Timeline Budget Risk Resource R A R A R R R A R A A G A G A G SRP.OP.04 City Deal Risk Code Risk Identification Managed by Risk Control Measures Likelihood Impact Risk Evaluation SRP.O P.04 South East Scotland Region City Deal - a bid for funding to Scottish and UK Governments to accelerate economic growth through investment in infrastructure/ housing/ skills and innovation. 200 Council Houses linked to the City Deal. Head of *Adult and Social Care; Chief Operating Officer *Education; Chief *Executive; Director *Health and Social Care; Chief Officer *Place; Executive Director *Place; Chief Officer Corporate Solutions; Chief Finance Officer; Chief Officer 1. Maintain strong Midlothian involvement through the City Deal governance structure. 2. Midlothian City Deal Key Officer (Internal) Group. 3. Securing best arrangements for Midlothian through close liaison with partners and conclusion of business cases. 4 5 Page 289 of 396
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STRATEGIC RISK PROFILE, Q4 Jan-Mar 2025 v1.2 Young People and Partnerships Related Action Code Related Action Related action latest note Managed By Due Date Status SRP.O P.04.02 Realisation of outcomes of respective workstreams Q1 24/25: Work continues on the relevant programmes. Executive Director *Place 31-Mar-2025 10% Page 290 of 396
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Audit Committee Monday 16 June 2025 Item No 5.3 Unaudited Annual Accounts 2024/25 Report by David Gladwin, Chief Financial Officer and Section 95 Officer Report for Information 1 Recommendation 1.1 In accordance with The Local Authority Accounts (Scotland) Regulations 2014 set out in section 3.2 of this report and specifically sections 8 (9) and 8 (10), Audit Committee are asked to consider the unaudited annual accounts for 2024/25. 2 Purpose of Report / Executive Summary 2.1 The purpose of this report is to outline material changes in the value of net assets as at 31st March 2025 and to facilitate Audit Committee consideration of the Council’s unaudited annual accounts for 2024/25. 2.2 At the time of writing this report a final review of the document is ongoing. Date: 12 June 2025 Report Contact: David Gladwin: 0131 271 3113 David.gladwin@midlothian.gov.uk Page 291 of 396
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2 3 Background 3.1 The unaudited annual accounts for 2024/25 are in the final stages of preparation with work on track to complete the document in advance of the statutory deadline of 30th June. A draft copy of the accounts will be issued to Committee members in advance of the meeting and will published online once signed after Audit Committee consideration. 3.2 The Local Authority Accounts (Scotland) Regulations 2014 sets out the requirements in respect of preparation, submission and scrutiny of unaudited accounts as follows, paragraphs 9 and 10 set out the requirements for Audit Committee to consider the unaudited annual accounts by 31st August 2025. Published Accounts and Audit 8.—(1) A local authority must ensure that its Annual Accounts are prepared in accordance with these Regulations and, so far as compatible with these Regulations, in accordance with proper accounting practices. (2) The Annual Accounts must include, in addition to the financial statements required by proper accounting practices, the following statements, which are to be prepared in accordance with proper accounting practices and recognised guidance— (a) a management commentary; (b) a statement of responsibilities; (c) an annual governance statement; (d) either— (i) a remuneration report in the style set out in the Schedule to these Regulations, or (ii) a statement that no remuneration report has been prepared because no persons have received remuneration that requires to be included in such a report. (3) The Annual Accounts must also include such of the following statements and disclosures as are relevant to the functions of the local authority— (a) a housing revenue account; (b) a non-domestic rate account; (c) a council tax account; (d) any other statement relating to statutory funds which is required by any statutory provision. (4) The remuneration report referred to in paragraph (2)(d)(i) must contain the information set out in the Schedule to these Regulations. (5) The proper officer must ensure that— (a) the statement of responsibilities required by paragraph (2)(b) accurately reflects the proper officer’s responsibilities; and (b) the financial statements give a true and fair view of the financial position of the local authority and its group at the end of the financial year and the transactions of the local authority and its group for that year. (6) Once the proper officer is satisfied as to the matters set out in paragraph (5), the proper officer must certify these matters by signing and dating the statement of responsibilities and the balance sheets contained within the Annual Accounts and then submit the Annual Accounts to the auditor. (7) The Annual Accounts must be submitted to the auditor no later than 30th June immediately following the financial year to which the Annual Accounts relate. (8) The local authority must publish a copy of the Annual Accounts submitted to the auditor, clearly identified as an unaudited version, on a website of the authority from the date they are submitted until the date on which the audited Annual Accounts are published in accordance with regulation 11. (9) A local authority or a committee of that authority whose remit includes audit or governance functions must meet to consider the unaudited Annual Accounts as submitted to the auditor. (10) The meeting referred to in paragraph (9) must be held no later than 31st August immediately following the financial year to which the Annual Accounts relate. Page 292 of 396
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3 3.3 As required by paragraph 6 and 7 of the regulations the unaudited annual accounts will be signed by the Chief Financial Officer on or before the 30th June 2025 and immediately submitted to Audit Scotland, the Council’s appointed external auditors. 3.4 The regulations also provides for public inspection and this will run from 30th June 2025 to 21st July 2025. 3.5 Separately, on the Council agenda for 24th June 2025, are the year- end financial monitoring reports which provide commentary on the in- year spend against budget and reserves positions for the following account areas: • Financial Monitoring 2024/25 General Fund Revenue; • Housing Revenue Account Revenue and Capital Plan Final Outturn 2024/25; • General Services Capital Plan Outturn 2024/25. 3.6 The Annual Treasury Management Report 2024/25 is on the Audit Committee agenda today and will subsequently be reported to Council. 4 Financial Statements Presentation 4.1 There continues to be refinements to the format and presentation of the annual accounts as part of a continuous improvement approach. 4.2 There is one significant change to the accounting code for 2024/25 that impacts materially on the Council’s accounts. The accounting requirements of International Financial Reporting Standard (IFRS) 16 (Leases) has been reflected in the Council’s Accounts. At this stage figures in the draft accounts are provisional whilst we await final figures from MUFG Corporate Markets who have been commissioned by the Council to undertake a detailed assessment of scope, provide the appropriate accounting entries and support with Audit work in this area. 4.3 IFRS16 requires recognition of assets and liabilities for almost all leases with assessment of eligibility centred around control of an identified asset for a period of time. Previously the costs of many of these arrangements may have simply been revenue expenses. 5 Long Term Assets 5.1 The total value of Long-Term Assets increased during the year by £30 million reflecting further investment in the asset base and changes to the value of the Council’s asset base. 5.2 For the School estate the Council’s valuation methodology applies published Scottish Futures Trust (SFT) metrics intrinsic in the Learning Estate Investment Programme (LEIP) alongside evidence on the cost of school builds in Midlothian in recent years. 5.3 Valuation methodology for the Council Housing stock was an area raised during the 2023/24 audit resulting in a recommendation that management consider the use of a rent yield adjustment in the valuations of council dwellings. Further work has been done in this area Page 293 of 396
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4 but at this stage the valuation basis remains consistent with 2023/24 and previous years. To progress this issue to conclusion requires further engagement with Audit Scotland and this will take place during the audit process. As a consequence, a revised valuation methodology and consequently an adjustment to the reported value of Housing Stock may need to be reflected in the draft audited accounts. 5.4 In 2020/21 the Council amended the valuation basis for its shareholding in Lothian Buses Ltd to exclude any impact from the volatility of IAS 19 Pension valuation methodology. This basis of valuation remains in 2024/25. Excluding pension valuations, Lothian Buses Ltd accounts to 31st December 2024 show an increase in net assets of £8.929 million. 5.5 The Council have a 5.47% shareholding in Lothian Buses Ltd valued in the accounts at £6.082 million. This is an increase of £0.489 million from that in the 2023/24 accounts. 5.6 Council approved a capped level of investment in Midlothian Energy Limited of £8.6 million to support work on the initial Shawfair project. During 2024/25 there was further drawdown of £4.589 million taking the total to the maximum approved value. Lothian Pension Fund Valuation 5.7 The requirement of International Accounting Standard (IAS) 19 – Employee Benefits requires an annual actuarial valuation for accounting purposes of the council’s share of Lothian Pension Fund. There can be significant volatility between annual valuations. 5.8 The draft accounts in front of Audit Committee today the incorporates results based on actual figures for 2024/25. They show a net asset for the Council’s share of Lothian Pension Fund of £273.943 million. This is an increase of £87.414 million on the value at 31st March 2024. 5.9 The accounting standard imposes a limit on the maximum amount of surplus which can be recognised on an employer’s balance sheet and this limit depends on factors unique to each employer. The limitation on valuation is based on the remaining future working lifetime of active staff and the present value of accruing service cost less value of cash contributions. 5.10 Application of this methodology results in the derecognition of all the pension asset. However, the accounting standard requires inclusion of the liability in relation to the present value of unfunded obligations. At the 31st March this is £6.433 million being a £1.179 million reduction on the figure as at 31st March 2024. 5.11 Funding of pension obligations is determined by a full triennial valuation and the 2023 triennial valuation showed an increase in the overall funding position to 158% of assets relative to liabilities. In response the contribution rate that the Council pay for employee members of Lothian Page 294 of 396
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5 Pension Fund reduced from 22.2% in 23/24 to 17.6% for 2024/25 to 2026/27. The next triennial revaluation is in 2026. 6 Current Assets 6.1 At 31st March 2024, the combined value of short-term investments and cash and cash equivalents shown in the Balance Sheet was £57.522 million. The position at 31st March 2025 of £26.948 million reflects an increased under borrowed position of £90 million which is in line with approved Treasury Strategy related to interest prospects for longer term Public Works Loans Board borrowing. 7 Long term Liabilities 7.1 As the Council’s Public Private Partnership (PPP) and similar contracts move a year closer to expiry there is reduction of £2.6 million in the outstanding long-term liability. 7.2 Despite maintaining the Treasury Strategy of delaying longer term borrowing whilst interest rates remain high it was appropriate towards the end of the financial year to take some shorter dated long-term borrowing to the value of £40 million. 8 Audit and Consideration of audited Accounts 8.1 Audit Scotland are well underway with the initial phase of the 2024/25 audit. Plans for the substantive phase of the audit over the summer months are in place with a clearance meeting expected during September 2025. 8.2 Thereafter, the audited annual accounts are scheduled to be presented to Audit Committee on Tuesday 30th September 2025 together with the Audit Scotland annual audit report which will also go on to Council in October. 8.3 The Local Authority Accounts (Scotland) Regulations 2014 also set out the requirements for completion, approval and signing of the audited accounts as follows. Consideration and Signing of Audited Annual Accounts 10.—(1) A local authority, or a committee of that authority whose remit includes audit or governance functions, must— (a) meet to consider the audited Annual Accounts; and (b) aim to approve those accounts for signature as described in this regulation no later than 30th September immediately following the financial year to which the accounts relate. (2) That local authority or committee must consider whether the Annual Accounts should be signed, having regard to any report made on those accounts and any advice given by the proper officer or the auditor. (3) Immediately following the approval of the Annual Accounts for signature, the statements which form part of those accounts are to be signed and dated as follows— (a) the management commentary by the proper officer, the Chief Executive and the Leader of the Council; (b) the statement of responsibilities by the Leader of the Council and the proper officer, who must also certify the matters referred to in paragraphs (5) and (6) respectively; Page 295 of 396
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6 (c) the annual governance statement by the Chief Executive and the Leader of the Council; (d) the remuneration report by the Chief Executive and the Leader of the Council; and (e) the balance sheets by the proper officer, to authorise publication of the financial statements. (4) Where a local authority does not have a Chief Executive or a Leader of the Council, the statements that paragraph (3) requires that person to sign are to be signed by such other person as it nominates for that purpose. (5) The person who signs the statement of responsibilities as Leader of the Council must certify that the Annual Accounts have been approved for signature by, or on behalf of, the authority. (6) The proper officer must certify that the financial statements give a true and fair view of the financial position of the local authority and its group at the end of the financial year and the transactions of the local authority and its group for that year. (7) Following the signature of the Annual Accounts, the proper officer must provide the Annual Accounts, including the signed statements, to the auditor. (8) Any further report provided by the auditor following the signature of the Annual Accounts which relates to those accounts must be considered by the local authority or a committee of that authority whose remit includes audit or governance functions. 9 Report Implications 9.1 Resource Whilst this report deals with financial issues there are no financial implications arising directly from it. 9.2 Digital There are no IT implications arising from this report. 9.3 Risk Section 95 of the Local Government (Scotland) Act 1973 requires all Local Authorities in Scotland to have adequate systems and controls in place to ensure the proper administration of their financial affairs. The Council’s Standing Orders and Financial Regulations detail the responsibilities of members and officers in relation to the conduct of the Council’s financial affairs. 9.4 Ensuring Equalities There are no equality implications arising directly from this report. 9.5 Additional Report Implications (See Appendix A) Appendices Appendix A – Additional Report Implications Page 296 of 396
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7 APPENDIX A – Additional Report Implications A.1 Key Priorities within the Single Midlothian Plan Midlothian Council and its Community Planning Partners have made a commitment to treat the following areas as key priorities under the Single Midlothian Plan:- • Reducing the gap in learning outcomes • Reducing the gap in health outcomes • Reducing the gap in economic circumstances This report does not directly impact Midlothian Council’s key priorities but a key message within the Accounts Commission report is that the way Council’s respond to the financial challenge will inevitably impact on how they can deliver of key priorities and outcomes. A.2 Key Drivers for Change Key drivers addressed in this report: Holistic Working Hub and Spoke Modern Sustainable Transformational Preventative Asset-based Continuous Improvement One size fits one None of the above A.3 Key Delivery Streams Key delivery streams addressed in this report: One Council Working with you, for you Preventative and Sustainable Efficient and Modern Innovative and Ambitious A.4 Delivering Best Value The report does not directly impact on Delivering Best Value. A.5 Involving Communities and Other Stakeholders No consultation was required. A.6 Impact on Performance and Outcomes The decisions taken to balance the budget will have fundamental implications for service performance and outcomes. The Council’s Transformation Programme aims to minimise the impact on priority services. Page 297 of 396
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8 A.7 Adopting a Preventative Approach The proposals in this report do not directly impact on the adoption of a preventative approach. A.8 Supporting Sustainable Development There are no sustainability issues arising from this report. Page 298 of 396
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2024/25 www.midlothian.gov.uk Midlothian Council Midlothian Council Unaudited Annual Accounts Page 299 of 396
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WWW.MIDLOTHIAN.GOV.UK 1 Table of Contents Table of Contents TABLE OF CONTENTS .................................................................................................................... 0 MANAGEMENT COMMENTARY ...................................................................................................... 3 ABOUT MIDLOTHIAN COUNCIL ............................................................................................................... 3 KEY PRIORITIES AND OBJECTIVES ............................................................................................................ 4 KEY ACHIEVEMENTS AND HIGHLIGHTS FOR 2024/25 ................................................................................... 5 FINANCIAL PERFORMANCE FOR 2024/25 ................................................................................................. 5 RISKS AND UNCERTAINTIES FACING THE COUNCIL ..................................................................................... 12 LOOKING AHEAD .............................................................................................................................. 13 CONCLUSION .................................................................................................................................. 14 ACKNOWLEDGEMENTS ....................................................................................................................... 15 STATEMENT OF RESPONSIBILITIES .............................................................................................. 16 ANNUAL GOVERNANCE STATEMENT ........................................................................................... 17 REMUNERATION REPORT ........................................................................................................... 24 REMUNERATION OF COUNCILLORS ........................................................................................................ 24 REMUNERATION OF EMPLOYEES............................................................................................................ 25 PENSION BENEFITS ........................................................................................................................... 26 REMUNERATION OF OTHER EMPLOYEES BY PAY BANDS ............................................................................... 28 EXIT PACKAGES ................................................................................................................................ 28 TRADE UNION FACILITY ...................................................................................................................... 29 INDEPENDENT AUDITOR’S REPORT ............................................................................................. 30 EXPENDITURE AND FUNDING ANALYSIS ..................................................................................... 31 PRINCIPAL FINANCIAL STATEMENTS ........................................................................................... 32 GROUP AND COUNCIL COMPREHENSIVE INCOME AND EXPENDITURE STATEMENT .............................................. 33 GROUP AND COUNCIL MOVEMENT IN RESERVES STATEMENT ....................................................................... 34 GROUP AND COUNCIL BALANCE SHEET .................................................................................................. 35 GROUP AND COUNCIL CASH FLOW STATEMENT ........................................................................................ 36 NOTES TO THE ACCOUNTS ......................................................................................................... 37 1. ACCOUNTING POLICIES ........................................................................................................... 37 2. ACCOUNTING STANDARDS ISSUED, NOT YET ADOPTED .................................................................... 51 3. CRITICAL JUDGEMENTS IN APPLYING ACCOUNTING POLICIES ............................................................. 51 4. FUTURE ASSUMPTIONS AND ESTIMATION UNCERTAINTIES ................................................................. 51 5. EVENTS AFTER THE REPORTING PERIOD ........................................................................................ 54 6. NOTE TO THE EXPENDITURE AND FUNDING ANALYSIS ....................................................................... 55 7. ADJUSTMENTS BETWEEN ACCOUNTING BASIS AND FUNDING BASIS UNDER REGULATIONS ......................... 56 8. MOVEMENT IN EARMARKED RESERVES ......................................................................................... 58 9. OTHER OPERATING INCOME AND EXPENDITURE .............................................................................. 58 10. FINANCING AND INVESTMENT INCOME AND EXPENDITURE ................................................................. 58 11. TAXATION AND NON-SPECIFIC GRANT INCOME AND EXPENDITURE ...................................................... 58 12. GRANT INCOME ..................................................................................................................... 59 13. EXPENDITURE AND INCOME ANALYSED BY NATURE .......................................................................... 60 14. PROPERTY, PLANT AND EQUIPMENT............................................................................................. 61 15. INFRASTRUCTURE ASSETS ......................................................................................................... 64 Page 300 of 396
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WWW.MIDLOTHIAN.GOV.UK 2 Table of Contents 16. HERITAGE ASSETS ................................................................................................................... 64 17. INTANGIBLE ASSETS ................................................................................................................ 64 18. LONG-TERM DEBTORS ............................................................................................................. 65 19. FINANCIAL INSTRUMENTS ......................................................................................................... 65 20. NATURE AND EXTENT OF RISKS ARISING FROM FINANCIAL INSTRUMENTS ............................................... 69 21. ASSETS HELD FOR SALE ........................................................................................................... 72 22. INVENTORIES ......................................................................................................................... 72 23. DEBTORS ............................................................................................................................. 72 24. CASH AND CASH EQUIVALENTS .................................................................................................. 73 25. CREDITORS ........................................................................................................................... 73 26. PROVISIONS .......................................................................................................................... 73 27. GRANTS RECEIVED IN ADVANCE ................................................................................................. 73 28. USABLE RESERVES .................................................................................................................. 74 29. UNUSABLE RESERVES .............................................................................................................. 74 30. EXTERNAL AUDIT COSTS ........................................................................................................... 76 31. RELATED PARTIES ................................................................................................................... 76 32. CAPITAL EXPENDITURE AND CAPITAL FINANCING ............................................................................ 78 33. LEASES ................................................................................................................................ 78 34. PUBLIC PRIVATE PARTNERSHIP (PPP) AND SIMILAR CONTRACTS ......................................................... 79 35. PENSION SCHEMES ACCOUNTED FOR AS DEFINED BENEFIT CONTRIBUTION SCHEMES ............................. 82 36. DEFINED BENEFIT PENSION SCHEMES ......................................................................................... 83 37. CONTINGENT LIABILITIES .......................................................................................................... 87 38. TRUSTS AND BEQUESTS ............................................................................................................ 87 39. NOTES TO THE GROUP ACCOUNTS .............................................................................................. 87 SUPPLEMENTARY STATEMENTS .................................................................................................. 89 HOUSING REVENUE ACCOUNT ............................................................................................................. 89 NOTES TO THE HOUSING REVENUE ACCOUNT .......................................................................................... 90 COUNCIL TAX INCOME ACCOUNT.......................................................................................................... 91 NON-DOMESTIC RATE ACCOUNT .......................................................................................................... 93 GLOSSARY OF TERMS ................................................................................................................. 94 Page 301 of 396
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WWW.MIDLOTHIAN.GOV.UK 3 Management Commentary Management Commentary The Management Commentary is intended to assist users in understanding the objectives and strategy of the Council and provide a review of its business and financial performance for the year. It also outlines the principal risks and uncertainties which are likely to affect the future development and performance of the Council. The Annual Accounts present the financial position and performance of the Council, demonstrating the stewardship of funds that support the Council’s vision and key priorities. The format and content of the Annual Accounts are prepared in accordance with the Code of Practice on Local Authority Accounting in the United Kingdom. About Midlothian Council Midlothian Council is located south of Edinburgh centred on the main towns of Penicuik, Dalkeith, Bonnyrigg and Lasswade. One of the smaller local authority areas, but also one of the fastest growing, it has emerged as a world centre for the Bioscience industry. Midlothian population has grown by 16.1% between the census 2011 and 2022. Projections show a continued increase by a further 9.1% to 2043. Key facts about Midlothian are: MidlothianEmployees 5,357 Population 96,527 (Census 2022) Primary Schools 33 Secondary Schools 6 Elected Members 18 (SNP 8, Lab 7, Con 3) Page 302 of 396
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WWW.MIDLOTHIAN.GOV.UK 4 Management Commentary Council Service Structure Key Priorities and Objectives Midlothian Council’s key priorities and objectives are set out in in The Single Midlothian Plan (SMP). The priorities are delivered through the Community Planning Partnership (CPP), which sets out how we collaborate with communities and partners to deliver our vision for Midlothian to be a “Great Green Place to Grow.” The Single Midlothian Plan has identified its three main outcomes for the next four years: • Individuals and communities to have improved health and skills for learning, life and work; • No child or household should be living in poverty; • Significant progress to be made towards net carbon emissions by 2045. These form the common and strategic guidance for the Council and its partners to encourage plans and measures to be developed to work towards enabling individuals and communities being able to lead healthier, safer and greener lives by 2030. The Community Planning Partnership is led by the Community Planning Board, on which a number of organisations sit and work together to achieve key actions towards seven thematic priorities across the four years, with a more focused approach in reducing poverty and collaborating with communities to increase wealth, reflecting the wellbeing and circular economy principles using a place based model. Dr Grace Vickers Chief Executive PEOPLE AND PARTNERSHIPS Fiona Robertson Executive Director Children, Young People and Parnerships Chief Education Officer Rebecca Hooten Chief Officer Children's Services, Partnerships and Commuinities Michelle Strong Chief Education Operating Officer Morag Barrow Joint Health and Social Care Chief Officer IJB Nick Clater Head of Adult Social Care Chief Social Work Officer Grace Cowan Head of Primary Care and Older People PLACE Kevin Anderson Executive Director Place Saty Kaur Chief Officer Corporate Solutions Derek Oliver Chief Officer Place Fiona Clandillion Head of Development FINANCE David Gladwin Chief Financial Officer Section 95 Officer Page 303 of 396
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WWW.MIDLOTHIAN.GOV.UK 5 Management Commentary The annual Balanced Scorecard measures progress towards these outcomes and is used to show ongoing improvements and reflect the ongoing challenges within Midlothian. The full detail behind the performance indicators measured by the Balanced Scorecard for 2024/25 can be found on the Council’s website Midlothian Council/Performance and spending. Key Achievements and Highlights for 2024/25 Achievement Commentary Completion of Woodburn Primary School Extension The £11.4 million extension and refurbishment project was completed during October 2024, six weeks ahead of schedule. The new 2,262 m2 extension and refurbishment increases pupil capacity from a three-stream to a four-stream entry and is available for the community to use. Official Opening of the Alpine Coaster The Alpine Coster was officially opened to the public in September 2024. The coaster is the only one in Scotland and the longest in the UK. The Alpine Coaster is part of the ambitious Destination Hillend project – a national tourist attraction, with total visitor numbers expected to rise, bringing in much needed additional revenue to the Council. Official Opening of New Easthouses Primary School The new primary school, which was delivered on time and on budget, was opened in August 2024. Official Opening of Midlothian Energy Ltd (MEL) The project is part of a partnership between Midlothian Council and Vattenfall to deliver low carbon energy projects across the region. The first project is to supply low carbon heat to new homes in Midlothian through the MEL heat network that is planned to expand into existing buildings and other areas in Midlothian and north into Edinburgh. Provision of Affordable Housing The Council’s Strategic Housing Investment Programme (SHIP) was submitted to the Scottish Government in October 2024. To address the need for affordable housing the SHIP details potential sites for 2,082 new affordable homes to be built during 2024 to 2030. During 2024/25 100 new Council houses were completed, this brings the total completed to 1,755 over the past eighteen years, net of demolitions and disposals. In addition, seven properties were purchased during the year to add to the overall housing stock. Financial Performance for 2024/25 Financial information is part of the Council’s Performance Management Framework with the General Fund and Housing Revenue Account (HRA) financial performance regularly reported to Council. This section Page 304 of 396
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WWW.MIDLOTHIAN.GOV.UK 6 Management Commentary summarises our financial performance for 2024/25. Full details of the Council's financial performance were reported to Council on 24 June 2025 and is available on the Council's website. Usable Reserves The Council holds funds in a number of Usable Reserves for various purposes. Details of the balances and prior year comparatives are shown in the table below, more detail can be found in the Movement in Reserves Statement on page 34. Usable Reserve Purpose 2024/25 £000 2023/24 £000 General Fund Reserve – Non-earmarked Funds held as a general contingency 6,408 9,318 General Fund Reserve - Earmarked Funds held for specific purposes (note 8) 25,621 37,021 Housing Revenue Account Funds held for investment in the Council’s housing stock 31,910 33,182 Capital Fund Funds set aside for major capital developments or asset purchases 17,600 17,242 Repairs and Renewals Fund Funds held for specific types of repairs and maintenance work 3,756 4,113 General Fund Performance The General Fund is a statutory fund into which all the receipts of the Council are required to be paid and out of which all liabilities of the Council are to be met, except to the extent the statutory rules provide otherwise. Government grants, council tax income, fees and charges, non-domestic rates income (subject to pooling arrangements) and interest/returns on investments provide resources to the General Fund. The General Fund is split between non-earmarked balances (the level of funding available to the Council to manage financial risks and unplanned expenditure) and balances that are earmarked for specific purposes (note 8). Actual outturns against budget for each of the Council’s General Fund Service areas are as follows: General Fund Revenue Outturn 2024/25 Service Area Revised Budget £000 Net Expenditure £000 (Under)/ Overspend £000 Management and Members 2,684 2,464 (220) Place: Corporate Solutions 25,009 26,469 1,460 Place 46,267 47,842 1,575 Central Costs 24 378 354 People and Partnerships: Midlothian Integration Joint Board 69,072 69,072 0 Adult Health and Social Care (Non-delegated) 719 707 (12) Children’s Services, Partnerships and Communities 19,318 19,118 (200) Education 149,246 150,600 1,354 Lothian Valuation Joint Board 582 613 31 Non-distributable Costs 992 923 (69) Net Expenditure 313,913 318,186 4,273 Loan Charges 5,460 4,140 (1,320) Non-domestic Discretionary Relief 70 77 7 Investment Income (111) (51) 60 Allocations to Housing Revenue Account (5,537) (5,587) (50) Total Expenditure 313,795 316,765 2,970 Less Funding: Scottish Government Grant (229,789) (229,964) (175) Council Tax (64,686) (64,170) 516 Service Concessions – in-year adjustment (2,796) (2,796) 0 Utilisation of Reserves 16,524 19,835 3,311 Page 305 of 396
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WWW.MIDLOTHIAN.GOV.UK 7 Management Commentary The most significant areas (greater than £0.500 million) contributing to variances against budget in the Council service areas were in relation to: • The cost of transporting school pupils to school exceeded budget by £1.677 million; • The level of maternity cover required in schools and deployment of temporary resources in areas of the council where permanent recruitment of staff has been challenging resulted in an overspend pf £0.987 million; • A reduction in housing benefit subsidy received from the Department of Work and Pensions of £0.537 million. This relates to an ongoing appeal relating to error testing in a previous financial year; • Council Tax Income was £0.516 million lower than budged due to household growth being slower than anticipated, a significant increase in the number of households eligible for single person discount and a slight increase in bad debt provision; • Additional costs in relation to the extension of the bulky items disposal contract and legislative changes in relation to treatment and haulage of air pollution contaminants have increased costs of waste disposal by £0.529 million; • The cost of maintaining ageing vehicles, higher than anticipated volumes of externally contracted repairs and subsequent external fleet hire to support service continuity during periods of vehicle downtime resulted in an overspend for fleet of £0.573 million. Offset by:- • A reduction in loan charges of £1.320 million due to deferral of borrowing to later years, a reduction of £36 million in the borrowing requirement for 2024/25 and higher than forecast surplus cash providing opportunity to generate deposit income. These all relate to timing of planned capital expenditure. Full details of all other variances affecting the final outturn position can be found in the 24 June Council report Midlothian Council > Meetings. Midlothian Council provide Midlothian Integration Joint Board (MIJB) an annual sum for services managed by Midlothian Health and Social Care Partnership. This sum is adjusted in-year in accordance with the integration scheme. In 2024/25 MIJB spend exceeded budget by £8.888. Of this, £4.883 million related to Adult Social Care services and in accordance with the Integration Scheme, required a further allocation from the Council to MIJB to fund this. Detailed commentary on the financial performance of the Midlothian Integration Joint Board is contained in their annual accounts. Summary Position The Council approved a reserves strategy in February 2019 setting the minimum level of uncommitted reserve of two percent of net expenditure (excluding resources delegated to Midlothian Integration Joint Board), which now equates to £4.9 million. In 2024/25 there was a decrease of £19.835 million in the General Fund Reserve, as shown in the table below: Movement in General Fund Reserve £000 2024/25 performance against budget 3,311 Planned utilisation of reserves 22,836 Supplementary Estimate for MIJB 4,883 Budget carried forward for use in future years (11,195) Total Movement 19,835 Page 306 of 396
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WWW.MIDLOTHIAN.GOV.UK 8 Management Commentary Housing Revenue Account The Council has a statutory obligation to maintain a revenue account for its housing provision in accordance with the Housing (Scotland) Act 1987. The Housing Revenue Account records all income and expenditure relating to the Council's own housing stock. Rents paid by tenants’ funds the revenue expenditure on housing management, repairs and maintenance and in part financing capital expenditure. The table below provides analysis of financial performance for 2024/25: Housing Revenue Account Outturn 2024/25 Revised Budget £000 Net Expenditure £000 (Under)/ Overspend £000 Expenditure: Repairs and Maintenance 9,157 12,775 3,618 Administration and Management 5,537 5,587 50 Loan Charges 16,568 15,532 (1,036) Other Expenses 2,979 3,760 781 Total Expenditure 34,241 37,654 3,413 Income: Council House Rents (35,299) (35,516) (217) Other Rents and Recharges (866) (866) 0 Total Income (36,165) (36,382) (217) Utilisation of Reserves (1,924) 1,272 3,196 Overall, the Housing Revenue Account showed an overspend of £3.196 million at the year-end mainly due to: • High value repairs, particularly in relation to essential damp, roofing works and electrical insulation contributed to an overspend in repairs to the housing stock of £3.618 million; • An increase in levels of outstanding debt and write-offs of historic debt resulted in an overspend of £0.607 million; Offset by:- • The timing of delivery of HRA capital plan projects allowed lower than expected loan charges of £1.036 million. The closing balance on the Housing Revenue Account reserve is £31.910 million which is committed to fund the Council’s ambitious capital investment plan, currently running to 2039/40. The capital plan includes provision to build additional housing stock and continue to improve and upgrade its existing stock, particularly through Scottish Quality Housing Standard (SHQS) and Energy Efficiency Standard for Social Housing (EESSH) works. The majority of this plan is funded through prudential borrowing with costs of borrowing met from rental income and planned utilisation of the Housing Revenue Account reserve, which is projected to reduce to approximately £2 million by the end of the plan. Reconciliation of General Fund and Housing Revenue Account Monitoring to the EFA The table below provides a reconciliation to assist users of the accounts to navigate from the Midlothian Council Budget Monitoring position reported in the previous section to the first column in the Expenditure and Funding Analysis (EFA) on page 31. The EFA provides the link between the Final Outturn reports and the figure in the Comprehensive Income and Expenditure Statement (CIES) by removing the various statutory adjustments required under generally accepted accounting practices. Page 307 of 396
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WWW.MIDLOTHIAN.GOV.UK 9 Management Commentary Final Outturn to EFA Reconciliation Service Area Final Outturn £000 Internal Reporting Adjustments £000 Figure Reported in EFA £000 Management and Members 2,464 (469) 1,995 Place: Corporate Solutions 26,469 (67) 26,402 Place 47,842 (10,306) 37,536 Central Costs 378 (69) 309 People and Partnerships: Midlothian Integration Joint Board 69,072 (41) 69,031 Adult Health and Social Care (Non-delegated) 707 (1) 706 Children’s Services, Partnerships and Communities 19,118 (26) 19,092 Education 150,600 (11,157) 139,443 Lothian Valuation Joint Boards 613 0 613 Non-distributable Costs 923 0 923 Add Back: Housing Revenue Account 0 (14,668) (14,668) Net Expenditure 318,186 (36,804) 281,382 Loan Charges 4,140 26,613 30,753 Non-domestic Discretionary Relief 77 (77) 0 Investment Income (51) 0 (51) Allocations to Housing Revenue Account (5,587) 5,587 0 Service Concessions (2,796) 0 (2,796) Scottish Government Grant (229,964) 77 (229,887) Council Tax (64,170) 5,876 (58,294) Total Funding and Other Expenditure (298,351) 38,076 (260,275) Utilisation of Reserves 19,835 1,272 21,107 Internal Reporting Adjustments HRA (1) PPP and Leases (2) Council Tax Reduction (3) Other(4) Total Service Area £000 £000 £000 £000 £000 Management and Members (87) 0 0 (382) (469) Place: Corporate Solutions (2,593) 0 (5,876) 8,402 (67) Place (2,560) 320 0 (8,066) (10,306) Central Costs 0 0 0 (69) (69) People and Partnerships: Midlothian Integration Joint Board 0 (41) 0 0 (41) Adult Health and Social Care (Non-delegated) (1) (1) Children’s Services, Partnerships and Communities 0 (8) 0 (18) (26) Education 0 (10,368) 0 (789) (11,157) Lothian Valuation Joint Boards 0 0 0 0 0 Non-distributable Costs 0 0 0 0 0 Add Back: Housing Revenue Account (14,608) (60) 0 0 (14,668) Net Expenditure (19,848) (10,157) (5,876) (923) (36,804) Loan Charges 15,533 10,157 0 923 26,613 Non-domestic Discretionary Relief 0 0 0 (77) (77) Investment Income 0 0 0 0 0 Allocations to Housing Revenue Account 5,587 0 0 0 5,587 Service Concessions 0 0 0 0 0 Scottish Government Grant 0 0 0 77 77 Council Tax 0 0 5,876 0 5,876 Total Funding and Other Expenditure 21,120 10,157 5,876 923 38,076 Utilisation of Reserves 1,272 0 0 0 1,272 1. As part of the financial monitoring process the Council reports on the Housing Revenue Account separately from the General Fund, this adjustment adds back the Housing Revenue Account to reflect the structure reported in the Expenditure and Funding Analysis. 2. The Council has a number of Public Private Partnership (PPP) and lease arrangements which fall under IFRS 16. Accounting regulations require to be treated as finance leases. This is a statutory adjustment which is not required for internal reporting purposes. Page 308 of 396
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WWW.MIDLOTHIAN.GOV.UK 10 Management Commentary 3. For the purpose of the annual accounts the cost of the Council Tax Reduction Scheme is offset against the Council Tax Income received, whereas this is reported against the service area as part of the internal reporting process. 4. Various other presentational adjustments. Capital Expenditure 2024/25 Capital expenditure is the money spent by the Council for buying, upgrading or improving assets such as buildings and roads. The difference between capital and revenue expenditure is that the Council receives the benefit from capital expenditure over a period exceeding one year. In 2024/25 the final budget for General Services capital investment was £49.270 million (2023/24 £47.509 million), which was underspent by £0.236 million. The table below identifies actual capital spend during the financial year for key projects classes: 2023/24 Revised Budget 2023/24 Actual Spend 2024/25 Revised Budget 2024/25 Actual Spend £000 £000 General Fund Capital Spend £000 £000 26,047 26,241 School Estate 17,532 17,218 2,007 2,007 Roads, Pavements and Street Lighting 6,971 6,971 6,263 6,263 Regeneration and Development 15,078 15,078 5,137 5,137 Fleet Replacement and Upgrades 2,401 2,401 2,824 2,824 Digital Assets 2,560 2,560 2,358 2,340 Transport, Energy and Infrastructure 2,361 2,346 599 599 Centralised Property Upgrades 872 872 2,274 2,245 Other Capital Projects 1,495 1,588 47,509 47,656 Total 49,270 49,034 The table below demonstrates the breakdown of the Housing Revenue Account Capital Spend for 2024/25: 2023/24 Revised Budget 2023/24 Actual Spend 2024/25 Revised Budget 2024/25 Actual Spend £000 £000 Housing Capital Spend £000 £000 39,215 39,215 New Social Housing and Market Purchases 42,247 42,247 8,570 8,570 Scottish Housing Quality Standard (SHQS) Works 7,739 7,739 1,267 1,267 Energy Efficiency Standard for Social Housing (EESSH 2) 2,724 2,724 1,396 1,360 Other Housing Capital Projects 625 464 50,448 50,412 Total 53,335 53,174 A combination of government grants, external funding contributions from third parties, capital receipts, Section 75 developer contributions and prudential borrowing funded this expenditure. Note 32 in the accounts provides a full analysis of capital expenditure and the financing required. Treasury Management and Investment The Council is able to regulate its own capital spending limits within a prudential framework recommended by the Chartered Institute of Public Finance and Accountancy (CIPFA) and endorsed by Scottish Government, provided it operates within a series of indicators. The Council’s capital expenditure is a key driver of treasury management activity, and these indicators are relevant for the purposes of establishing an integrated treasury management strategy, which demonstrates that the Council’s capital investment plans are affordable, prudent and sustainable. Page 309 of 396
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WWW.MIDLOTHIAN.GOV.UK 11 Management Commentary Financial Indicator 2023/24 2024/25 Commentary Capital financing requirement (excluding PPP and similar contracts) £401.845m £469.866m Reflects the Council’s underlying need to borrow to finance capital expenditure incurred historically by the Council that has yet to be financed. Authorised debt limit £534.105m £604.957m This is calculated in line with the requirements of the Prudential Code for Capital Finance in Local Authorities and represents the maximum amount that the Council may borrow and is set at a level that reflects capital expenditure but includes headroom to allow for unusual cash movements. Actual external borrowing £340.871m £379.445m The actual external debt and long-term liabilities position of the Council. This figure should never exceed the Councils authorised debt limit (see indicator above). Under/(over) borrowed £60.974m £90.421m This demonstrates that the Council’s capital borrowing requirement has not been fully funded by loan debt and is using cash from working capital to support capital programmes whilst interest rates on long- term fixed rate borrowing are high. General Fund ratio of finance costs to net revenue stream 0.60% 1.63% This is a measure of how affordable the Council’s capital plans are. It takes actual finance costs as a % of net revenue. HRA ratio of finance costs to net revenue stream 40.24% 42.81% As above. External Loans Fund Interest Rate 3.00% 3.14% Average rate of interest paid on external debt. Internal Loans Fund Interest Rate 2.08% 2.73% This combines the interest paid by the Council on money borrowed, with the interest earned by the Council on money invested, along with other charges to arrive at a weighted average ‘loans fund rate’ figure for the Council. The borrowing strategy is prepared in accordance with the Code of Practice on Treasury Management in Local Authorities. The majority of the Council’s borrowing comes from Public Works Loan Board (PWLB). Note 19 and 20 of the accounts provides further information on the Council's borrowing. Balance Sheet The table below summarises the Council’s Balance Sheet as at 31 March 2025. The Balance Sheet brings together assets and liabilities, year-end balances, money owed to and by the Council and reserves. More information on the Balance Sheet is provided on page 35. 31 March 25 £000 31 March 24 £000 Change £000 Long-term Assets 1,255,439 1,225,660 29,779 Current Assets 51,776 98,298 (46,522) Current Liabilities (106,110) (96,872) (9,238) Long-term Liabilities (467,126) (432,401) (34,725) Net Assets 733,979 794,685 (60,706) The main areas of movement in the net assets of the Council relate to the following areas:- Long-term Assets Long-term Assets have decreased in value by £29.779 million. This is primarily due to continued investment in new assets across the Council and increase in the value of our existing assets which have been revalued as part of our five-year rolling revaluation programme. Further details of these movements can be found in Notes 14-17 of the annual accounts. Page 310 of 396
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WWW.MIDLOTHIAN.GOV.UK 12 Management Commentary Current Assets A reduction in short-term and liquid deposits within current assets to £0.070 million, reflecting an increased level of internal borrowing in line with the Council's treasury strategy. Long-term Liabilities- Long-term Borrowing Increase in the Council’s longer term borrowing of £37.725 million. Long-term Liabilities- Pension Obligation The impact of the Local Government Pension Scheme and Scottish Teachers Superannuation Scheme on the Council’s accounts have been disclosed in Notes 34 and 35 to the accounts. As at 31 March 2025, the Council’s share of Lothian Pension Fund shows a net pension asset of £273.943 million (2023/24 Pension Asset £186.529 million). However, under the International Financial Reporting Interpretations Committee Standard 14 – The Limit of a Defined Benefit Asset (IFRIC 14) the actuary has calculated the net present value of future contributions of £913.931 million exceeds the value of the future service costs of £658.215 million, a negative contribution. As a result of this calculation, IFRIC 14 advises that no defined benefit plan asset should be recognised in the Council’s Balance Sheet and there is no requirement to recognise the £255.716 million difference as a liability, however the Council is required to reflect the liability in relation to present value of unfunded obligations of £6.433 million and this figure is contained in the Balance Sheet. Formal actuarial valuations are conducted every three years, where each employer’s assets and liabilities are calculated on a detailed basis, using individual member data, for cash contribution setting purposes. The most recent formal valuation was March 2023 with the subsequent results based on a roll forward from the formal valuation. The movements in the pension valuation is due to a combination of applying the actuals pension increase order of 1.7% to the benefits, an increase in the discount rate of 1% and changes in demographic assumptions by the actuary. Risks and Uncertainties Facing the Council Like all local authorities Midlothian Council is facing a period of unprecedented change and financial challenge with many factors affecting the need to adapt as an organisation. These pressures and demand for Council services are only likely to increase as it reacts to future challenges which have been exacerbated by the recent pandemic and growing cost of living crisis. Some of the challenges the Council face include: Risk and Uncertainty Commentary Continued Demographic Pressures Continued demographic pressures particularly around looked after children, people with learning disabilities, elderly care, school age pupils and the significant population growth in Midlothian. Increasing financial hardship is also expected due to pressures on household budgets. These pressures continue to present a considerable challenge to the Council in both financing them and transforming services to improve ways of managing some of the service delivery to respond to these pressures. Delays in the supply chain caused by local or global market shortages World events continue to contribute to a supply chain volatility leading to the Council facing higher prices and shortages of key resources, particularly in the construction and care sectors. This has resulted in longer lead times and increased development costs in maintaining existing and constructing new capital assets. The Council continues to monitor the impact of this on delivery of its front-line services and its capital programmes. Climate Change The Council recognises that climate change is an urgent issue and has committed to significantly reduce carbon emissions by 2045. This will require significant investment and resource to achieve this. Financial Pressures Pay, general inflationary pressures and available Scottish Government Grant funding are critical areas of modelling given their overall significance and uncertainty. For 2024/25, and again for 2025/26, the Scottish Government published a one-year budget and grant settlement. Pressure on the public Page 311 of 396
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WWW.MIDLOTHIAN.GOV.UK 13 Management Commentary purse remains acute and indications are that grant support to Councils will remain at, or close to, a cash flat level for at least the next few years. This represents a challenging outlook for local government with a potential real term reduction in grant income at a time when costs and service demands continue to rise, particularly in Midlothian as the fastest growing Council. There are a number of factors which will continue to influence the actual level of grant support the Council might expect. Among these will be a range of economic factors which will impact on the resources Scottish Government has at its disposal, whether from the UK Government block grant or through tax revenues directly controlled by Scottish Government. Scottish Government priorities and policies relating to taxation and spending will also be a key factor. Whilst an assessment of economic factors can be made at this time, based on various sets of published information the impact of Scottish Government’s tax and spending priorities will only become apparent when the Scottish Government’s 2026/27 budget is published later in 2025 and whilst the Council set a balanced budget for 2025/26, which included a council tax increase of 10%, in the context of potentially reduced real terms external funding and exponential growth in demand for services, the Council faces a considerable challenge to ensure its future expenditure plans are financially sustainable. How the Council Manages Risk Action Commentary Service Risk Registers The service Risk Registers contain operational risks and are managed by each Service Management Team. The Risk Management Group provides further scrutiny of service risks and significant risks are added to the corporate risk register. The Corporate Risk Register The Corporate Risk Register managed by the Corporate Management Team provides assurance through scrutiny and challenge and ensures that the significant risks facing the Council have been identified and effective treatment actions are implemented. The Corporate Risk Register is then submitted to Audit Committee for approval which provides effective scrutiny and challenge as part of the Council’s corporate governance arrangements. Development of a Medium-term Financial Strategy (MTFS) The Council’s Medium-term financial outlook highlights significant funding pressure that the Council may face over the next few years. On 25 February 2025 Council agreed a Medium-term Financial Strategy 2025/26- 2029/30, which sets out budget projections for this period and shows a projected budget gap of £8.9 million by 2028/29. The MTFS set out cost projections for pay and price inflation, debt charges and the impact of demographic changes together with projections of income. As a framework to address the financial challenge, Council approved a Transformation Blueprint which contains five main strategic themes of Following the Money, 21st Century Workforce, Commercialisation and Income Generation, Workplaces of the Future and Multi-Agency Transformation. Within each theme sits a number of individual projects phased over the next two financial years. Council will also continue to explore any options to increase external funding including ongoing discussion with the Scottish Government on funding fast growing Councils. Looking Ahead Economic performance has a significant impact on the availability of funding and demand for public services. The February 2025 the Bank of England monetary report states that whilst progress towards achieving the 2% cpi inflation target remains consistent, there are still significant uncertainties around the current and prospective balance of demand and supply in the economy, therefore the Monetary Policy Page 312 of 396
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WWW.MIDLOTHIAN.GOV.UK 14 Management Commentary Committee is maintaining its focus on the persistence of inflationary pressures in the medium term to ensure sustainability of this target. In addition, Midlothian Council also faces additional pressure being the fastest growing local authority in Scotland, resulting in greater demand for services with future funding for Local Government likely to remain constrained. The Council’s Capital Plan remains under pressure but contains further major investment in the following areas over the coming years: Capital Expenditure Commentary School Infrastructure • Wide-ranging school building, extension and refurbishment programme including a major project at Penicuik High School; • A new 3-18 school at Shawfair; • Replacement Schools for: o Beeslack Community High School; o Mayfield Primary School Campus. Provision of Care Services A new care facility in Bonnyrigg which will provide accommodation for those in need of high quality care. Carriageway and Footway Infrastructure • Continuing investment in improved roads, footpaths and lighting across Midlothian; • As part of the Edinburgh and South East Scotland City Region Deal major investment is also planned in the new A701 Relief Road and A702 link which will support planned investment in new research and technology facilities at Easter Bush. Social Housing A continuation of the new build housing programme and upgrading of existing housing, particularly with regard to energy efficiency measures to work towards the Councils carbon neutral target. The Council has recognised the need for a strategic step change in the form of the Medium-Term Financial Plan together with resource allocation measures that will enable the Council to balance revenue budgets for each financial year. The Council continues to regularly monitor its financial position and provide full financial updates to the Corporate Management Team and elected members as appropriate, including options on addressing any new budgetary and spending pressures. This may include further use of reserves, reallocation of committed reserves, changes to capital spend, or other cost savings. Management is continuing to engage with the Scottish Government on providing sustainable funding going forward. The Council will continue to assess the potential impact of the external risks and challenges facing the Council, including the possible financial and economic impacts. From a financial perspective, the potential impact on future Scottish Government grant funding levels, and from an economic perspective, the potential lack of skilled resource and the impact on the local economy. In delivering services, it is important to recognise that people are our most important asset. Our people have the potential to have a positive impact every day and can deliver life-changing impacts for our communities. Therefore, to maximise that positive impact, it is imperative that we work as One Council by removing any institutional barriers; and eliminate silo working to enable the organisation to implement simple solutions which make a big difference. This means placing our citizens and communities at the centre of our daily work; growing our own talent and empowering our staff and thereby enabling Midlothian to fulfil its potential as a ‘Green Great Place to Grow.’ Conclusion Budget constraints and increasing cost pressures are putting Scotland’s councils’ finances under a severe strain. COSLA have continued to highlight that funding in the Local Government Finance Settlement falls short of the amount required to protect local services. Adding to the challenge of constrained funding, Midlothian Council continues to face the ongoing impacts of a global pandemic as well as long-standing and growing demographic pressures and the impact of pressured household budgets thus placing Page 313 of 396
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WWW.MIDLOTHIAN.GOV.UK 15 Management Commentary increasing pressures on Council resources and demand for its services. Despite these pressures, the Council continues to make significant improvements across a range of service areas and is investing in its asset base to provide essential infrastructure to support the growing population. It is important to appreciate these improvements. We have concluded the year with financial challenge ahead but with a focus on meeting the challenges identified in the Medium-Term Financial Strategy and the Transformation Blueprint to ensure the Council maintains longer-term financial sustainability. Acknowledgements We would like to acknowledge the tremendous effort undertaken in producing the Annual Accounts and express our thanks to colleagues throughout the Council for the significant dedication and commitment shown throughout the year in financial matters. _____________________ _____________________ _____________________ David Gladwin Dr Grace Vickers Councillor Kelly Parry Chief Financial Officer Chief Executive Leader of the Council and Section 95 Officer Page 314 of 396
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WWW.MIDLOTHIAN.GOV.UK 16 Statement of Responsibilities Statement of Responsibilities The Council’s Responsibilities The Council is required to: • Make arrangements for the proper administration of its financial affairs and to secure that one of its officers has the responsibility for the administration of those affairs. In this Council, that officer is the Chief Financial Officer; • Manage its affairs to secure economic, efficient and effective use of resources and safeguard its assets. I certify that the Annual Accounts have been approved for signature by, or on behalf of, the authority. ___________________________ Councillor Kelly Parry Leader of the Council The Chief Financial Officer Responsibilities The Chief Financial Officer is responsible for the preparation of the Council’s Annual Accounts in accordance with proper practices as required by legislation and as set out in the CIPFA/LASAAC Code of Practice on Local Authority Accounting in the United Kingdom (the code). In preparing these Annual Accounts, the Chief Financial Officer has: • Selected suitable accounting policies and then applied them consistently; • Made judgements and estimates that were reasonable and prudent; • Complied with the local authority code; • Kept proper accounting records, which were up to date; • Taken reasonable steps for the prevention and detection of fraud and other irregularities. I certify that the financial statements present a true and fair view of the financial position of the Council (and its group) at the reporting date and the transactions of the Council (and its group) for the year ended 31 March 2025. ___________________________ David Gladwin Chief Financial Officer Page 315 of 396
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WWW.MIDLOTHIAN.GOV.UK 17 Annual Governance Statement Annual Governance Statement Introduction The Annual Governance Statement explains how the Council has complied with the terms of the CIPFA/SOLACE Framework (2016) for the year ended 31 March 2025, sets out the Council’s governance arrangements and systems of internal control, and reports on their effectiveness. The statement also covers relevant governance matters as they affect those entities included as part of the Council’s Group Accounts. Scope of Responsibility Midlothian Council is responsible for ensuring that its business is conducted in accordance with the law and proper standards, and that public money is safeguarded and properly accounted for. The Council also has a statutory duty of Best Value under the Local Government in Scotland Act 2003 to make arrangements to secure continuous improvement and performance, while maintaining an appropriate balance between quality and cost; and in making these arrangements and securing that balance, to have regard to economy, efficiency and effectiveness. In discharging this overall responsibility, elected members and senior officers are responsible for putting in place proper arrangements for the governance of Midlothian Council’s affairs and facilitating the exercise of its functions in a timely, inclusive, open, honest and accountable manner. This includes setting the strategic direction, vision, culture and values of the Council, effective operation of corporate systems, processes and internal controls, engaging with and, where appropriate, lead communities, monitoring whether strategic objectives have been achieved and services delivered cost effectively, and ensuring that appropriate arrangements are in place for the management of risk. The system can only provide reasonable and not absolute assurance of effectiveness. Framework for Good Governance The overall aim of the CIPFA/SOLACE Framework ‘Delivering Good Governance in Local Government’ (2016) is to ensure that: resources are directed in accordance with agreed policy and according to priorities; there is sound and inclusive decision making; and there is clear accountability for the use of those resources in order to achieve desired outcomes for service users and communities. The Framework defines the seven core principles of good governance, namely: A. Behaving with integrity, demonstrating strong commitment to ethical values, and respecting the rule of law; B. Ensuring openness and comprehensive stakeholder engagement; C. Defining outcomes in terms of sustainable economic, social, and environmental benefits; D. Determining the interventions necessary to optimise the achievement of the intended outcomes; E. Developing the entity’s capacity, including the capability of its leadership and the individuals within it; F. Managing risks and performance through robust internal control and strong public financial management; and G. Implementing good practices in transparency, reporting, and audit to deliver effective accountability. The Council’s Local Code of Corporate Governance, which is consistent with the principles and recommendations of the CIPFA/SOLACE Framework and the supporting guidance notes for Scottish authorities (November 2016), and was approved by Council in March 2021. Page 316 of 396
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WWW.MIDLOTHIAN.GOV.UK 18 Annual Governance Statement The Council’s Governance Framework The key elements of the Council’s governance arrangements, as set out in the Council’s Local Code of Corporate Governance, include: A. Behaving with integrity, demonstrating strong commitment to ethical values, and respecting rule of law The roles and responsibilities of elected members and officers and the processes to govern the conduct of the Council’s business are defined in the Elected Members Code of Conduct, standing orders and scheme of delegation for officers, scheme of administration, and financial regulations. Codes of conduct are in place for and define the high ethical values and standards of behaviour expected from elected members and officers to make sure that public business is conducted with fairness and integrity. The Monitoring Officer is responsible for ensuring that agreed procedures are followed and that all applicable statutes and regulations are complied with. The Standards Committee is responsible for dealing with matters relating to conduct and ethical standards. The Council seeks feedback from the public through its complaints and complements procedures for all of the Council which responds to the outcomes, as appropriate, and reports the results annually. Professional advice on the discharge of statutory social work duties was provided during the year to the Council by the Chief Officer Children’s Services, Partnerships and Communities (Chief Social Work Officer). The CSWO promotes values and standards of professional practice and acts as the 'agency decision maker' taking final decisions on a range of social work matters including adoption, secure accommodation, guardianship, etc. The CSWO reports annually on the statutory work undertaken, regulation and inspection, workforce issues and significant social policy themes. B. Ensuring openness and comprehensive stakeholder engagement All meetings of the Council and its Committees are held in public with the exception of items for discussion that are exempt under the Local Government (Scotland) Act 1973. All Council and Committee meetings are hybrid and webcast to ensure public access, and recordings can be accessed from the Council’s website. Unless confidential, decisions made by Council or other Committees are documented in the public domain. All decisions are explicit about the criteria, rationale and considerations used. The impact and consequences of all decisions are clearly set out. The Council seeks community views on a wide range of issues and undertakes regular consultation and engagement with citizens and service users, including the public consultation on the Medium Term Financial Strategy 2025/26 to 2028/29 reported to the December 2024 Council meeting. C. Defining outcomes in terms of sustainable economic, social, and environmental benefits The Council’s vision, strategic objectives and priorities are set out in the Single Midlothian Plan developed through the Community Planning Partnership (of which the Council is a partner). The Council’s Medium Term Financial Strategy and Service Plans outline how Midlothian Council will deliver its contribution to the Single Midlothian Plan. In June 2023 the Council also approved a Transformation Blueprint 2023-2028 to support the Medium Term Financial Strategy and help bridge a projected five-year funding gap. Progress against this blueprint is reported to Council on a quarterly basis along with progress on the Medium Term Financial Strategy which was updated for the period 2025/26 to 2028/29 in October 2024.Progress is also reviewed at 4 weekly BTB’s and reported to BTSG as a Standing Item. Capital investment at a strategic level is structured to consider and balance the combined economic, social and environmental impact of policies and plans when taking decisions about service provision. Asset management planning is being developed to support this, although it is recognised that this process needs to be accelerated to meet the needs of the growing council area. Page 317 of 396
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WWW.MIDLOTHIAN.GOV.UK 19 Annual Governance Statement The Council considered the recommendation of the February 2024 Aether Climate Action Support Report in November 2024 and has instructed a refresh of the Councils Climate Change Strategy. The Council approved the Economic Growth Strategy 2025-30 in November 2024, which has been reviewed to align with the Scottish Government National Strategy for Economic Transformation and the Edinburgh and South East Scotland City Region Deal Regional Prosperity Framework. The Council supports community empowerment and recognises the importance of building community capacity and volunteering as a key factor in building stronger, safer, and supportive communities. Implications are considered during the decision-making process within the standard report template covering Resources, Risk, Single Midlothian Plan and Key Priorities, Impact on Performance and Outcomes, Adopting a Preventative Approach, Involving Communities and Other Stakeholders, Ensuring Equalities, Supporting Sustainable Development, and IT issues. D. Determining the interventions necessary to optimise the achievement of the intended outcomes Decision makers receive detailed information indicating how intended outcomes would be achieved together with the risks, financial and other implications associated with the proposals, by way of the compulsory sections of the Committee report template. In determining how services and other courses of action should be planned and delivered the Council is increasingly engaging with internal and external stakeholders. The Council fosters effective relationships, collaborative working and contractual arrangements with other public, private, and voluntary organisations in delivering services that meet the needs of the local community including the achievement of ‘social value’ (community benefits) through service planning and commissioning. E. Developing the entity’s capacity, including the capability of its leadership and the individuals within it The roles of officers are defined in agreed job descriptions. Staff performance is reviewed on an annual basis in accordance with the relevant appraisal processes in place during the year. In December 2024 the Council approved the Midlothian Council Workforce Strategy 2024 to 2034 developed using an evidence- based management approach engaging with stakeholders and employees via an employee survey. The Chief Executive is responsible and accountable to the Council for all aspects of management including promoting sound governance, providing quality information/support to inform decision making and scrutiny, supporting other statutory officers, and building relationships with all Councillors. The Elected Members Induction Programme took place following elections in May 2022 and is periodically supplemented by training events, seminars and briefings. Members appointed to certain committees have also received specific training related to the responsibilities on these committees e.g. licensing, planning, audit. F. Managing risks and performance through robust internal control & strong public financial management The Council has overall responsibility for directing and controlling the organisation. The Cabinet is the principal decision-making committee of the Council. The Performance, Review and Scrutiny Committee is responsible for reviewing performance against policy objectives and commenting on decisions and policies and their impact. The Council updated its Risk Management policy and strategy in August 2022 whose main priorities are the robust systems of identification, evaluation and control of risks which threaten the Council’s ability to meet its objectives to deliver services to the public. Internal Audit’s assessment in March 2024 was that assurance is substantial in relation to the Council’s Risk Management Policy and application of the policy at a strategic level, however significant further progress is required on the Service level risk management framework. Page 318 of 396
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WWW.MIDLOTHIAN.GOV.UK 20 Annual Governance Statement The Chief Financial Officer (the Section 95 officer) is responsible for the proper administration of all aspects of the Council’s financial affairs including ensuring appropriate advice is given to the Council on all financial matters. The Council’s system of internal financial control is based on a framework of financial regulations (updated in June 2022), regular management information, administrative procedures (including segregation of duties), management supervision and a system of delegation and accountability. This remains reliant on the staff within the framework to ensure management supervision and accountability are diligently enforced. The Council has an approved strategy to tackling fraud, theft, corruption and crime, as an integral part of protecting public finances, safeguarding assets, and delivering services effectively. A revised Medium Term Financial Strategy continues to be monitored and updated on a regular basis with the latest 2025/26 to 2028/29 strategy being approved by Council in February 2025 Given the significant fiscal challenges which lie ahead, the Council continues to regularly monitor the Transformation Blueprint workstreams aligned to the Medium Term Financial Strategy. This will then inform the revised service plans, workforce plans and the long term sustainability of services. A Balanced budget was set by Council in February 2025 for the 2025/26 financial year by increasing Council tax by 10% and utilisation of £4.1 million of reserves, with indicative increases of Council tax of, 9%, 8% and 5% in the following 3 financial years and continued utilisation of reserve of £4.1milllion in the following 2 years the budget gap by 2028/29 becomes £8.9million. Highlighting the unprecedented financial pressure on the Council and some of the difficult decisions to be made in relation to both Capital and Revenue Budgets to establish a sustainable financial position. The previous Chief Officer Corporate Solutions carried out a self-assessment against the CIPFA FM code and reported the findings of this to CMT in September 2021 and this was subsequently reported to Audit Committee in December 2021. The Chief Officer Corporate Solutions identified six areas requiring improvement from his review of the CIPFA FM code. Actions identified included improving the resourcing of the Procurement team (Ongoing), updating the Council’s Financial Regulations and Directives (Complete – approved at June 2022 Council), putting in place a multi-year financial plan (Ongoing – action relevant to two sections of the FM Code), improving the Council’s approach to lessons learned from completed projects (Ongoing), and improving the Council’s risk management arrangements (Ongoing). No further Committee update has been provided within the 2024/25 financial year. Revenue and Capital Budget Monitoring reports are presented to the Council on a quarterly basis for monitoring and control purposes including the annual outturn. The Management Commentary in the Statement of Accounts provides financial and other performance information regarding the operation of the Council, its wider achievements and areas for development. The Internal Audit of Budget Monitoring highlighted that the Council element of the IJB spend, being adult social work expenditure needed to be included in the revenue budget monitoring figures and whilst this had been verbally updated to Council during the 2024/25 financial year, and formally reported to the Midlothian IJB Board with links provided to this publicly available information within the quarterly reports, these figures will now be included in the monitoring for the 2025/26 financial year. On the 10 January 2025 the Accounts Commission wrote in a letter to all Chief Executives of Scottish Local Authorities, copying in Directors of Finance and external auditors highlighting the report of the 12 December 2024 relating to a significant council tax fraud perpetrated against Aberdeen City Council. Highlighting the Chief Executives responsibility to ensure arrangements are in place to help assure elected members and the public that risks are being identified and managed effectively. The letter encouraged all Chief Executives to use the annual governance statement as an opportunity to take stock of the key controls and processes and whether self-assessment procedures are sufficient to provide elected members and officers with the required assurances. A review of the Council Tax processes within Midlothian Council has been completed and highlighted that in relation to Council Tax refunds the system did not provide adequate segregation of duties controls and there was not an appropriate monitoring Page 319 of 396
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WWW.MIDLOTHIAN.GOV.UK 21 Annual Governance Statement regime in place. Subsequent sample testing identified no evidence of fraud within the 2024/25 financial year. Work is now ongoing with the supplier and within the service to rectify these issues. G. Implementing good practices in transparency, reporting, & audit to deliver effective accountability The independent and objective audit opinion of the Chief Internal Auditor (Chief Audit Executive) is stated within the Internal Audit Annual Assurance Report 2024/25. This is based on work carried out by an in- house team, including shared services resources from East Lothian Council for the Chief Internal Auditor, in conformance with the Public Sector Internal Audit Standards to fulfil statutory Internal Audit provision. The Council responds to the findings and recommendations of Internal Audit, External Audit, Scrutiny and Inspection bodies including associated Action Plans for improvement. The Audit Committee is integral to overseeing independent and objective assurance and monitoring improvements in internal control and governance. Quarterly Performance Reports were presented to Cabinet and the Performance, Review and Scrutiny Committee for monitoring the achievement of strategic priorities and key performance indicators. The Annual Accounts and Report sets out the financial position in accordance with relevant accounting regulations. Review of Adequacy and Effectiveness of the Council’s Governance Framework An annual review of the adequacy and effectiveness of the Council’s overall governance framework has been carried out. The output is this Annual Governance Statement which is presented to the Audit Committee. The review was further informed by assurances from: assessment of compliance against the Local Code; written assurance statements from the Executive Directors; Internal Audit annual opinion, findings and recommendations; External Audit, and comments and recommendations made by External Auditor and other external scrutiny bodies and inspection agencies. Improvement Areas of Governance The collective review activity outlined above has identified the following areas where improvement in governance arrangements can continue to be made to enhance compliance with the Council’s Local Code of Corporate Governance and to demonstrate Best Value: 1) The previous Chief Officer Corporate Solutions carried out a self-assessment against the CIPFA FM code and reported the findings of this to CMT in September 2021 and this was subsequently reported to Audit Committee in December 2021. One of the actions identified was putting in place a multi-year financial plan. The Council’s subsequently approved a 2023-2028 Strategic Blueprint in June 2023, aligned to the Medium Term Financial Strategy. The Medium Term Financial Strategy 2025/26 to 2028/29 approved in October 2024 highlighted that the budget gap for 2025/26 incorporating planned use of service concession retrospection and a 5% Council Tax increase was projected to £9.4million rising to £20.6million by 2028/29. A Balanced budget was set by Council in February 2025 for the 2025/26 financial year by increasing Council tax by 10% and utilisation of £4.1 million of reserves, with indicative increases of Council tax of, 9%, 8% and 5% in the following 3 financial years and continued utilisation of reserve of £4.1milllion in the following 2 years the budget gap by 2028/29 becomes £8.9million. Working towards that sustainable position has been significant during the year, however further ongoing work is required and there were also 15 risks noted to this strategy that could impact on the current position, including the MIJB finances with management highlighting that the level of financial resource available to both partners is nor reflective of the current level of demand to maintain services on a sustainable basis. Work will continue during 2025/26 towards a sustainable financial position over a multiyear period. 2) The Procurement Service continues to face recruitment challenges and despite multiple recruitment attempts was unable to secure a permanent Procurement Manager for 2024/25. A permanent Procurement Manager was appointed at the end April 2025, and the work plan is being developed for improvements to the service for the 2025/26 reporting year. Issues arising from the reduced team Page 320 of 396
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WWW.MIDLOTHIAN.GOV.UK 22 Annual Governance Statement capacity are the off contract spend, and maverick spend within the organisation, chief officers are now reporting impacts to the delivery of services from this lack of resource. Expired contracts and off contract spend is being managed through regular review at Budget Boards to ensure that the risk is managed, and the appropriate remedial action is being taken, with oversight from the Executive Director and Chief Officers. In addition, commissioning and contract management are both focused areas of the Transformation Blueprint. 3) Capital plan affordability continues to be worked through as part of the Capital Plan prioritisation exercise, which was considered by Council in February 2025, alongside approval of new projects to the General Services Capital Plan and noting the expenditure and funding levels shown in the GSCP for 2024/25 to 2028/29 prior to reaching a financially sustainable outcome. Within that paper it is noted that in developing the strategy and taking cognisance of the longer term affordability gap it is clear that a number of potential projects which are currently included will only be able to be progressed if they can be delivered on a spend to save basis or where they can be delivered on a cost neutral basis or through alternative funding mechanisms. Whilst approval for fully funded learning estates projects has been progressed, delays in decision to critical projects may result in breaches of capacity to provide education provision across the council area. The condition of certain schools is deteriorating, and significant investment is required in order to ensure all schools meet at least condition B standard. Changes to the leadership and management of the learning estate delivery programme are being worked through. It is also noted that there is ongoing development of the Council’s asset management across fleet, property and infrastructure to manage and invest in the portfolios effectively. 4) During the year there has been insufficient recording and reporting by services on service level risk registers and business continuity plans. There is a requirement to ensure that there is a one system approach to aligning business continuity planning across NHS and Midlothian Council including cybersecurity planning to ensure all critical services can be maintained at times of incidents. Training is being delivered to staff within services in relation to risk management and there has been involvement of contracted resource in the Children, Young People and Partnerships directorate. Outstanding Internal Audit recommendations to report to Audit Committee on the delivery of service risk registers and the review of business continuity resourcing, and completion of plans should result in an improvement in the control environment. 5) Deficiencies in the control environment for Council Tax within systems controls and monitoring of refunds are being resolved in conjunction with the systems supplier and that ongoing monitoring will be implemented. The Counter Fraud team are intending to establish a risk assessment process for the Council to identify areas of risk and work with services for them to implement appropriate mitigations across the Council, specifically on the risk of fraud. Prior Year Improvement Areas of Governance Implemented The 2023/24 Annual Governance Statement for Midlothian Council contained the following areas of improvement all of which have been taken forward: 1) It was highlighted that the Council over the next 5 years required an approved multi-year financial plan key to developing the Council on a sustainable basis. The Medium Term Financial Strategy 2025/26 to 2028/29 approved in October 2024 highlighted that the budget gap for 2025/26 incorporating planned use of service concession retrospection and a 5% Council Tax increase was projected to £9.4million rising to £20.6million by 2028/29. A Balanced budget was set by Council in February 2025 for the 2025/26 financial year by increasing Council tax by 10% and utilisation of £4.1 million of reserves, with indicative increases of Council tax of, 9%, 8% and 5% in the following 3 financial years and continued utilisation of reserve of £4.1milllion in the following 2 years the budget gap by 2028/29 becomes £8.9million. Working towards that sustainable position has been significant during the year, however further ongoing work is required and there were also 15 risks noted to this strategy that could impact on the current position. 2) Improvements in Procurement Service Capacity have been enacted within the 2024/25 financial year, however obtaining and maintaining resources within the procurement team remains a workforce challenge. A solution is currently in place however services have highlighted that the procurement Page 321 of 396
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WWW.MIDLOTHIAN.GOV.UK 23 Annual Governance Statement workload has increased, and a planned approach will now need to be implemented over a significant period of time to reestablish an appropriate control framework, which will require support across the Council. 3) Capital plan affordability continues to be worked through as part of the Capital Plan prioritisation exercise, which was considered by Council in February 2025, alongside approval of new projects to the General Services Capital Plan and noting the expenditure and funding levels shown in the GSCP for 2024/25 to 2028/29 prior to reaching a financially sustainable outcome. Within that paper it is noted that the In developing the strategy and taking cognisance of the longer term affordability gap it is clear that a number of potential projects which are currently included will only be able to be progressed if they can be delivered on a spend to save basis or where they can be delivered on a cost neutral basis or through alternative funding mechanisms. A Capital plan prioritisation paper with options for consideration was also considered at the February 2025 and further work will be required to deliver a long-term sustainable solution. 4) In December 2024 the Council approved the Midlothian Council Workforce Strategy 2024 to 2034 developed using an evidence-based management approach engaging with stakeholders and employees via an employee survey. Additional resources were deployed during 2024/25 to improve the Council’s position in relation to Council Tax and Housing Benefit processing and within the compliance environment to meet statutory reporting responsibilities, work is ongoing to provide long term sustainable staffing in this area. The Council is currently subject to a Level 2 intervention from the Scottish Information Commissioner (SIC) in respect of its response rates for Freedom of Information requests. An action plan has been created and being delivered to improve the current position, with regular reporting to the Corporate Management Team (CMT). The Chief Officer Corporate Solutions, the Legal and Governance Manager and the Lead Performance and Improvement Officer (Place) meet the SIC on a monthly basis to monitor and evaluate progress on the improvement plan. Feedback from the SIC is that significant sustained improvement is demonstrated, and it is expected that the intervention will be removed Summer 2025. Conclusion and Opinion on Assurance The conclusion from the review activity completed and subject to the successful progression of the areas for improvement highlighted above, our opinion is that reasonable assurance given financial constraints can be placed upon the adequacy and effectiveness of Midlothian Council’s systems of governance, risk management and internal control. Although areas for further improvement have been identified, the annual review demonstrates sufficient evidence that the Council’s Local Code of Corporate Governance is operating effectively and that the Council complies with that Local Code in most respects to meet its principal objectives. Systems are in place to regularly review and improve governance arrangements and the system of internal control. _______________________ ______________________ Dr Grace Vickers Kelly Parry Chief Executive Leader of the Council Page 322 of 396
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WWW.MIDLOTHIAN.GOV.UK 24 Remuneration Report Remuneration Report The Local Authority Accounts (Scotland) Regulations 2014 require local authorities in Scotland to prepare a Remuneration Report as part of the annual statutory accounts. The following report details Midlothian Council’s remuneration policy for its senior councillors and senior employees, providing full details of the remuneration and pension benefits they receive. This report also provides information on the number of employees whose annual remuneration was £50,000 or more as well as summary information in relation to employees’ exit packages agreed during the year. Information disclosed in the tables in this report is subject to audit by Audit Scotland, who report on whether the information has been properly prepared in accordance with the Local Authority Accounts (Scotland) Regulations 2014 (with the exception of the table in note 4.4). All other sections of the Remuneration Report, including the table in respect of Trade Union Facility Time, are read and considered to identify any material inconsistencies with the financial statements. Remuneration of Councillors The remuneration of Councillors is regulated by the Local Governance (Scotland) Act 2004 (Remuneration) Regulations 2007 (SSI No 2007/183) as amended. The Regulations provide for the grading of councillors for the purposes of remuneration arrangements, as Leader of the Council, Provost, Senior Councillors or Councillors. The Leader of the Council and the Provost cannot be the same person for the purposes of payment of remuneration. A Senior Councillor is a Councillor who holds a significant position of responsibility within the Council’s political structure. The Regulations permit the Council to remunerate one Leader of the Council and one Provost. For 2024/25 the Regulations set the salary for the Leader of Midlothian Council £35,580 (2023/24 £33,503) and the salary for the Provost was set at £26,686 (2023/24 £25,128), the maximum level. The Regulations also set out the remuneration that may be paid to Senior Councillors and total number of Senior Councillors the Council may have. The maximum yearly amount that may be paid to a Senior Councillor is 75% of the total yearly amount payable to the Leader of the Council. For 2024/25, the maximum salary which could be paid to a Senior Councillor was £26,686 (2023/24 £25,128) with the maximum number of Senior Councillors set at eight (excluding the Provost and the Leader). The total remuneration for Senior Councillors (excluding the Provost and the Leader) should not exceed £192,128 (2023/24 £180,905). The Council is able to exercise local flexibility in the determination of the precise number of Senior Councillors and their salary within these maximum limits. The Regulations also permit the Council to pay contributions or other payments as required to the Local Government Pension Scheme in respect of those Councillors who elect to become Councillor Members of the pension scheme. In addition to the Senior Councillors of the Council, the regulations also set out the remuneration payable to Councillors with the responsibility of a Convener or a Vice-Convener of a Joint Board. The Regulations require the remuneration and any pension contributions, if a member of the Local Government Pension Scheme, to be paid by the Council of which the Convener and Vice-Convener is a member. The Council is reimbursed by the Joint Board for any additional remuneration paid to a member from being a Convener or Vice-Convener of a Joint Board. Details of the Remuneration of Council Leader, Provost and Senior Councillors are shown in the table below: Page 323 of 396
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WWW.MIDLOTHIAN.GOV.UK 25 Remuneration Report Councillor Name and Responsibility Salary 2024/25 Expenses 2024/25 Total Remuneration 2024/25 Total Remuneration 2023/24 Senior Councillor (Apr 24-Mar 25) K Parry: Council Leader £35,580 £0 £35,580 £33,526 D McCall: Provost £26,686 £447 £27,133 £25,256 D Virgo: Group Leader £24,016 £38 £24,054 £22,759 D Alexander: Cabinet Member £24,016 £77 £24,093 £22,792 C McManus: Cabinet Member £24,016 £36 £24,052 £22,724 E Scott: Cabinet Member £24,016 £0 £24,016 £22,719 S McKenzie: Cabinet Member £24,016 £0 £24,016 £22,614 D Milligan: Group Leader £24,016 £58 £24,074 £22,952 R Imrie: Chair of Planning Committee £24,016 £1,327 £25,343 £22,824 C Cassidy: Depute Leader and Group Leader £24,016 £0 £24,016 £22,646 Total £254,394 £1,983 £256,377 £240,812 The total remuneration of all the Council’s elected members (including Senior Councillors above) and including all business expenses for 2024/25 was £0.428 Million (2023/24 £0.402 million). Detailed figures for these costs are available on the Council’s website, members' remuneration details for 2024/25. Remuneration of Employees The salary of senior employees is set by reference to national arrangements. The Scottish Joint Committee (SJC) for Local Authority Services sets the salaries for the Chief Executives of Scottish Local Authorities. The salaries of the Executive Directors, Chief Officers and Heads of Service are all now based on a fixed percentage of the Chief Executives salary. The salaries of all other employees are set by reference to: • Teaching staff – The Scottish Negotiating Committee for Teachers (SNCT); • Other staff – The Scottish Joint Committee (SJC). The table below details the remuneration paid to Senior Employees (as defined in the regulations) of the Council during the financial year: Senior Employee Name and Responsibility Total Salary, Fees and Allowances 2024/25 Total Remuneration 2023/24 Full Year (Apr 24-Mar 25) G Vickers: Chief Executive £137,928 £133,135 G Vickers: Returning Officer £545 £0 M Barrow: Joint Director: Health and Social Care (1) £59,048 £55,822 K Anderson: Executive Director: Place £120,542 £116,353 F Robertson: Executive Director: Children, Young People and Communities £120,542 £116,353 D Gladwin: Chief Financial Officer (S95 Officer) £101,890 £95,000 A Turpie: Legal Services Manager (Monitoring Officer) £81,834 £76,661 Part-Year J Tranent: Chief Officer: Children’s Services, Partnerships and Communities (Chief Social Work Officer) (2) £60,925 £98,349 N Clater: Head of Adult Social Care (Chief Social Work Officer) (2) £101,890 N/A Total £785,144 £691,673 Notes: 1. Post joint funded with NHS Lothian , full time equivalent £118,095, 2. N Clater assumed Chief Social Work Officer role Nov 2024. He replaces J Tranent, who retired from post 29 October 2024 (full time equivalent £101,890). Subsidiary Entities None of our subsidiaries have remunerated employees. Page 324 of 396
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WWW.MIDLOTHIAN.GOV.UK 26 Remuneration Report Pension Benefits Pension benefits for Councillors and local government employees are provided through the Local Government Pension Scheme (LGPS), which is administered by the Lothian Pension Fund. From 1 April 2015, this became a career average salary pension scheme, although it was a final salary scheme until that date. This means that pension benefits are based on an average of the pay over the number of years that a person has been a member of the scheme. From 1 April 2009, a five-tier contribution system is in place with contributions from scheme members based on how much pay falls into each tier. This is designed to give more equality between costs and benefits of scheme membership. Part-time workers contribution rates are worked out on the whole time pay rate for the job, with actual contributions paid on actual pay earned. The tiers and contribution rates are as follows: Pensionable Pay 2024/25 Contribution Rate On earnings up to and including £27,000 5.5% On earnings above £27,001 and up to £33,000 7.25% On earnings above £33,001 and up to £45,300 8.5% On earnings above £45,301 and up to £60,400 9.5% On earnings of £60,401 and above 12% There is no automatic lump sum on retirement. Pension scheme members may opt to commute pension for a lump sum payment up to the limits set by the Finance Act 2004. The rate and basis at which employees accrue their pension benefits has changed over time, this is shown in the table below: Pension Benefit Time Period Accrual Basis Accrual Rate Lump Sum Basis From 1 April 2015 Career Average 1/49th Pensionable pay each year n/a From 1 April 2009 to 31 March 2015 Final Salary 1/60th Pensionable pay each year n/a Prior to April 2009 Final Salary 1/80th Pensionable pay each year 3/80th Final pensionable salary and years of pensionable service The value of accrued benefits has been calculated on the basis of the age at which the person will become first entitled to receive a pension on retirement without reduction on account of its payment at that age, without exercising any option to commute pension entitlement into a lump sum, and without any adjustment for the effects of future inflation. The pension entitlements for Senior Councillors for the year to 31 March 2025 are shown in the tables below, together with the contribution made by the Council to each Senior Councillor’s pension during the year. Page 325 of 396
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WWW.MIDLOTHIAN.GOV.UK 27 Remuneration Report Senior Councillors In-Year Pension Contributions Councillor Name and Responsibility Year to 31 Mar 2025 Year to 31 Mar 2024 Senior Councillor (Apr 24-Mar 25) K Parry: Council Leader £6,262 £7,438 D McCall: Provost £4,696 £5,578 D Virgo: Group Leader £4,227 £5,020 C McManus: Cabinet Member £4,227 £5,036 E Scott: Cabinet Member £4,227 £5,020 S McKenzie: Cabinet Member £4,227 £5,020 R Imrie: Chair of Planning Committee (1) £0 £3,347 C Cassidy: Depute Leader and Group Leader £4,227 £5,020 Total £32,093 £41,479 1. Member now out of scheme due to scheme regulations. Senior Councillors Accrued Pension Benefits Pension at 31 March 2025 Lump Sum at 31 March 2025 Pension Difference from 31 March 2024 Lump Sum Difference from 31 March 2024 Senior Councillor £000 £000 £000 £000 K Parry 5 0 1 0 D McCall 4 0 1 0 D Virgo 1 0 0 0 C McManus 1 0 1 0 E Scott 1 0 1 0 S McKenzie 2 0 1 0 C Cassidy 4 0 1 0 Total 18 0 6 0 The pension entitlements for Senior Employees for the year to 31 March 2025 are shown in the tables below, together with the contribution made by the Council to each Senior Employees (as defined in the regulations) pension during the year. Senior Employees In-Year Pension Contributions Senior Employee Name and Responsibility Year to 31 Mar 2025 Year to 31 Mar 2024 Full Year (Apr 24-Mar 25) G Vickers: Chief Executive £24,371 £29,556 K Anderson: Executive Director: Place £21,215 £25,830 F Robertson: Executive Director: Children, Young People and Communities £21,215 £25,830 D Gladwin: Chief Financial Officer (S95 Officer) £17,933 £21,210 M Barrow: Joint Director: Health and Social Care (2) £12,241 £0 A Turpie: Legal Services Manager (Monitoring Officer) £14,403 £17,019 Part-Year J Tranent: Chief Officer: Children’s Services, Partnerships and Communities (Chief Social Work Officer) (1) £10,316 £21,834 N Clater: Head of Adult Social Care (Chief Social Work Officer) (1) £17,933 N/A Total £139,627 £141,279 1. N Clater assumed Chief Social Work Officer role Nov 2024. He replaces J Tranent, who retired from post 29 October 2024 (full time equivalent £17,933). 2. Member rejoined the pension scheme during 2024_25. Post joint-funded with NHS Lothian, Full time equivalent £24,481. Page 326 of 396
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WWW.MIDLOTHIAN.GOV.UK 28 Remuneration Report Senior Employees Accrued Pension Benefits Pension at 31 March 2025 Lump Sum at 31 March 2025 Pension Difference from 31 March 2024 Lump Sum Difference from 31 March 2024 Senior Councillor £000 £000 £000 £000 G Vickers 26 0 4 0 K Anderson 75 119 5 4 F Robertson 20 0 4 0 D Gladwin 50 63 6 4 M Barrow 30 82 n/a n/a J Tranent 45 49 2 1 A Turpie 47 68 5 4 N Clater 43 0 n/a n/a Total 336 381 26 13 All senior employees (as defined in the regulations), except M Barrow, shown in the tables above are members of the Local Government Pension Scheme. M Barrow is employed by NHS Lothian and is a member of the NHS pension scheme. The pension figures shown relate to the benefits accrued as a consequence of total local government service, not solely on the current appointment. Remuneration of Other Employees by Pay Bands The Regulations require the Remuneration Report to provide information on the number of persons whose remuneration was £50,000 or above, this information is detailed in bands of £5,000 in the table below: Total Employees 2023/24 Remuneration Band Non-teaching Employees 2024/25 Teaching Employees 2024/25 Total Employees 2024/25 80 £50,000-£54,999 56 431 487 107 £55,000-£59,999 26 112 138 63 £60,000-£64,999 16 48 64 60 £65,000-£69,999 15 62 77 47 £70,000-£74,999 11 35 46 20 £75,000-£79,999 5 34 39 5 £80,000-£84,999 3 10 13 4 £85,000-£89,999 1 6 7 2 £90,000-£94,999 1 2 3 7 £95,000-£99,999 0 2 2 0 £100,000-£104,999 6 0 6 0 £105,000-£109,999 0 1 1 2 £110,000-£114,999 0 0 0 2 £115,000-£119,999 0 2 2 0 £120,000-£124,999 2 0 2 1 £130,000-£134,999 0 0 0 0 £135,000-£139,999 1 0 1 400 Total 143 745 888 Exit Packages Termination benefits are amounts payable because of a decision by the Council to terminate an officer’s employment before the normal retirement date or an officer’s decision to accept voluntary redundancy. They are charged on an accruals basis to Services in the Comprehensive Income and Expenditure Statement when the Council is demonstrably committed to either terminating the employment of an officer or making an offer to encourage voluntary redundancy. The Council is only demonstrably committed to a termination when it has a detailed formal plan for the termination and it is without realistic possibility of withdrawal. Page 327 of 396
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WWW.MIDLOTHIAN.GOV.UK 29 Remuneration Report Where termination benefits involve the enhancement of pensions, statutory provisions require the General Fund balance to be charged with the amount payable by the Council to the pension fund or pensioner in the year, not the amount calculated according to the relevant accounting standards. In the Movement in Reserves Statement, appropriations are required to and from the Pensions Reserve to remove the notional debits and credits for pension enhancement termination benefits and to replace them with debits for the cash paid to the pension fund and the pensioners and any such amounts payable but unpaid at the year- end. Details of the cost incurred by the Council for voluntary redundancy packages in 2024/25 was as follows. Total Employees 2023/24 Total Cost 2023/24 £000 Remuneration Band Total Employees 2023/24 Total Cost 2023/24 £000 0 0 £10,000-£19,999 3 49 0 0 £20,000 + 3 149 0 0 Total 6 198 Trade Union Facility The Council is now required to publish details of Trade Union facility time incurred during the year. Further information is published on the Council’s website: Trade union facility time | Midlothian Council For the reporting year 2024/25, the equivalent of 5.6 FTE employees (across fourteen individuals) of paid time facility was made available. The proportion of their working hours spent on facility time is as follows: Percentage of Time Number of Employees 1%-50% 12 51%-99% 1 100% 1 The percentage of the total pay bill spent on facility time (calculated as total cost of facility time ÷ total pay bill) is: Total cost of facility time £244,013 Total pay bill £202,526,725 100% 0.12% Time spend on paid Trade Union activities as a percentage of total paid facility time: 10,519 hours = 100%. ___________________________ ___________________________ Councillor Kelly Parry Dr Grace Vickers Leader of the Council Chief Executive Page 328 of 396
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WWW.MIDLOTHIAN.GOV.UK 30 Independent Auditor’s Report Independent Auditor’s Report Independent Auditor’s Report to the members of Midlothian Council and the Accounts Commission Under arrangements approved by the Commission for Local Authority Accounts in Scotland, the auditor with responsibility for the audit of the annual accounts of Midlothian Council for the year-end 31 March 2025 is: Claire Gardiner Audit Director Audit Scotland 4th Floor 102 West Port Edinburgh EH3 9DN The certified Annual Accounts will be presented to Audit Committee for approval on completion of the audit. Page 329 of 396
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WWW.MIDLOTHIAN.GOV.UK 31 Expenditure and Funding Analysis Expenditure and Funding Analysis The Expenditure and Funding Analysis shows how annual expenditure is used and funded from resources (government grants, rents, council tax and business rates) by the Council in comparison with those resources consumed or earned by the Council in accordance with generally accepted accounting practices. It also shows how this expenditure is allocated for decision making purposes between the Council’s services. Income and expenditure accounted for under generally accepted accounting practices are presented more fully in the Comprehensive Income and Expenditure Statement. 2023/24 2024/25 Net expenditure charged to the General Fund and HRA Balances Adjustments (see note 6) Net expenditure in the CIES Net expenditure charged to the General Fund and HRA Balances Adjustments (see note 6) Net expenditure in the CIES £000 £000 £000 Service £000 £000 £000 1,889 (11) 1,878 Management & Members 1,995 20 2,015 18,635 76 18,711 Children’s Services, Partnerships & Communities 19,092 426 19,518 121,038 22,228 143,266 Education 139,443 29,999 169,442 615 566 1,181 Adult Health & Social Care (Non-Delegated) 706 10 716 57,416 2,827 60,243 Midlothian Integrated Joint Board 69,031 725 69,756 46,091 10,150 56,241 Place 37,536 8,281 45,817 11,424 1,013 12,437 Corporate Solutions 26,402 1,498 27,900 (14,717) 55,597 40,880 Housing Revenue Account (14,668) 63,328 48,660 562 0 562 Joint Boards 613 0 613 313 74 387 Central Costs 309 69 378 808 (23) 785 Non-distributable Costs 923 0 923 244,074 92,497 336,571 Net Cost of Services 281,382 104,356 385,738 (236,000) (53,655) (289,655) Other income and expenditure (259,918) (48,984) (308,902) 8,074 38,842 46,916 (Surplus) or Deficit 21,464 55,372 76,836 (87,569) Opening General Fund & HRA Balance (85,046) 8,074 Less/plus (Surplus) or Deficit on General Fund & HRA Balance in year 21,464 (25) Transfers to/from other Statutory Reserves (357) (79,520) Closing General Fund and HRA Balance at 31 March* (63,939) *For a split of this balance between the General Fund and HRA – see Movement in Reserves Statement Page 330 of 396
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WWW.MIDLOTHIAN.GOV.UK 32 Principal Financial Statements Principal Financial Statements The annual accounts summarise the Council’s transactions for the year, its year-end position at 31 March 2025 and its cash flows. The annual accounts are prepared in accordance with the Code of Practice on Local Authority Accounting in the United Kingdom 2024/25 (the Code), which is based on International Financial Reporting Standards (IFRSs). Every effort has been made to use plain language; where technical terms are unavoidable, they have been explained in the Glossary. The four principal statements and their relationships are explained in more detail below: • Comprehensive Income and Expenditure Statement – this shows the accounting cost in the year of providing services in accordance with generally accepted accounting practices, rather than the amount to be funded from taxation (or rents). Councils raise taxation (and rents) to cover expenditure in accordance with statutory requirements; this may be different from the accounting cost. The taxation position is shown in both the Expenditure and Funding Analysis and the Movement in Reserves Statement. • Movement in Reserves Statement – this shows the movement from the start of the year to the end on the different reserves held by the Council, analysed into ‘usable reserves’ (i.e. those that can be applied to fund expenditure or reduce local taxation) and other ‘unusable reserves.’ The statement shows how the movements in the year of the Council’s reserves are broken down between gains and losses incurred in accordance with generally accepted accounting practices and the statutory adjustments required to return to the amounts chargeable to council tax (or rents) for the year. The net increase/decrease line shows the statutory General Fund balance and Housing Revenue Account (HRA) balance movements in the year following those adjustments. • Balance Sheet – this shows the value as at the Balance Sheet date of the assets and liabilities recognised by the Council. The net assets of the Council (assets less liabilities) are matched by the reserves held by the Council. Reserves are reported in two categories. The first category of reserves are usable reserves, i.e. those reserves that the authority may use to provide services, subject to the need to maintain a prudent level of reserves and any statutory limitations on their use. The second category of reserves is those that the Council is not able to use to provide services. This category of reserves includes reserves that hold unrealised gains and losses (for example the revaluation reserve), where amounts would only become available to provide services if the assets are sold; and reserves that hold timing differences shown in the Movement in Reserves Statement line ‘adjustments between accounting basis and funding basis under regulations.’ • Cash Flow Statement – this shows the changes in cash and cash equivalents of the Council during the reporting period. The statement shows how the Council generates and uses cash and cash equivalents by classifying cash flows as operating, investing and financing activities. The amount of net cash flows arising from operating activities is a key indicator of the extent to which the operations of the Council are funded by way of taxation and grant income or from the recipients of the services provided by the Council. Investing activities represent the extent to which cash outflows have been made for resources which are intended to contribute to the Council’s future service delivery. Cash flows arising from financing activities are useful in predicting claims on future cash flows by providers of capital (i.e. borrowing) to the Council. Page 331 of 396
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WWW.MIDLOTHIAN.GOV.UK 33 Principal Financial Statements Group and Council Comprehensive Income and Expenditure Statement 2023/24 2024/25 Gross Expenditure Gross Income Net Expenditure or (Income Group Net Expenditure Gross Expenditure Gross Income Net Expenditure or (Income) Group Net Expenditure £000 £000 £000 £000 Service £000 £000 £000 £000 1,878 0 1,878 1,878 Management and Members 2,173 (158) 2,015 2,015 20,490 (1,779) 18,711 18,711 Children’s Services, Partnerships and Communities 22,054 (2,536) 19,518 19,518 163,851 (20,585) 143,266 143,266 Education 180,739 (11,297) 169,442 169,442 1,598 (417) 1,181 1,181 Adult Health and Social Care (Non-Delegated) 1,021 (305) 716 716 150,812 (90,569) 60,243 60,243 Midlothian Integration Joint Board 164,132 (94,376) 69,756 69,756 106,713 (50,472) 56,241 56,241 Place 95,009 (49,192) 45,817 45,817 36,415 (23,978) 12,437 12,437 Corporate Solutions 46,226 (18,326) 27,900 27,900 72,840 (31,960) 40,880 40,880 Housing Revenue Account 85,166 (36,506) 48,660 48,660 562 0 562 562 Lothian Valuation Joint Board 613 0 613 613 387 0 387 387 Central Costs 378 0 378 378 785 0 785 782 Non-Distributable Costs 923 0 923 855 556,331 (219,760) 336,571 336,568 Cost of Services 598,434 (212,696) 385,738 385,670 0 6,244 Associates and Joint Ventures accounted for on an Equity Basis (Note 39) 0 98 (70) (70) Other Operating (Income) or Expenditure (Note 9) 45 45 31 31 Financing and Investment Income and Expenditure (Note 10) 7,466 7,466 (289,616) (289,616) Taxation and Non-specific Grant Income and Expenditure (Note 11) (316,413) (316,413) 46,916 53,157 (Surplus) or Deficit on Provision of Services (Note 13) 76,836 76,866 (15,560) (15,560) Surplus or Deficit on Revaluation of Property, Plant and Equipment Assets (20,025) (20,025) 165 165 Surplus or deficit on Financial Assets Measured at Fair Value through Other Comprehensive Income (488) (488) 11,373 11,373 Remeasurement of the Net Defined Benefit Liability/(Asset) 4,896 4,896 2,705 4,198 Other (Gains)/Losses (513) (544) (1,317) 176 Other Comprehensive (Income) and Expenditure (16,132) (16,163) 45,599 53,333 Total Comprehensive (Income) and Expenditure 60,706 60,705 Page 332 of 396
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WWW.MIDLOTHIAN.GOV.UK 34 Principal Financial Statements Group and Council Movement in Reserves Statement General Fund Housing Revenue Account Capital Fund Repairs & Renewals Fund Total Usable Reserves Unusable Reserves Total Council Reserves Councils Share of Reserves of Associates, Subsidiaries & Joint Ventures Total Group Reserves Current Year £000 £000 £000 £000 £000 £000 £000 £000 £000 Balance at 31 March 2024 (46,338) (33,182) (17,242) (4,113) (100,875) (693,810) (794,685) 910 (793,775) Opening Balance Adjustment (5,526) 0 0 0 (5,526) 5,526 0 0 0 Revised Balance at 31 March 2024 (51,864) (33,182) (17,242) (4,113) (106,401) (688,284) (794,685) 910 (793,775) Movement in Reserves during 2024/25 Total comprehensive income and expenditure 18,878 57,958 (358) 0 76,478 (15,772) 60,706 (1) 60,705 Adjustments between accounting basis and funding basis under regulations (Note 7) 4,110 (56,686) 0 0 (52,576) 52,576 0 0 0 Adjustment to the statutory repayment of debt for service concession arrangements – permitted flexibility (2,796) 0 0 0 (2,796) 2,796 0 0 0 Transfers to/(from) other statutory reserves (357) 0 0 357 0 0 0 0 0 (Increase)/Decrease in Year 19,835 1,272 (358) 357 21,106 39,600 60,706 (1) 60,705 Balance at 31 March 2025 Carried Forward (32,029) (31,910) (17,600) (3,756) (85,295) (648,684) (733,979) 909 (733,070) General Fund Housing Revenue Account Capital Fund Repairs & Renewals Fund Total Usable Reserves Unusable Reserves Total Council Reserves Councils Share of Reserves of Associates, Subsidiaries & Joint Ventures Total Group Reserves Comparative Year £000 £000 £000 £000 £000 £000 £000 £000 £000 Balance at 31 March 2023 (34,963) (32,143) (20,107) (4,138) (91,351) (748,933) (840,284) (6,948) (847,232) Opening Balance Adjustment (20,463) 0 0 0 (20,463) 20,463 0 124 124 Revised Balance at 31 March 2023 (55,426) (32,143) (20,107) (4,138) (111,814) (728,470) (840,284) (6,824) (847,108) Movement in Reserves during 2023/24 Total comprehensive income and expenditure (1,295) 48,211 2,865 0 49,781 (4,182) 45,599 7,734 53,333 Adjustments between accounting basis and funding basis under regulations (Note 7) 15,087 (51,321) 0 0 (36,234) 36,234 0 0 0 Adjustment to the statutory repayment of debt for service concession arrangements – permitted flexibility (2,608) 0 0 0 (2,608) 2,608 0 0 0 Transfers to/(from) other statutory reserves (2,096) 2,071 0 25 0 0 0 0 0 (Increase)/Decrease in Year 9,088 (1,039) 2,865 25 10,939 34,660 45,599 7,734 53,333 Balance at 31 March 2024 Carried Forward (46,338) (33,182) (17,242) (4,113) (100,875) (693,810) (794,685) 910 (793,775) Page 333 of 396
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WWW.MIDLOTHIAN.GOV.UK 35 Principal Financial Statements Group and Council Balance Sheet 31 Mar 24 31 Mar 24 31 Mar 25 31 Mar 25 Midlothian Council Group Midlothian Council Group £000 £000 £000 £000 Notes 1,170,980 1,170,980 Property, Plant and Equipment 1,181,730 1,181,730 14 38,423 38,423 Infrastructure Assets 52,394 52,394 15 456 456 Heritage Assets 507 507 16 104 104 Intangible Assets 448 448 17 4,171 4,113 Long-term Debtors 3,756 3,756 18/19 11,526 5,916 Long-term Investments 16,604 6,404 19 0 4,589 Share of Net Assets of Associates and Joint Ventures 0 9,111 39 1,225,660 1,224,581 Long-term Assets 1,255,439 1,254,350 30,017 30,017 Short-term Deposits 70 70 19 1,690 1,690 Assets Held for Sale 810 810 21 972 972 Inventories 985 985 22 38,114 38,175 Short-term Debtors 23,033 23,098 19/23 27,505 27,505 Cash and Cash Equivalents 26,878 26,878 24 98,298 98,359 Current Assets 51,776 51,841 (3,797) (3,797) Short-term Borrowing (5,015) (5,015) 19 (50,960) (50,852) Short-term Creditors (54,035) (53,920) 19/25 (1,294) (1,294) Provisions (1,005) (1,005) 26 (40,821) (40,821) Grants Received in Advance (46,055) (46,055) 27 (96,872) (96,764) Current Liabilities (106,110) (105,995) (339,971) (339,971) Long-term Borrowing (377,696) (377,696) 19 Other Long-term Liabilities (84,818) (84,818) • PPP Contracts (81,615) (81,615) 19/34 0 0 • Leases (1,382) (1,382) 33 (7,612) (7,612) • Pension Liability (6,433) (6,433) 35/36 (432,401) (432,401) Long-term Liabilities (467,126) (467,126) 794,685 793,775 Net Assets 733,979 733,070 100,875 100,079 Usable Reserves 85,295 84,480 28 693,810 693,696 Unusable Reserves 648,684 648,590 29 794,685 793,775 Total Reserves 733,979 733,070 The unaudited accounts were authorised for issue on 16 June 2025. I certify that the Balance Sheet presents a true and fair view of the financial position of the Council and its Group at 31 March 2025, and its income and expenditure for the year ended 31 March 2025. _____________________ David Gladwin Chief Financial Officer Page 334 of 396
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WWW.MIDLOTHIAN.GOV.UK 36 Principal Financial Statements Group and Council Cash Flow Statement 2023/24 2023/24 2024/25 2024/25 Midlothian Council Group Midlothian Council Group £000 £000 £000 £000 (46,916) (53,157) Net surplus/(deficit) on the provision of services (76,838) (76,868) Operating Activities Adjustments to the surplus or deficit on the provision of services for non-cash movements: 50,206 50,206 Depreciation 26,949 26,949 44,230 44,230 Impairment and downward valuations 73,333 73,333 124 124 Amortisation 50 50 2,223 2,285 (Increase)/decrease in debtors 15,029 15,091 (10,416) (10,524) Increase/(decrease) in creditors 2,763 2,655 51 51 (Increase)/decrease in inventories (12) (12) (11,561) (11,561) Movement in pension liability (6,073) (6,073) 179 179 Carrying amounts of non-current assets sold or derecognised 573 573 55 6,342 Other non-cash items charged to the net surplus or deficit on the provision of services (289) (213) 75,091 81,332 Total Non-cash Movements 112,323 112,353 Adjustments to the surplus or deficit on the provision of services for investing and financing activities: 132,000 132,000 Proceeds from short and long-term deposits 30,000 30,000 (249) (249) Proceeds from sale of property, plant and equipment and intangible assets (528) (528) (33,554) (33,554) Any other items for which the cash effects are investing or financing cash flows (28,231) (28,231) 98,197 98,197 Total Investing and Financing Activities 1,241 1,241 173,288 179,529 Net Cash Flows from Operating Activities 113,564 113,594 Investing Activities (95,601) (95,601) Purchase of property, plant and equipment and intangible assets (99,792) (99,792) (142,000) (142,000) Purchase of short and long-term deposits (4,590) (4,590) 0 0 Other payments for investing activities 0 0 249 249 Proceeds from sale of property, plant and equipment and intangible assets 528 528 27,322 27,322 Other receipts from investing activities 30,645 30,645 (210,030) (210,030) Net Cash Flows from Investing Activities (73,209) (73,209) Financing Activities 20,000 20,000 Cash receipts from short and long-term borrowing 40,000 40,000 (3,769) (3,769) Cash payments for the reduction of the outstanding liabilities relating to finance leases and on balance sheet PPP contracts 155 155 160 160 Other receipts from financing activities (2,874) (2,874) (882) (882) Repayments of short and long-term borrowing (1,425) (1,425) 15,509 15,509 Net Cash Flows from Financing Activities 35,856 35,856 (68,149) (68,149) Net Increase/(Decrease) in Cash and Cash Equivalents (627) (627) 95,654 95,654 Cash and Cash Equivalents at 1 April 27,505 27,505 27,505 27,505 Cash and Cash Equivalents at 31 March (Note 24) 26,878 26,878 The cash flow for operating activities include the following items: Interest Paid and Received 4,415 4,415 Interest Received 2,386 2,386 (16,244) (16,244) Interest Paid (20,066) (20,066) 175 175 Dividend Received 0 0 Page 335 of 396
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WWW.MIDLOTHIAN.GOV.UK 37 Notes to the Accounts Notes to the Accounts The notes to the accounts provide further information about the basis of preparation of the Annual Accounts, the specific accounting policies used and where the materiality is such that further disclosure is merited. The Council’s Annual Accounts for 2024/25 have been prepared on a going concern basis. The concept of a going concern assumes that the Council’s functions and services will continue in operational existence for the foreseeable future. The provisions in respect of going concern reporting requirements reflect the economic and statutory environment in which local authorities operate. These provisions confirm that, as authorities cannot be created or dissolved without statutory prescription, they must prepare their annual accounts on a going concern basis of accounting. In accordance with the CIPFA Code of Local Government Accounting (2024/25), the Council is required to prepare its annual accounts on a going concern basis unless informed by the relevant national body of the intention for dissolution without transfer of services or function to another entity. The accounts are prepared on the assumption that the Council will continue in operational existence for the foreseeable future. 1. Accounting Policies i. General principles The statement of accounts summarise the Council’s transactions for the 2024/25 financial year and its position for the year-end of 31 March 2025. The Council is required to prepare an annual statement of accounts by the Local Authority Accounts (Scotland) Regulations 2014, which Section 12 of the Local Government Scotland Act 2003 require to be prepared in accordance with proper accounting practices. These practices under Section 21 of the 2003 Act primarily comprise the Code of Practice on Local Authority Accounting in the United Kingdom 2024/25, supported by International Financial Reporting Standards (IFRS) and the statutory guidance issued under section 12 of the 2003 Act. The accounting convention adopted in the statement of accounts is principally historical cost, modified by the revaluation of certain categories of non-current assets and financial instruments. ii. Accruals of income and expenditure Activity is accounted for in the year that it takes place, not simply when cash payments are made or received. In particular: • Revenue from contracts with service recipients, whether for services or the provision of goods, is recognised when (or as) the goods or services are transferred to the service recipient in accordance with the performance obligations of the contract. • Supplies are recorded as expenditure when they are consumed – where these is a gap between the date supplies are received and their consumption, they are carried as inventories on the Balance Sheet. • Expenses in relation to services received (including services provided by employees) are recorded as expenditure when the services are received rather than when payments are made. • Interest receivable on deposits and payable on borrowings is accounted for respectively as income and expenditure on the basis of the effective interest rate for the relevant financial instrument rather than the cash flows fixed or determined by the contract. • Where revenue and expenditure have been recognised but cash has not been received or paid, a debtor or creditor for the relevant amount is recorded in the Balance Sheet. Where debts may not be settled, the balance of debtors is written down and a charge made to revenue for the income that might not be collected. Page 336 of 396
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WWW.MIDLOTHIAN.GOV.UK 38 Notes to the Accounts iii. Cash and cash equivalents Cash is represented by cash in hand and deposits with financial institutions repayable without penalty on notice of not more than 24 hours. Cash equivalents are highly liquid deposits that mature in no more than three months or less from the date of acquisition and that are readily convertible to known amounts of cash with insignificant risk of change in value. In the Cash Flow Statement, cash and cash equivalents are shown net of bank overdrafts that are repayable on demand and form an integral part of the Council’s cash management. iv. Prior period adjustments, changes in accounting policies, estimates and errors Prior period adjustments may arise as a result of a change in accounting policies or to correct a material error. Changes in accounting estimates are accounted for prospectively, i.e. in the current and future years affected by the change and do not give rise to a prior year adjustment. Changes in accounting policies are only made when required by proper accounting practices or the change provides more reliable or relevant information about the effect of transactions, other events and conditions on the Council’s financial position or financial performance. Where a change is made, it is applied retrospectively (unless stated otherwise) by adjusting opening balances and comparative amounts for the prior period as if the new policy had always been applied. Material errors discovered in prior period figures are corrected retrospectively by amending opening balances and comparative amounts for the prior period. v. Charges to revenue for non-current assets Services and support services are charged an accounting estimate of the cost of holding non-current assets during the year. This comprises: • Depreciation attributable to the assets used by the relevant service; • Revaluation and impairment losses on assets used by the service where there are no accumulated gains in the revaluation reserve against which the losses can be written off; • Amortisation of intangible assets attributable to the service. The Council is not required to raise council tax to fund depreciation, revaluation and impairment losses or amortisation. However, it is required to make an annual contribution from revenue towards the reduction in its overall borrowing requirement, equal to an amount calculated on a prudent basis determined by the Council in accordance with the statutory Repayment of Loans Fund Advances. This is known as the Loans Fund Principal Repayment. Depreciation, revaluation and impairment losses, and amortisation are therefore replaced by the Loans Fund Principal Repayments in the General Fund balance by way of an adjusting transaction with the Capital Adjustment Account in the Movement in Reserves Statement for the difference between the two. vi. Employee Benefits Benefits payable during employment Short-term employee benefits are those due to be settled wholly within 12 months of the year-end. They include such benefits as wages and salaries, paid annual leave, paid sick leave and overtime for current employees. They are recognised as an expense for services in the year in which employees render service to the Council. An accrual is made for the cost of holiday entitlements earned by employees but not taken before the year-end that employees can carry forward into the next financial year. The accrual is made at the wages and salary rates applicable in the following accounting year. The accrual is charged to surplus or deficit on the provision of services, but then reversed out through the Movement in Reserves Statement to the accumulated absences account so that holiday entitlements are charged to revenue in the financial year in which the holiday absence occurs. Page 337 of 396
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WWW.MIDLOTHIAN.GOV.UK 39 Notes to the Accounts Termination benefits Termination benefits are amounts payable as a result of a decision by the Council to terminate an officer’s employment before normal retirement date or an officer’s decision to accept voluntary redundancy in exchange for those benefits and are charged on an accruals basis to the appropriate service segment when the Council is demonstrably committed to the termination of the employment of an officer or group of officers or making an offer to encourage voluntary severance. Where termination benefits involve the enhancement of pensions, statutory provisions require the General Fund balance to be charged with the amount payable by the Council to the pension fund or pensioner in the year, not the amount calculated according to the relevant accounting standards. In the Movement in Reserves Statement, appropriations are required to and from the pensions reserve to remove the notional debits and credits for pension enhancement termination benefits and replace them with debits for the cash paid to the pension fund and pensioners and any such amounts payable but unpaid at the year-end. Post-employment benefits Employees of the Council are members of two separate pension schemes: • The Teachers’ pension scheme, administered by the Scottish Government; • The Local Government Pensions Scheme, administered by the City of Edinburgh Council on behalf of Lothian Pension Fund. Both schemes provide defined benefits to members (retirement lump sums and pensions), earned as employees worked for the Council. However, the arrangements for the teachers’ scheme mean that liabilities for these benefits cannot ordinarily be identified specifically to the Council. The scheme is therefore accounted for as if it were a defined contribution scheme and no liability for future payments of benefits is recognised in the Balance Sheet. The education services line in the Comprehensive Income and Expenditure Statement is charged with the employer’s contributions payable to the Teachers’ Pensions in the year. The Local Government Pension Scheme The Local Government Pension Scheme is accounted for as a defined benefits scheme: • The liabilities of the Lothian Pension Fund attributable to the Council are included in the Balance Sheet on an actuarial basis using the projected unit method – i.e. an assessment of the future payments that will be made in relation to retirement benefits earned to date by employees, based on assumptions about mortality rates, employee turnover rates, etc. and projected earnings for current employees. • Liabilities are discounted to their value at current prices, using a discount rate as advised by the actuary, Hymans Roberson LLP. • The assets of Lothian Pension Fund attributable to the Council are included in the Balance Sheet at their fair value: o Quoted securities – current bid price; o Unquoted securities – professional estimate; o Unitised securities – current bid price; o Property – market value. The change in the net pension’s liability is analysed into the following components: • Service cost comprising: Page 338 of 396
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WWW.MIDLOTHIAN.GOV.UK 40 Notes to the Accounts – Current service cost - the increase in liabilities as a result of years of service earned this year – allocated in the Comprehensive Income and Expenditure Statement to the services for which the employees worked; – Past service cost - the increase in liabilities as a result of a scheme amendment or curtailment whose effect relates to years of service earned in earlier years – debited to the surplus or deficit on the provision of services in the Comprehensive Income and Expenditure Statement as part of Non-Distributed Costs; – Net interest on the net defined liability (asset), i.e. net interest expense for the Council - the change during the period in the net defined liability (asset) that arises from the passage of time charged to the financing and investment income and expenditure line of the Comprehensive Income and Expenditure Statement – this is calculated by applying the discount rate used to measure the defined benefit obligation at the beginning of the period to the net defined benefit liability (asset) at the beginning of the period, taking into account any changes in the net defined benefit liability (asset) during the period as a result of contribution and benefit payments. • Re-measurements comprising: – The return on plan assets – excluding amounts included in net interest on the net defined benefit liability (asset) – charged to the pensions reserve as other comprehensive income and expenditure; – Actuarial gains and losses – changes in the net pensions liability that arise because events have not coincided with assumptions made at the last actuarial valuation or because the actuaries have updated their assumptions – charged to the pensions reserve as other comprehensive income and expenditure; – Contributions paid to the Lothian Pension Fund – cash paid as employer’s contributions to the pension fund in settlement of liabilities; not accounted for as an expense. In relation to retirement benefits, statutory provisions require the General Fund balance to be charged with the amount payable by the Council to the pension fund or directly to pensioners in the year, not the amount calculated according to the relevant accounting standards. In the Movement in Reserves Statement, this means that there are transfers to and from the pensions reserve to remove the notional debits and credits for retirement benefits and replace them with debits for the cash paid to the pension fund and pensioners and any such amounts payable but unpaid at the year-end. The negative balance that arises on the pensions reserve thereby measures the beneficial impact to the General Fund of being required to account for retirement benefits on the basis of cash flows rather than as benefits earned by employees. Pension Net Asset Restriction Calculation The actuary has calculated the Council’s IAS 19 defined benefit surplus for 2024/25 to be £273.943 million as detailed in Note 35 to the accounts. IAS 19 states that when an entity has a surplus in the defined benefit plan it should measure the net defined benefit of the asset as the lower of: • The surplus in the defined benefit plan, and • The asset ceiling, which the actuary has calculated as the present value of any economic benefits available in the form of reductions in future contributions to the plan. For IFRIC 14 purposes, the actuary has calculated the net present value of the future contributions which exceeds the value of the future service costs resulting in a negative contribution. As a result of this calculation IFRIC 14 advises that no defined benefit plan asset should be recognised on the Council’s Balance Sheet and there is no requirement to recognise the difference as a liability, however, is required to reflect the liability in relation to present value of any unfunded obligations. Page 339 of 396
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WWW.MIDLOTHIAN.GOV.UK 41 Notes to the Accounts Discretionary benefits The Council also has restricted powers to make discretionary awards of retirement benefits in the event of early retirements. Any liabilities estimated to arise as a result of an award to any member of staff (including teachers) are accrued in the year of the decision to make the award and accounted for using the same policies as are applied to the Local Government Pension Scheme. vii. Employee Benefits Events after the Balance Sheet reporting period are those events, both favourable and unfavourable, that occur between the Balance Sheet date and the date when the statement of accounts is authorised for issue. Two types of events can be identified: • Those that provide evidence of conditions that existed at the end of the reporting period – the statement of accounts is adjusted to reflect such events; • Those that are indicative of conditions that arose after the reporting period – the statement of accounts is not adjusted to reflect such events, but where such a category of events would have a material effect, disclosure is made in the notes of the nature of the events and their estimated financial effect. Events taking place after the date of authorisation for issue are not reflected in the statement of accounts. viii. Financial instruments Financial Liabilities Financial liabilities are recognised on the Balance Sheet when the Council becomes a party to the contractual provisions of a financial instrument and are initially measured at fair value and are carried at their amortised cost. Annual charges to the financing and investment income and expenditure line in the Comprehensive Income and Expenditure Statement (CIES) for interest payable are based on the carrying amount of the liability, multiplied by the effective rate of interest for the instrument. The effective interest rate is the rate that exactly discounts estimated future cash payments over the life of the instrument to the amount at which it was originally recognised. For most of the borrowings that the Council has, this means that the amount presented in the Balance Sheet is the outstanding principal repayable (plus accrued interest); and interest charged to the CIES is the amount payable for the year according to the loan agreement. Where premiums and discounts have been charged to the CIES, regulations allow the impact on the General Fund or Housing Revenue Account balances to be spread over future years. The Council has a policy of spreading the gain or loss over the term that was remaining on the loan against which the premium was payable or discount receivable when it was repaid. The reconciliation of amounts charged to the CIES to the net charge required against the General Fund balance is managed by a transfer to or from the financial instruments adjustment account in the Movement in Reserves Statement. Financial Assets Financial assets are classified based on a classification and measurement approach that reflects the business model for holding the financial assets and their cash flow characteristics. The Council holds financial assets measured at: • Amortised cost; and • Fair value through other comprehensive income (FVOCI). The Council’s business model is to hold investments to collect contractual cash flows. Financial assets are therefore classified at amortised cost, except for those whose contractual payments are not solely payment of principal and interest (i.e. where the cash flows do not take the form of a basic debt instrument). Page 340 of 396
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WWW.MIDLOTHIAN.GOV.UK 42 Notes to the Accounts Financial Assets Measured at Amortised Cost Financial assets measured at amortised cost are recognised on the Balance Sheet when the Council becomes party to the contractual provisions of a financial instrument and are initially measured at fair value. They are subsequently measured at their amortised cost. Annual credits to the financing and investment income and expenditure line in the CIES for interest receivable are based on the carrying amount of the asset multiplied by the effective rate of interest for the instrument. For most of the financial assets held by the Council, this means that the amount presented in the Balance Sheet is the outstanding principal receivable (plus accrued interest), and interest credited to the CIES is the amount receivable for the year in the loan agreement. Any gains and losses that arise on de-recognition of a financial asset are credited or debited to the financing and investment income and expenditure line in the CIES. Expected Credit Loss Model The Council recognises expected credit losses on all of its financial assets held at amortised cost (or where relevant FVOCI), either on a 12-month or lifetime basis. The expected credit loss model also applies to lease receivables and contract assets. Only lifetime losses are recognised for trade receivables (debtors) held by the Council. Impairment losses are calculated to reflect the expectation that the future cash flows might not take place because the borrower could default on their obligations. Credit risk plays a crucial part in assessing losses. Where risk has increased significantly since an instrument was initially recognised, losses are assessed on a lifetime basis. Where risk has not increased significantly or remains low, losses are assessed on the basis of 12-month expected losses. Financial Assets Measured at Fair Value through Other Comprehensive Income (FVOCI) Financial assets that are measured at FVOCI are recognised on the Balance Sheet when the Council becomes a party to the contractual provisions of a financial instrument and are initially measured and carried at fair value. Fair value gains and losses are recognised as they arise in other comprehensive income. Fair Value Measurement of Financial Assets Fair value of an asset is the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. The fair value measurements of the Council’s financial assets are based on the following techniques: • Instruments with quoted market prices – the market price; • Other instruments with fixed determinable payments – discounted cash flow analysis. The inputs to the measurement techniques are categorised in accordance with the following three levels: • Level 1 inputs – quoted prices (unadjusted) in active markets for identical assets that the Council can access at the measurement date; • Level 2 inputs – inputs other than quoted prices included in Level 1 that are observable for the asset, either directly or indirectly; • Level 3 inputs – unobservable inputs for the asset. Any gains and losses that arise on de-recognition of the asset are credited or debited to the financing and investment income and expenditure line in the Comprehensive Income and Expenditure Statement. The Council designates that investments held for strategic purposes be classified as being measured as FVOCI. Any gains and losses on these investments will be held in the Financial Instruments Revaluation Reserve. Page 341 of 396
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WWW.MIDLOTHIAN.GOV.UK 43 Notes to the Accounts Where assets are identified as impaired because of a likelihood arising from a past event that payments due under the contract will not be made (fixed or determinable payments) or fair value falls below cost, the asset it written down and a charge made to the Financing and Investment Income and Expenditure line in the CIES. If the asset has fixed or determinable payments, the impairment loss is measured as the difference between the carrying amount and the present value of the revised future cash flows discounted at the asset’s original effective interest rate. Otherwise the impairment loss is measured as any shortfall of fair value against the acquisition cost of the instrument (net of any principal repayment and amortisation). ix. Government grants and contributions Whether paid on account, by instalments or in arrears, government grants and third party contributions and donations are recognised as due to the Council when there is reasonable assurance that: • The Council will comply with the conditions attached to the payments; and • The grants or contributions will be received. Amounts recognised as due to the Council are not credited to the Comprehensive Income and Expenditure Statement until conditions attached to the grant or contribution have been satisfied. Conditions are stipulations that specify that the future economic benefits or service potential embodied in the asset in the form of the grant or contribution are required to be consumed by the recipient as specified, or future economic benefits or service potential must be returned to the transferor. Monies advanced as grants and contributions for which conditions have not been satisfied are carried in the Balance Sheet as creditors. When conditions are satisfied, the grant or contribution is credited to the relevant service line (attributable revenue grants and contributions) or taxation and non-specific grant income and expenditure (non-ring-fenced revenue grants and all capital grants) in the Comprehensive Income and Expenditure Statement. Where capital grants are credited to the Comprehensive Income and Expenditure Statement, they are reversed out of the General Fund Balance in the Movement in Reserves Statement. Where the grant has yet to be used to finance capital expenditure, it is posted to the capital grants received in advance. Where it has been applied, it is posted to the Capital Adjustment Account once they have been applied to fund capital expenditure. x. Heritage assets A heritage asset is defined as a tangible asset with historical, artistic, scientific, technological, geophysical or environmental qualities that is held and maintained principally for its contribution to knowledge and culture. Heritage assets are valued at insurance replacement value where available, otherwise assets are held at depreciated historic cost since the cost of obtaining a valuation would outweigh the benefits to users of the accounts. xi. Intangible assets Expenditure on non-monetary assets that do not have physical substance but are controlled by the Council as result of past events (i.e. software licences) is capitalised when it is expected that future economic benefits or service potential will flow from the intangible asset to the Council. Intangible assets are measured initially at cost. Amounts are only revalued where the fair value of assets held by the Council can be determined by reference to an active market. In practice, no intangible asset held by the Council meets this criterion, and they are therefore carried at amortised cost. The depreciable amount of an intangible asset is amortised over its useful life to the relevant service(s) line in the Comprehensive Income and Expenditure Statement. An asset is tested for impairment whenever there is Page 342 of 396
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WWW.MIDLOTHIAN.GOV.UK 44 Notes to the Accounts an indication that the asset might be impaired – any losses recognised are posted to the relevant service line(s) in the Comprehensive Income and Expenditure Statement. xii. Interests in companies and other entities The Council has an interest in companies and other entities that have the nature of subsidiaries, associates and jointly controlled entities. In the Council’s own single entity accounts these interests are recorded as the share of net assets. xiii. Inventories Inventories are included in the Balance Sheet at the lower of cost and net realisable value. The cost of inventories is assigned using the First in First out (FIFO) costing formula. xiv. Leases The Council as lessee The Council classifies contracts a leases based on their substance. Contracts and parts of contracts, including those described as contracts for services, are analysed to determine whether they convey the right to control the use of an identified asset, through the rights both to obtain substantially all the economic benefits or service potential from that asset and to direct its use. The Code expands the scope of IFRS 16 Leases to include arrangements with nil consideration, peppercorn or nominal payments. Initial Measurement Leases are recognised as right-of-use assets with a corresponding liability at the date from which the leased asset is available for use (or IAS 16 transition date, if later). The leases are typically for fixed periods in excess of one year but may have extension options. The Council recognises lease liabilities measured at the present value of lease payments, discounting by applying the Council’s incremental borrowing rate wherever the interest rate implicit in the lease cannot be determined. Lease payments included in the measurement of the lease liability include: • Fixed payments, including in-substance fixed payments; • Variable lease payments that depend on an index or rate, initially measured using the prevailing index or rate as at the adoption date; • Amounts expected to be payable under a residual value guarantee; • The exercise price under a purchase option that the Council is reasonably certain to exercise; • Lease payments in an optional renewal period if the Council is reasonably certain to exercise an extension option; • Penalties for early termination of a lease, unless the Council is reasonably certain not to terminate early. The right-of-use asset is measured at the amount of the lease liability, adjusted for any prepayments made, plus any direct costs incurred to dismantle and remove the underlying asset or restore the underlying asset on the site on which it is located, less any lease incentives received. However, for peppercorn, nominal payments or nil consideration leases, the asset is measured at fair value. Subsequent Measurement The right-of-use asset is subsequently measured using the fair value model. The Council considers the cost model to be a reasonable proxy except for: • Assets held under non-commercial leases; • Leases where rent reviews do not necessarily reflect market conditions; Page 343 of 396
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WWW.MIDLOTHIAN.GOV.UK 45 Notes to the Accounts • Leases with terms of more than five years that do not have any provision for rent reviews; • Leases where rent reviews will be at periods of more than five years. For theses leases, the asset is carried as a revalued amount. In these financial statements, right-of-use assets held under index-linked leases have been adjusted for changes in the relevant index, while assets held under peppercorn nil consideration leases have been valued using market prices or rentals for equivalent land and properties. The right-of-use asset is depreciated straight-line over the shorter period of the remaining lease term and useful life of the underlying asset as at the date of adoption. The lease liability is subsequently measured at amortised cost, using the effective interest method. The liability is remeasured when: • There is a change in future lease payments arising from a change in index or rate; • There is a change in the group’s estimate of the amount expected to be payable under a residual value guarantee; • The Council changes its assessment of whether it will exercise a purchase, extension or termination option, or; • There is a revised in-substance fixed lease payment. When such remeasurement occurs, a corresponding adjustment is made to the carrying amount of the right-of-use asset, with any further adjustment required from remeasurement being recorded in the income statement. Low Value and Short Lease Exemption As permitted by the code, the Council excludes leases: • For low-value items that cost less than £10,000 when new, provided they are not highly dependent on or integrated with other items, and; • With a term shorter than twelve months (comprising the non-cancellable period plus any extension options that the authority is reasonably certain to exercise and any termination options that the authority is reasonably certain not to exercise). Lease Expenditure Expenditure in the Comprehensive Income and Expenditure Statement includes interest, straight-line depreciation, any asset impairments and changes in variable lease payments not included in the measurement of the liability during the period in which the triggering event occurred. Lease payments less than twelve months are expensed. Depreciation and impairments are not charged against council tax, as the cost of non-current assets is fully provided for under separate arrangements for capital financing. Amounts are therefore appropriated to the Capital Adjustment Account from the General Fund balance in the Movement in Reserves Statement. The Council as lessor Midlothian Council currently has no finance leases where the Council is the lessor. xv. Allocation of Support Services Support services will not be recharged although the costs of services provided by the Council will be charged to separate accounts such as the Housing Revenue Account. The costs of support and other services will be allocated in government returns as required. Page 344 of 396
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WWW.MIDLOTHIAN.GOV.UK 46 Notes to the Accounts xvi. Property, Plant and Equipment Assets that have physical substance and are held for use in the production or supply of goods or services, for rental to others or for administrative purposes, and that are expected to be used during more than one financial year are classified as Property, Plant and Equipment. Recognition Expenditure on the acquisition, creation or enhancement of Property, Plant and Equipment is capitalised on an accruals basis, provided it is probable that the future economic benefits or service potential associated with the item will flow to the Council and the cost of the item can be measured reliably. Expenditure that maintains but does not add to an asset’s potential to deliver future economic benefits or service potential (i.e. repairs and maintenance) is charged as an expense when it is incurred. Measurement Assets are initially measured at cost, comprising: • The purchase price; • Any costs attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. The Council does not capitalise borrowing costs incurred whilst assets are under construction. The cost of assets acquired other than by purchase is deemed to be its fair value, unless the acquisition does not have commercial substance (i.e. it will not lead to a variation in the cash flows of the Council). In the latter case, where an asset is acquired via an exchange, the cost of the acquisition is the carrying amount of the asset given up by the Council. Assets are carried in the balance sheet using the following measurement bases: • Community assets – depreciated historical cost; • Assets under construction – historical cost; • Dwellings - current value, determined using the basis of existing use value for social housing (EUV-SH). Gross valuations are reduced by applying the discount factor which is designed to reflect that houses are only available for social use. Any new build housing and newly purchased houses are valued at historic cost; • Vehicles, Plant and Equipment – depreciated historical cost; • Surplus Assets – fair value based on open market value; • Other land and buildings – current value, determined as the amount that would be paid for the asset in its existing use (existing use value – EUV). Where there is no market-based evidence of current value because of the specialist nature of an asset, depreciated replacement cost (DRC) is used as an estimate of current value. Where non-property assets that have short useful lives or low values (or both), depreciated historical cost basis is used as a proxy for current value. Assets included in the Balance Sheet at current value are revalued as a minimum every five years to ensure their carrying amount is not materially different from their current value at year-end. As part of the Council’s plan for revaluation, a move has been made to revalue all items in a specific category in the same year, if one of the assets in the category has been revalued. Increases in valuations are matched by credits to the Revaluation Reserve to recognise any unrealised gains. Exceptionally, gains might be credited to the surplus or deficit on the provision of services where they arise from the reversal of a loss previously charged to the service. Page 345 of 396
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WWW.MIDLOTHIAN.GOV.UK 47 Notes to the Accounts Where decreases in value are identified, they are accounted for by: • Where there is a balance of revaluation gains for the asset in the Revaluation Reserve, the carrying amount of the asset is written down against that balance (up to the amount of the accumulated gains); • Where there is no balance in the Revaluation Reserve or an insufficient balance, the carrying amount of the asset is written down against the relevant service line(s) in the Comprehensive Income and Expenditure Statement (CIES). The Revaluation Reserve contains revaluation gains recognised since 1 April 2007 only, the date of its formal implementation. Gains arising before that date have been consolidated into the Capital Adjustment Account. Impairment Assets are assessed at each year-end to establish whether there is any indication that an asset may be impaired. Where indications exist and any possible differences are estimated to be material, the recoverable amount of the asset is estimated and, where this is less than the carrying amount of the asset, an impairment loss is recognised for the shortfall. Where impairment losses are identified, they are accounted for by: • Where there is a balance of revaluation gains for the asset in the Revaluation Reserve, the carrying amount of the asset is written down against that balance (up to the amount of the accumulated gains); • Where there is no balance in the Revaluation Reserve or an insufficient balance the carrying amount of the asset is written down against the relevant service line(s) in the CIES. Where an impairment loss is subsequently reversed, the reversal is credited to the Revaluation Reserve or the relevant service line(s) in the CIES, up to the amount of the original loss, adjusted for depreciation that would have been charged if the loss had not been recognised. Depreciation Depreciation is provided for on all Property, Plant and Equipment assets by the systematic allocation of their depreciable amounts over their useful lives. An exception is made for assets without a determinable finite useful life (i.e. freehold land and certain Community Assets) and assets that are not yet available for use (i.e. assets under construction). Depreciation is calculated on the following bases: • Dwellings and other buildings – straight-line allocation over the useful life of the property as estimated by the valuer; • Vehicles, plant and equipment – straight-line allocation over the useful life of the assets in Balance Sheet, as advised by a suitably qualified officer). Where an item of Property, Plant and Equipment asset has major components whose cost is significant in relation to the total cost of the item, the components are depreciated separately. Council policy is to only consider any asset with a gross book value of £1.5 million or above. The assessment of which components of these assets require to be recognised and depreciated separately is based on the cost of each of component. Significance is determined by comparing the cost of components against the overall cost of the asset. This threshold is set at 15% or more of the overall cost of the asset. Revaluation gains are also depreciated, with an amount equal to the difference between current value depreciation charged on assets and the depreciation that would have been chargeable based on their historical cost being transferred each year from the Revaluation Reserve to the Capital Adjustment Account. Page 346 of 396
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WWW.MIDLOTHIAN.GOV.UK 48 Notes to the Accounts Disposals of non-current assets held for sale When it becomes probable that the carrying amount of the asset will be recovered principally through a sale transaction rather than through its continuing use, it is reclassified as an Asset Held for Sale. The asset is revalued immediately before reclassification and then carried at the lower of this amount and fair value less costs to sell. Where there is a subsequent decrease to fair value less costs to sell, the loss is posted to the other operating expenditure Line in the CIES. Gains in fair value are recognised only up to the amount of any previously recognised losses in the Surplus or Deficit on the Provision of Services. Depreciation is not charged on Assets Held for Sale. If assets no longer meet the criteria to be classified as Assets Held for Sale, they are reclassified back to non-current assets and valued at the lower of their carrying amount before they were classified as Held for Sale; adjusted for depreciation, amortisation or revaluations that would have been recognised had they not been classified as Held for Sale, and their recoverable amount at the date of the decision not to sell. Assets that are to be abandoned or scrapped are not reclassified as Assets Held for Sale. When an asset is disposed of or decommissioned, the carrying amount of the asset in the Balance Sheet (whether Property, Plant and Equipment or Assets Held for Sale) is written off to the Other Operating Expenditure Line in the CIES as part of the gain or loss on disposal. Receipts from disposals (if any) are credited to the same line in the CIES also as part of the gain or loss on disposal (i.e. netted off against the carrying value of the asset at the time of disposal). Any revaluation gains accumulated for the asset in the Revaluation Reserve are transferred to the Capital Adjustment Account. Amounts received for a disposal in excess of £10,000 are categorised as capital receipts. The balance of receipts is credited to the Capital Fund and can then only be used for new capital investment or to defray debt. Receipts are appropriated to the Reserve from the General Fund Balance in the Movement in Reserves Statement. The written-off value of disposals is not a charge against Council Tax, as the cost of non-current assets is fully provided for under separate arrangements for capital financing. Amounts are appropriated to the Capital Adjustment Account from the General Fund Balance in the Movement in Reserves Statement. xvii. Infrastructure Assets More information on the accounting for and disclosure around infrastructure assets held by the Council can be found at note 15. xviii. Public Private Partnership (PPP) and Similar Contracts PPP and similar contracts are agreements to receive services, where the responsibility for making available the property, plant and equipment needed to provide the services passes to the contractor. As the Council is deemed to control the services that are provided under its schemes, and where ownership of the property, plant and equipment will pass to the Council at the end of the contracts for no additional charge, the Council carries the assets used under the contracts on its Balance Sheet as part of Property, Plant and Equipment. The original recognition of these assets at fair value (based on the cost to purchase the property, plant and equipment) was balanced by the recognition of a liability for amounts due to the scheme operator to pay for the capital investment. Non-current assets recognised on the Balance Sheet are re-valued and depreciated in the same way as property, plant and equipment owned by the Council. The amounts payable to operators each year are analysed into five elements: • Fair value of the services received during the year – debited to the relevant service in the Comprehensive Income and Expenditure Statement (CIES); Page 347 of 396
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WWW.MIDLOTHIAN.GOV.UK 49 Notes to the Accounts • Finance Cost – an interest charge on the outstanding Balance Sheet liability, debited to the Financing and Investment Income and Expenditure line in the CIES, the interest charges are as follows: o Dalkeith Schools - 9.69%; o Midlothian Primary Schools - 7.29%; o Newbattle Community Campus - 5.06%; o Residual Waste Treatment Plant, Millerhill – 18.84%; • Contingent rent – increases in the amount to be paid for the property arising during the contract, debited to the Financing and Investment Income and Expenditure line in the CIES; • Payment towards liability – applied to write down the Balance Sheet liability towards the PPP operator (the profile of write-downs is calculated using the same principles as for a finance lease); • Service charge and lifecycle replacement costs – proportion of the amounts payable is posted to the Balance Sheet as a prepayment and then recognised as additions to Property, Plant and Equipment when the relevant works are eventually carried out. xix. Provisions, Contingent Liabilities and Contingent Assets Provisions Provisions are made where an event has taken place that gives the Council a legal or constructive obligation that probably requires settlement by a transfer of economic benefits or service potential, and a reliable estimate can be made of the amount of the obligation. For instance, the Council may be involved in a court case that could eventually result in the making of a settlement or the payment of compensation. Provisions are charged as an expense to the appropriate service line in the Comprehensive Income and Expenditure Statement in the year that the Council becomes aware of the obligation, and are measured at the best estimate at the balance sheet date of the expenditure required to settle the obligation, taking into account relevant risks and uncertainties. When payments are eventually made, they are charged to the provision carried in the balance sheet. Estimated settlements are reviewed at the end of each financial year – where it becomes less than probable that a transfer of economic benefits will now be required (or a lower settlement than anticipated is made), the provision is reversed and credited back to the relevant service. Where some or all of the payment required to settle a provision is expected to be recovered from another party (i.e. from an insurance claim), this is only recognised as income for the relevant service if it is virtually certain that reimbursement will be received if the Council settles the obligation. Contingent Liabilities A contingent liability arises where an event has taken place that gives the Council a possible obligation, whose existence will only be confirmed by the occurrence or otherwise of uncertain future events not wholly within control of the Council. Contingent liabilities also arise in circumstances where a provision would otherwise be made but either it is not definite that an outflow of resources will be required, or the amount of the obligation cannot be measured reliably. Contingent liabilities are not recognised in the balance sheet but disclosed in a note to the accounts. Contingent Assets A contingent asset arises where an event has taken place that gives the Council a possible asset whose existence will only be confirmed by the occurrence or otherwise of uncertain future events not wholly within the control of the Council. Page 348 of 396
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WWW.MIDLOTHIAN.GOV.UK 50 Notes to the Accounts Contingent assets are not recognised in the balance sheet but disclosed in a note to the accounts where it is probable that there will be an inflow of economic benefits or service potential. xx. Reserves Reserves are created by transferring amounts out of the General Fund Balance. When Expenditure to be financed from a reserve is incurred, it is charged to the appropriate service in that year to score against the Surplus or Deficit on the Provision of Services in the Comprehensive Income and Expenditure Statement. The reserve is then transferred back into the General Fund Balance in the Movement in Reserves Statement so that there is no net charge against Council Tax for the expenditure. Certain reserves are kept to manage the accounting processes for non-current assets, financial instruments and retirement and employee benefits and do not represent usable resources for the Council – these reserves are explained in the relevant policies. xxi. Revenue Expenditure Funded from Capital Under Statute (Refcus) Expenditure incurred during the year that may be capitalised under statutory provisions but that does not result in the creation of a non-current asset is charged as expenditure to the relevant service line in the Comprehensive Income and Expenditure Statement in the year. Where the Council has determined to meet the cost of this expenditure from existing capital resources or by borrowing, a transfer in the Movement in Reserves Statement from the General Fund Balance to the Capital Adjustment Account then reverses out the amounts charged so there is no impact on the level of council tax. xxii. VAT VAT payable is included as an expense only to the extent that it is not recoverable from HMRC. VAT receivable is excluded from income. xxiii. Fair Value Measurement of Non-financial Assets The Council measures some of its non-financial assets, such as Surplus Assets and some of its financial instruments at fair value at each reporting date. Fair value is the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. The fair value measurement assumes the transaction to sell the asset takes place either: • In the principal market for the asset; or • In the absence of a principal market, in the most advantageous market for the asset. The Council measures the fair value of an asset using the assumptions that market participants would use when pricing the asset, assuming the market participants act in their economic best interest. When measuring the fair value of a non-financial asset, the Council takes into account a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. The Council uses valuation techniques that are appropriate in the circumstances and for which sufficient data is available, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. Inputs to the valuation techniques in respect of assets and liabilities for which Fair Value is measured or disclosed in the Council’s financial statements are categorised within the fair value hierarchy, as follows: • Level 1 inputs – quoted prices (unadjusted) in active markets for identical assets that the Council can access at the measurement date; • Level 2 inputs – inputs other than quoted prices included within Level 1 that are observable for the asset, either directly or indirectly; • Level 3 inputs – unobservable inputs for the asset. Page 349 of 396
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WWW.MIDLOTHIAN.GOV.UK 51 Notes to the Accounts 2. Accounting Standards Issued, Not Yet Adopted The code requires disclosure of information relating to the impact of an accounting change that will be required by a new standard that has been issued but not yet adopted. This applies to the adoption of the following new or amended standards within the 2025/26 code. • The changes to the measurement of non-investment assets with the 2025/26 code include adaptations and interpretations of IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets. These include setting out three revaluation processes for operational property, plant and equipment, requiring indexation for tangible non-investment assets and a requirement to value intangible assets using the historical cost approach. The changes will be effective from 1 April 2025 and none are expected to have a material impact on the Council’s financial statements. 3. Critical Judgements in Applying Accounting Policies In applying the accounting policies set out in Note 1, the Council has to make certain judgements about complex transactions or those involving uncertainty about future events (see Note 4). The accounting policies considered and critical judgements made in the annual accounts are: • Uncertainty over future funding - There is a high degree of uncertainty around future levels of funding for local government, which may significantly impact the Council’s ability to maintain its property, plant and equipment. The council has determined that this uncertainty is not yet sufficient to provide an indication that the assets of the council might be impaired as a result of a reduction in funding and subsequent required changes to investment and capital strategies • Public-Private Partnerships (PPP) and similar type contracts - The Council has entered into PPP and similar type contracts for the provision of educational buildings and waste facilities as detailed in Note 33. For each of these contracts the Council has considered the tests under IFRIC 12 and concluded the following: The Council is deemed to control the services provided under the scheme and ownership of schools will pass to the Council at the end of the contract. The educational buildings are therefore all recognised as Property, Plant and Equipment on the Council’s Balance Sheet. The Council is deemed to control 20% of the services provided under the Design, Build, Finance and Maintain (DBFM) for the Residual Waste Treatment Plant (80% controlled by Edinburgh Council) and is therefore recognised as Property, Plant and Equipment on the Council’s Balance Sheet. Having considered the ownership transfers as outlined in Note 33 the Council is not deemed to control the Millerhill Food Waste Treatment Plant and has therefore concluded this is a service concession. The Council has therefore recognised assets in relation to PPP and similar type contracts on the council’s balance sheet at a net book value of £197.405 million, with a corresponding liability in relation to future payments to be made under the scheme of £85.790 million. • Associates - The Valuation Joint Board is included within the group accounts under the wider definition of an “associate” although the council holds less than 20% of voting rights that is normally presumed to confer significant influence. This is in view of the funding arrangements in place whereby the Council provides £0.613 million annually, and as such is considered to hold significant influence. Details of the impact on the Group accounts is provided in Note 39. 4. Future Assumptions and Estimation Uncertainties The Annual Accounts contain estimated figures that are based on assumptions made by the Council about the future or events that are otherwise uncertain. Estimates are made taking into account historical Page 350 of 396
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WWW.MIDLOTHIAN.GOV.UK 52 Notes to the Accounts experience, current trends and other relevant factors. The assumptions and other sources of estimation uncertainty disclosed below relate to the estimates that require the Council’s most difficult, subjective or complex judgements. As the number of variables and assumptions affecting the possible future resolution of the uncertainties increases, those judgements become more subjective and complex. As a result, balances cannot be determined with certainty and actual results could be materially different from the assumptions and estimates. The items in the Council’s Balance Sheet as at 31 March 2025 for which there is significant risk of material adjustment in the forthcoming year are as follows: Property, Plant and Equipment Uncertainties The valuation of the Council’s property, plant and equipment which are subject to revaluation are subject to significant estimation due to several factors, including ongoing changes to estimates around the costs of replacing existing assets, the market value fluctuation of comparable assets used for valuation, the current condition and future maintenance costs of assets, changes to regulatory standards and the remaining useful economic lives of the assets. Given the material nature of the Council’s assets, there is a high likelihood that changes in these estimates will result in material changes in the valuation of assets on the balance sheet. The total value of the Council’s assets at 31 March 2025 is outlined and broken down by asset category at note 14. 2024/25 Valuations In 2024/25, revaluations were undertaken for the following assets: 31 March - Housing stock, parks & open spaces, garages & garage sites, several schools and depots. The housing assets were revalued on a EUV-SH basis and totalled £462.478 million, the parks & open spaces were revalued on a DRC basis and totalled £28.850 million, garages & garage sites were revalued on a DRC basis and totalled £3.195 million, the schools were revalued on a DRC basis and totalled £231.449 million and the depots were valued on a DRC basis and totalled £30.591 million, with a valuation movement of (£82.455 million) for housing, (£0.325 million) for parks & open spaces, (£0.766 million) for garages & garage sites and (£3.959 million) for the schools , £5.280 million for the depots (from previous valuation (15.12%) for housing, (1.11%) for parks & open spaces, (19.33%) for garages & garage sites, (1.68%) for the schools, 21.99% for the depots). The changes in valuation in assets in 2024/25, compared to 2023/24, represent updated information around the assets since the most recent full valuation, in particular the cost of replacing assets based on indices for schools, the changes in adjustments for social rent discounts for housing stock, updating housing market information, and updated information on the indices used to value parks & open spaces. Ongoing assessment of asset valuation In addition to formal valuations of property, plant and equipment on a rolling basis over a five year period, the Council assesses all assets to ensure there are no material changes that should drive an earlier valuation, to ensure that, in line with the CIPFA code, assets are revalued with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using the current value at the end of the reporting period. The council’s Corporate Estates Manager has determined in his professional opinion that, at 31 March 2025, no asset categories were subject to early revaluation. The council has also continued to assess the valuation of its asset base after the financial year end to ensure new information does not indicate a change in valuation at the balance sheet date. Assets are depreciated over useful lives that are dependent on several assumptions including the level of repairs and maintenance that will be incurred in relation to individual assets. Page 351 of 396
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WWW.MIDLOTHIAN.GOV.UK 53 Notes to the Accounts Effect if Actual Result Differ from Assumptions The net book value of all council property, plant and equipment subject to revaluation through the 5 year revaluation cycle is £1.084.111 billion. Assets revalued in 2024/25 totalled £97.934 million before revaluation. The impact of a 5% change in valuation of these would be £6.483 million, either resulting in an increase or decrease in the Council’s revaluation reserve or an additional impairment charge. There would be no impact on the Council’s general fund. Given the wide ranging nature of the assets under revaluation, as well as the differing and overlapping estimates involved in the valuations, it is not possible for management to provide an expected range of estimate outcomes going forward. However, given the experience in past years and materiality of the asset values, it is expected that these balances will continue to be subject to change as estimates are updated annually. If the useful life of the asset is reduced, depreciation increases and the carrying amount of the asset falls. It is estimated that the annual depreciation charge would increase by £7.196 million for every year that useful lives had to be reduced. Pension Obligation Uncertainties Estimation of the net obligation to pay pensions depends on several complex judgements relating to the discount rate used, the rate at which salaries are projected to increase, changes in retirement ages, mortality rates and expected returns on pension fund assets. A firm of consulting actuaries is engaged to provide the council with expert advice about the assumptions to be applied. The actuarial inputs into the pension obligation valuation are subject to annual review, and have a significant impact on the potential valuation. Historically it is common for small changes in the discount rate, salary assumption rate and pension rate to have material impacts on the year-end valuations on a year to year basis. More information on the key assumptions used in the actuarial valuation of the estimates is available in note 35 to the accounts, including information on the key assumptions, risks, sensitivities and restrictions on the amount on the balance sheet arising from IFRIC 14. An update is also included in this note on the latest development around several equalisation adjustments to pension obligation which have occurred in LGPS and may continue to materially impact the valuation of the Council’s obligation going forward. Effect if Actual Result Differ from Assumptions The effects of the net pension obligation of changes in individual assumptions can be measured. For instance, it is estimated that a one year increase in life expectancy would approximately increase the Employers Defined Benefit Obligation by around 3-5%. However the assumptions interact in complex ways. During 2023/24 the Council’s actuary advised that the net pension obligation had increased by £81,339 million because of estimates being corrected as a result of updating of the financial assumptions. Arrears Uncertainties As at 31 March the Council has Council Tax and Non-Domestic Rates debt due of £46.943 million. Management reviewed this balance at 31 March and determined that an allowance for doubtful debts, detailed in Note 23, of £46.826 million was appropriate based upon historical assessment of recoverability/review of individual balances and correspondence with third parties at year-end. However, it is recognised that in the current economic climate and taking into account the impact of Covid-19 there Page 352 of 396
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WWW.MIDLOTHIAN.GOV.UK 54 Notes to the Accounts is increased uncertainty around the recoverability of debtor balances. Management has continued to review all material outstanding balances at the year-end subsequent to 31 March, and has not determined any further allowance is required based on recovery to date. Effect if Actual Result Differ from Assumptions If collection rates were to deteriorate then this will result in an increase in the provision required i.e., 1% would require an increase of £0.468 million, 3% an increase of £1.405 million and 5% an increase of £2.341 million. 5. Events after the Reporting Period The Unaudited Accounts were authorised for issue on 16 June 2025 by the Chief Financial Officer. Events taking place after these dates are not reflected in the annual financial statements or notes. Where events taking place before these dates provided information about conditions existing at 31 March 2025, the figures in the financial statements and notes have been adjusted in all material respects to reflect the impact of this information. Page 353 of 396
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WWW.MIDLOTHIAN.GOV.UK 55 Notes to the Accounts 6. Note to the Expenditure and Funding Analysis Adjustments between funding and accounting basis Adjustments from General Fund to arrive at the Comprehensive Income and Expenditure Statement amounts Adjustments for Capital Purposes Net Change for Pension Adjustments Other Adjustments Total Adjustments £000 £000 £000 £000 Current Year 2024/25 Management and Members 0 17 3 20 Children’s Services, Partnerships and Communities 299 129 (2) 426 Education 26,662 2,159 1,178 29,999 Adult Health and Social Care (Non-Delegated) 0 0 10 10 Midlothian Integrated Joint Board 470 315 (60) 725 Place 7,726 550 5 8,281 Corporate Solutions 1,866 (383) 15 1,498 Housing Revenue Account 63,309 19 0 63,328 Joint Boards 0 0 0 0 Central Costs 69 0 0 69 Non-distributable Costs 0 0 0 0 Net Cost of Services 100,401 2,806 1,149 104,356 Other expenditure from the Expenditure and Funding Analysis (42,887) (8,880) (13) (51,780) Adjustments between funding and accounting basis 57,514 (6,074) 1,136 52,576 Application of Service Concessions 0 0 2,796 2,796 Difference between the General Fund surplus or deficit and Comprehensive Income and Expenditure surplus or deficit on provision of services 57,514 (6,074) 3,932 55,372 Comparative Year 2023/24 Management and Members 0 (10) (1) (11) Children’s Services, Partnerships and Communities 199 (74) (49) 76 Education 22,654 (1,017) 591 22,228 Adult Health and Social Care (Non-Delegated) 713 0 (147) 566 Midlothian Integrated Joint Board 3,155 (206) (122) 2,827 Place 10,267 (331) 214 10,150 Corporate Solutions 1,964 (881) (70) 1,013 Housing Revenue Account 55,608 (11) 0 55,597 Joint Boards 0 0 0 0 Central Costs 74 0 0 74 Non-distributable Costs 0 0 (23) (23) Net Cost of Services 94,634 (2,530) 393 92,497 Other expenditure from the Expenditure and Funding Analysis (47,211) (9,031) (21) (56,263) Adjustments between funding and accounting basis 47,423 (11,561) 372 36,234 Application of Service Concessions 0 0 2,608 2,608 Difference between the General Fund surplus or deficit and Comprehensive Income and Expenditure surplus or deficit on provision of services 47,423 (11,561) 2,980 38,842 Adjustments for Capital Purposes This column adds in depreciation and impairment and revaluation gains and losses in the services line, and for: • Other operating expenditure – adjusts for capital disposals with a transfer of income and disposal of assets and the amounts written off for those assets. • Financing and investment income and expenditure – the statutory changes for capital financing i.e. loans fund repayments and other revenue contributions are deducted from other income and expenditure as these are not chargeable under generally accepted accounting practices. • Taxation and non-specific grant income and expenditure – Capital grants are adjusted for income not chargeable under generally accepted accounting practices. Revenue grants are adjusted from those receivable in the year to those receivable without conditions or for which Page 354 of 396
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WWW.MIDLOTHIAN.GOV.UK 56 Notes to the Accounts conditions were satisfied throughout the year. The taxation and non-specific grant income and expenditure line is credited with capital grants receivable in the year without conditions or for which conditions were satisfied in the year. Net Change for Pensions Adjustments Net change for the removal of pension contributions and the addition of IAS 19 Employee Benefits pension related expenditure and income. • For services – this represents the removal of the employer pension contributions made by the Council as allowed by statute and the replacement with the current service costs and past service costs. • For financing and investment income and expenditure – the net interest on the defined benefit liability is charged to the Comprehensive Income and Expenditure Statement. Other Adjustments Other adjustments between amounts debited/credited to the Comprehensive Income and Expenditure Statement and the amounts payable/receivable to be recognised under statute. • For services – the amount by which officer remuneration charged to the Comprehensive Income and Expenditure Statement on an accruals basis is different from the remuneration chargeable in the year in accordance with statutory requirements. • For financing and investment income and expenditure – this is the effective interest adjustment on the Council’s Lender Option/Borrower Option (LOBO) debt. 7. Adjustments between Accounting Basis and Funding Basis under regulations This note details the adjustments that are made to the total comprehensive income and expenditure recognised by the Council in the year in accordance with proper accounting practice to arrive at the resources that are specified by statutory provisions as being available to the Council to meet future capital and revenue expenditure. The following sets out a description of the reserves that the adjustments are made against. General Fund Balance The General Fund is the statutory fund into which all the receipts of the Council are required to be paid and out of which all liabilities of the Council are to be met, except to the extent that statutory rules might provide otherwise. These rules can also specify the financial year in which liabilities and payments should impact on the General Fund balance, which is not necessarily in accordance with proper accounting practice. The General Fund balance therefore summarises the resources that the Council is statutorily empowered to spend on its services or on capital investment (or the deficit of resources that the Council is required to recover) at the end of the financial year. Housing Revenue Account Balance The HRA balance reflects the statutory obligation to maintain a revenue account for local authority council housing provision in accordance with Part VI of the Local Government and Housing Act 1989. It contains the balance of income and expenditure as defined by the 1989 Act that is available to fund future expenditure in connection with the Council’s landlord function or (where in deficit) that is required to be recovered from tenants in future years. Capital Fund and Repairs and Renewals Fund The Capital Fund and the Repairs and Renewals Fund are reserves to hold funds for major capital developments and specific types of repairs and maintenance work, respectively. Whilst these funds are Page 355 of 396
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WWW.MIDLOTHIAN.GOV.UK 57 Notes to the Accounts classed as useable reserves, they are not subject to adjustments between the funding and accounting basis. Adjustments between Funding & Accounting Basis Current Year 2024/25 General Fund Reserve £000 Housing Revenue Account £000 Total Usable Reserves £000 Total Unusable Reserves £000 Adjustments to Revenue Resources Amounts by which income and expenditure included in the Comprehensive Income and Expenditure Statement are different from revenue for the year calculated in accordance with statutory requirements: • Pensions Costs (transferred to/from pensions reserve) 6,043 31 6,074 (6,074) • Financial Instruments (transferred to the Financial Instruments Adjustment Account) 12 0 12 (12) • Holiday Pay (transferred to the Accumulated Absence Account) (1,149) 0 (1,149) 1,149 • Reversal of entries included in the surplus or deficit on the provision of services in relation to capital expenditure (these items are charged to the Capital Adjustment Account) (36,682) (63,764) (100,446) 100,446 Total adjustments to Revenue Resources (31,776) (63,733) (95,509) 95,509 Adjustments between Revenue and Capital Resources Statutory provision for the repayment of debt (transfer from the Capital Adjustment Account) 7,655 7,047 14,702 (14,702) Total adjustments between revenue and capital resources 7,655 7,047 14,702 (14,702) Adjustments to Capital Resources Application of capital grants to finance capital expenditure 28,231 0 28,231 (28,231) Total Adjustments to Capital Resources 28,231 0 28,231 (28,231) Total adjustments between accounting and funding basis 4,110 (56,686) (52,576) 52,576 Application of Service Concessions (2,796) 0 (2,796) 2,796 Total Adjustments 1,314 (56,686) (55,372) 55,372 Comparative Year 2023/24 General Fund Reserve £000 Housing Revenue Account £000 Total Usable Reserves £000 Total Unusable Reserves £000 Adjustments to Revenue Resources Amounts by which income and expenditure included in the Comprehensive Income and Expenditure Statement are different from revenue for the year calculated in accordance with statutory requirements: • Pensions Costs (transferred to/from pensions reserve) 11,495 66 11,561 (11,561) • Financial Instruments (transferred to the Financial Instruments Adjustment Account) 22 0 22 (22) • Holiday Pay (transferred to the Accumulated Absence Account) (393) 0 (393) 393 • Reversal of entries included in the surplus or deficit on the provision of services in relation to capital expenditure (these items are charged to the Capital Adjustment Account) (38,558) (55,608) (94,166) 94,166 Total adjustments to Revenue Resources (27,434) (55,542) (82,976) 82,976 Adjustments between Revenue and Capital Resources Statutory provision for the repayment of debt (transfer from the Capital Adjustment Account) 8,967 4,221 13,188 (13,188) Total adjustments between revenue and capital resources 8,967 4,221 13,188 (13,188) Adjustments to Capital Resources Application of capital grants to finance capital expenditure 33,554 0 33,554 (33,554) Total Adjustments to Capital Resources 33,554 0 33,554 (33,554) Total adjustments between accounting and funding basis 15,087 (51,321) (36,234) 36,234 Application of Service Concessions (2,608) 0 (2,608) 2,608 Total Adjustments 12,479 (51,321) (38,842) 38,842 Page 356 of 396
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WWW.MIDLOTHIAN.GOV.UK 58 Notes to the Accounts 8. Movement in Earmarked Reserves This note sets out the amounts set aside from the General Fund in earmarked reserves to provide financing for future expenditure plans and the amounts posted back from earmarked reserves to meet general fund expenditure in 2024/25. Balance at 1 April 2023 Transfers out 2023/24 Transfers in 2023/24 Balance at 31 March 2024 Transfers out 2024/25 Transfers in 2024/25 Balance at 31 March 2025 £000 £000 £000 £000 £000 £000 £000 Scheme of Devolved Budget Management carry forwards (16,012) 16,012 (15,335) (15,335) 15,335 (11,035) (11,035) Loans Fund Review 0 3,373 (5,525) (2,152) Transformation Blueprint (1,069) 433 (2,000) (2,636) 1,132 0 (1,504) Set aside to balance budget (1,166) 1,166 (2,680) (2,680) 2,680 (163) (163) Total Earmarked Reserves (18,247) 17,611 (20,015) (20,651) 22,520 (16,723) (14,854) Vat claim not yet settled (6,839) 6,839 0 0 0 0 0 Service Concessions 0 4,093 (20,463) (16,370) 5,603 0 (10,767) Non-earmarked reserves (9,877) 0 560 (9,317) 2,909 0 (6,408) Total General Fund Balance (34,963) 28,543 (39,919) (46,338) 31,032 (16,723) (32,029) 9. Other Operating Income and Expenditure 2023/24 2024/25 £000 Other Operating Income and Expenditure £000 (70) (Gains)/Losses on disposal of non-current assets 45 (70) Total 45 10. Financing and Investment Income and Expenditure 2023/24 2024/25 £000 Financing Investment Income and Expenditure £000 16,244 Interest payable and similar charges 21,470 (9,031) Net interest on the net defined benefit liability/(asset) (8,880) (7,182) Interest receivable and similar income (5,124) 31 Total 7,466 11. Taxation and Non-specific Grant Income and Expenditure 2023/24 2024/25 £000 Taxation and Non-specific Grant Income and Expenditure £000 (57,306) Council tax income (58,294) (35,136) Non-domestic rates income (34,867) (163,620) Non-ringfenced government grants (195,021) (33,554) Capital grants and contributions (note 12) (28,231) (289,616) Total (316,413) Page 357 of 396
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WWW.MIDLOTHIAN.GOV.UK 59 Notes to the Accounts 12. Grant Income The Council credited the following grants, contributions and donations to the Comprehensive Income and Expenditure Statement in 2024/25. 2023/24 2024/25 £000 Grant Income £000 Credited to Taxation and Non-specific Grant Income and Expenditure (7,453) General Capital Grant (7,708) (6,135) Affordable Housing Supply Programme (8,470) (10,167) Developer Contributions (2,592) (3,918) General Capital Grant – Early Years Childcare (2,517) (2,060) Capital Fund Contribution 0 (2,686) Other Scottish Government Grants (5,357) (501) Net-Zero Funding (818) (184) Other Capital Grants and Contributions (769) (33,554) Total (28,231) Credited to Services (16,786) Housing Benefit Subsidy (17,065) (11,569) Early Years Expansion Grant 0 (6,913) LCITP Low Carbon Heating 0 (2,696) Unitary Charge Funding (2,677) (2,424) Pupil Equity Funding (2,436) (374) Unaccompanied Asylum Seeking Children (463) (1,663) Community Justice Grant (1,390) (1,079) Energy Efficient Scotland (498) (627) McMillan Funding for Improving Cancer Journey (461) (929) UK Shared Prosperity Fund (2,717) (608) Child Protection Grant (715) (457) Ukrainian Programme (937) (497) Scottish Government Attainment Programme (618) (526) Penicuik Townscape Heritage Project (527) (2,759) Other Grants Received (2,723) (49,907) Total (33,227) Page 358 of 396
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WWW.MIDLOTHIAN.GOV.UK 60 Notes to the Accounts 13. Expenditure and Income Analysed by Nature The Group and Council’s expenditure and income, which includes adjustments between the funding and accounting basis, is analysed as follows: 2023/24 2024/25 £000 Expenditure and income analysed by nature £000 Expenditure 192,380 Employee expenses 207,799 260,356 Other service expenses 281,419 94,560 Depreciation, amortisation and impairment 100,332 16,244 Interest payments 21,470 (70) Gain/(Loss) on disposal on non-current assets 45 6,241 Share of operating results of associates and joint ventures 30 569,711 Total Expenditure 611,095 Income (97,665) Fees, charges and service income (99,881) (7,182) Interest and investment income (5,124) (57,306) Income from council tax (93,161) (354,401) Government grants and contributions (336,063) (516,554) Total Income (534,229) 53,157 (Surplus) or deficit on the provision of services 76,866 Page 359 of 396
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WWW.MIDLOTHIAN.GOV.UK 61 Notes to the Accounts 14. Property, Plant and Equipment Movements on Balance Movements in 2024/25 Council Dwellings Buildings Land Vehicles, Plant and Equipment Community Assets Assets Under Construction Surplus Assets Total property, plant & Equipment Service Concession Assets* Cost of Valuation £000 £000 £000 £000 £000 £000 £000 £000 £000 Balance at 1 April 2024 518,018 573,575 17,297 54,508 8,868 73,297 952 1,246,515 195,300 Additions 12,830 1,911 28 10,734 374 66,331 0 92,208 0 Revaluation increases/(decreases) recognised in the Revaluation Reserve (9,292) 2,630 2,216 0 (1,007) 0 (3,137) (8,590) 4,980 Revaluation increases/(decreases) recognised in the Surplus/Deficit on the Provision of Services (73,926) (2,792) 29 (42) 435 0 411 (75,885) (522) De-recognition – Disposals (269) 0 (5) (1,528) (24) 0 0 (1,826) 0 Reclassification of Assets 24,835 35,135 97 2,979 0 (70,704) 2,793 (4,865) 0 Other Movements* 114 1,279 0 502 0 0 0 1,895 0 Balance at 31 March 2025 472,310 611,738 19,662 67,153 8,646 68,924 1,019 1,249,452 199,758 Accumulated Depreciation and Impairment Balance at 1 April 2024 (22,961) (16,355) 0 (36,165) (54) 0 0 (75,535) (3,197) Depreciation Charge (12,199) (30,472) 0 (4,624) (23) 0 (4) (47,322) (3,154) Depreciation written out to the Revaluation Reserve 11,318 15,493 0 0 70 0 0 26,881 666 Depreciation written out to the Surplus/Deficit on the Provision of Services 22,986 3,559 0 0 1 0 0 26,546 3,331 De-recognition – Disposals 269 0 0 1,439 0 0 0 1,708 0 Reclassification of Assets 23 (23) 0 0 0 0 0 0 0 Balance at 31 March 2025 (564) (27,798) 0 (39,350) (6) 0 (4) (67,722) (2,354) Net Book Value At 31 March 2025 471,746 583,940 19,662 27,803 8,640 68,924 1,015 1,181,730 197,404 At 31 March 2024 495,057 557,220 17,297 18,343 8,814 73,297 952 1,170,980 192,103 *Service concession assets included in ‘land and buildings ‘total. Adoption of right-of-use assets, under IFRS 16, are included in the other movements line of the note. Page 360 of 396
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WWW.MIDLOTHIAN.GOV.UK 62 Notes to the Accounts Movements in 2023/24 Council Dwellings Buildings Land Vehicles, Plant and Equipment Community Assets Assets Under Construction Surplus Assets Total property, plant & Equipment Service Concession Assets* Cost of Valuation £000 £000 £000 £000 £000 £000 £000 £000 £000 Balance at 1 April 2023 512,802 576,158 17,380 49,490 8,832 50,386 827 1,215,878 198,022 Additions 20,495 3,822 0 6,253 138 59,977 0 90,685 2 Revaluation increases/(decreases) recognised in the Revaluation Reserve (5,105) (8,449) 58 0 (102) 0 0 (13,598) (2,724) Revaluation increases/(decreases) recognised in the Surplus/Deficit on the Provision of Services (43,868) (767) (1) 0 0 0 0 (44,636) 0 De-recognition – Disposals (251) (100) (12) (1,235) 0 0 0 (1,598) 0 Reclassification of Assets 33,942 2,911 (128) 0 0 (37,066) 125 (216) 0 Balance at 31 March 2024 518,018 573,575 17,297 54,508 8,868 73,297 952 1,246,515 195,300 Accumulated Depreciation and Impairment Balance at 1 April 2023 (11,472) (15,802) 0 (32,576) (56) 0 0 (59,906) (2,397) Depreciation Charge (11,740) (29,730) 0 (4,757) (21) 0 0 (46,248) (3,161) Depreciation written out to the Revaluation Reserve 0 28,765 0 0 23 0 0 28,788 2,361 Depreciation written out to the Surplus/Deficit on the Provision of Services 0 412 0 0 0 0 0 412 0 De-recognition – Disposals 251 0 0 1,168 0 0 0 1,419 0 Balance at 31 March 2024 (22,961) (16,355) 0 (36,165) (54) 0 0 (75,535) (3,197) Net Book Value At 31 March 2024 495,057 557,220 17,297 18,343 8,814 73,297 952 1,170,980 192,103 At 31 March 2023 501,333 560,356 17,380 16,914 8,776 50,386 827 1,155,972 195,625 *Service concession assets included in ‘land and buildings ‘total Page 361 of 396
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WWW.MIDLOTHIAN.GOV.UK 63 Notes to the Accounts Depreciation The following useful lives are used in the calculation of depreciation for the categories of assets, except where the useful like is known to be different from these as a consequence of a Council decision: • Council Dwellings – 40 to 60 years; • Buildings – 10 to 60 years; • Vehicles, Plant and Equipment – 5 to 10 years. Capital Commitments At 31 March 2025, the Council has entered into a number of contracts for the construction or enhancement of property, plant and equipment in 2024/25. The major commitments are : Original Contractual Commitment Outstanding at 31 March 25 Capital Commitments £000 £000 Housing Revenue Account (HRA) Phase 3-5 New Social Housing – Site 32/34 Newbyres Crescent 17,532 8,868 Phase 3-5 New Social Housing – Site 130 Morris Road (Newbattle HS) 25,038 7,748 Phase 3-5 New Social Housing – Danderhall AA2/AA3 (Bellway) 7,383 1,546 Phase 3-5 New Social Housing – Dalhousie Mains 9,715 910 Phase 3-5 New Social Housing – Roslin Expansion Site 8,237 2,555 Phase 3-5 New Social Housing – Conifer Road 15,147 227 Phase 3-5 New Social Housing – Newmills Road 19,600 144 Phase 3-5 New Social Housing – Newton Church Road 7,039 7,039 Energy Efficiency in Social Housing 2,590 993 General Fund Destination Hillend 7,820 596 Easthouses Primary School 19,801 355 Woodburn Primary School 11,596 121 Other General Fund capital commitments 105 15 Joint-funded Project Phase 3-5 New Social Housing – Site 114 23,940 11,113 Total Contractual Commitment 175,543 42,230 Revaluations Valuations of the above categories of assets are undertaken by independent expert valuers engaged by the Council over a five-year rolling programme by Chartered Surveyors of the Council’s Estates department, in accordance with the Statement of Asset Valuation Practice and Guidance Notes of the Royal Institution of Chartered Surveyors. In 2024/25 valuations were undertaken for categories Housing stock, parks & open spaces, garages & garage sites. Several schools and depots were also revalued. The majority of asset valuations were based on either a depreciated replacement cost (DRC) basis or market value and resulted in a net downwards revaluation of assets of £28.266 million. In addition to formal valuations of property, plant and equipment on a rolling basis over a five year period, the Council assesses all assets to ensure there are no material changes that should drive an earlier valuation, to ensure that, in line with the CIPFA code, assets are revalued with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using the current value at the end of the reporting period. The Council has continued to assess the valuation of its asset base subsequent to the financial year end as summarised in note 4 to these financial statements. Page 362 of 396
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WWW.MIDLOTHIAN.GOV.UK 64 Notes to the Accounts 15. Infrastructure Assets The Council’s infrastructure assets have been recorded on the Balance Sheet at depreciated historic cost. A useful life of 15 years is applied to these assets and used in the calculation of the annual depreciation charge, based on the Council’s assessment of the average useful economic life of these assets, with the exception of where the useful life is known to be different from this amount as a consequence of a Council decision. On 29 August 2022, the Scottish Government confirmed in Local Government Finance Circular 09/2022 that it has provided a temporary statutory override to the accounting and disclosure requirements related to infrastructure assets in local government financial statements, whilst more permanent updates are developed within the CIPFA/LASAAC Code of Practice for Local Authority Accounting (“the Code”). The allowed changes are applicable for the 2021/22 financial year through to the 31 March 2025 financial year. The Council has applied both statutory overrides for infrastructure assets: • Statutory Override 1: For accounting periods commencing from 1 April 2021 until 31 March 2025 a local authority is not required to report the gross cost and accumulated depreciation for infrastructure assets. • Statutory Override 2: For accounting periods commencing from 1 April 2010 until 31 March 2025 the carrying amount to be derecognised in respect of a replaced part of an infrastructure asset is to be taken to be and accounted for as zero. No subsequent adjustment shall be made to the carrying amount of the asset with respect to that part. 2023/24 £000 Infrastructure Assets 2024/25 £000 34,819 Balance at 1 April 38,423 (3,956) Depreciation (2,222) 7,560 Additions 9,279 0 Reclassification of Assets and other movements 6,914 38,423 Balance at 31 March 52,394 16. Heritage Assets The Council’s chains and badges of office are the main heritage assets and have been included in the Balance Sheet at reinstatement cost, obtained from the Council’s insurer. 2023/24 £000 Heritage Assets 2024/25 £000 458 Balance at 1 April 456 (2) Depreciation (3) 0 Additions 1 0 Revaluations and restatements 53 456 Balance at 31 March 507 17. Intangible Assets The Council accounts for its software as intangible assets, to the extent that the software is not an integral part of a particular IT system and accounted for as part of the hardware item Property, Plant and Equipment. The intangible assets include software licences, warranties and internally generated assets. The movement on Intangible Asset balances during the year is as follows: Page 363 of 396
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WWW.MIDLOTHIAN.GOV.UK 65 Notes to the Accounts 2023/24 £000 Intangible Assets 2024/25 £000 Balance at 1 April 2,946 Gross carrying amounts 2,972 (2,744) Accumulated amortisation (2,868) 202 Net carrying amount at start of year 104 26 Additions – Purchases 498 (124) Amortisation for the period (50) 104 Net carrying amount at end of year 448 Comprising 2,972 Gross carrying amounts 3,366 (2,868) Accumulated amortisation (2,918) 104 Net carrying amount at end of year 448 18. Long-term Debtors 2023/24 £000 Long-term Debtors 2024/25 £000 4,113 Prepayment to PPP contractor 3,756 58 Pacific Shelf 0 4,171 Total 3,756 19. Financial Instruments Categories of Financial Instruments The following categories of financial instruments are carried in the Balance Sheet. Financial Assets 31 Mar 2024 31 Mar 2025 Long- term Current Total Long- term Current Total £000 £000 £000 Financial Assets Category £000 £000 £000 0 30,017 30,017 Short/long-term deposits (below) Amortised Cost 0 70 70 0 22,878 22,878 Debtors (note 23) Amortised Cost 0 19,158 19,158 11,526 0 11,526 Long-term investments (below) Fair value through other comprehensive income 16,604 0 16,604 11,526 52,895 64,421 Total Financial Assets 16,604 19,228 35,832 0 15,236 15,236 Debtors not defined as financial instruments 0 3,875 3,875 11,526 68,131 79,657 Total 16,604 23,103 39,707 Page 364 of 396
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WWW.MIDLOTHIAN.GOV.UK 66 Notes to the Accounts The short and long-term deposits on the balance sheet comprises: 31 Mar 2024 31 Mar 2025 Long- term Current Total Long- term Current Total £000 £000 £000 Deposits £000 £000 £000 0 30,017 30,017 Commercial banks/building societies 0 70 70 0 30,017 30,017 Total 0 70 70 Financial Liabilities 31 Mar 2024 31 Mar 2025 Long- term Current Total Long- term Current Total £000 £000 £000 Financial Liabilities Category £000 £000 £000 339,971 3,797 343,768 Borrowings (below) Amortised Cost 377,696 5,015 382,711 73,347 3,352 76,699 PPP Liability (note 33) Amortised Cost 70,722 3,602 74,324 11,471 568 12,039 PPP Donated Asset Liability (note 33) Amortised Cost 10,893 573 11,466 0 0 0 IFRS 16 – Leases Amortised Cost 1,382 352 1,734 0 33,331 33,331 Creditors (note 25) Amortised Cost 0 24,398 24,398 424,789 41,048 465,837 Total 460,693 33,940 494,633 0 17,629 17,629 Creditors not defined as financial instruments 0 29,637 29,637 424,789 58,677 483,466 Total 460,693 63,577 524,270 The Council’s borrowing is presented in the Balance Sheet as the outstanding principal repayable (plus accrued interest) and interest charged to the Comprehensive Income and Expenditure Statement is the amount payable for the year according to the loan agreement. Borrowing is classed as either a long-term liability, repayable after twelve months or longer, or a current liability if it is repayable within twelve months. The external borrowing as shown in the Balance Sheet comprises: 31 Mar 2024 31 Mar 2025 Long- term Current Total Long- term Current Total £000 £000 £000 Borrowing £000 £000 £000 303,897 2,630 306,527 Public Works Loan Board (PWLB) Loans 342,316 3,911 346,227 20,526 286 20,812 Lender Option/Borrower Option (LOBO) Loans 20,514 289 20,803 15,548 881 16,429 Loans from commercial banks and other local authorities 14,866 815 15,681 339,971 3,797 343,768 Total 377,696 5,015 382,711 Loans Fund Deferral of Repayments Loans Fund Principal repayments were deferred in 2022/23 under the Local Government Finance Circular 5/2022 provisions. The term over which deferred repayments will be repaid are in line with the provisions of the circular, as follows:- Deferred Principal Repayments – Loans Fund £000 Within 1 year 241 Within 2 to 5 years 770 Within 6 to 10 years 602 Within 11 to 15 years 317 Within 16 to 20 years 207 Total 2,137 Page 365 of 396
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WWW.MIDLOTHIAN.GOV.UK 67 Notes to the Accounts Investments Designated at Fair Value through Other Comprehensive Income Fair value of equity instruments designated at Fair Value through Other Comprehensive Income include the following: 31 Mar 2024 £000 Long-term Assets Input Level in Fair Value Hierarchy (see note 1 viii) 31 Mar 2025 £000 5,594 Equity Shareholding in Lothian Buses Level 2 6,082 324 Subordinated Debt Subscription in Newbattle DBFMCo Level 3 322 5,610 Midlothian Energy Shareholding Level 3 10,200 11,528 Total 16,604 Lothian Buses Plc Midlothian Council holds a 5.5% shareholding in Lothian Buses plc, a company incorporated in January 1986 under the terms of the Transport Act 1985 to operate buses in the City of Edinburgh and its surrounding area. The valuation basis for the Council’s shareholding (350,000 £1 ordinary shares) is calculated as net share of equity attributable to equity holders, in line with the published results for the year ended 31 December 2024. The IAS 19 Pension Asset/Liability has now been removed from calculations due to its volatility, as demonstrated in the on-year movement in the transfer to/from reserves figure in the table below. Note 37 provides more detail on the potential guarantee liability associated with investment. Year to 31 Dec 23 Year to 31 Dec 24 £000 Lothian Buses £000 Profit/Loss: 16,760 Profit/(Loss) before taxation 5,774 (2,178) Taxation (2,470) 14,582 Profit/(Loss) after Tax 3,304 Other relevant Financial Information: 183,508 Revenue 197,749 3,200 Ordinary Dividend 0 25,841 Transfer to/(from) reserves (9,819) 102,266 Equity attributable to equity holders (excluding IAS 19 Pension Asset/Liability) 111,195 Newbattle DBFMCo In 2017/18, the Council subscribed £0.333 million of subordinated debt in Newbattle DBFMco Limited, a company set up specifically to deliver the Council’s Schools Newbattle Community Campus project. Whilst the investment is sellable in the secondary market, the valuation basis for the Council’s shareholding (nominal value of loan stock £0.333 million) is calculated based on the subscription value as there is no equivalent market data to estimate resale value. The principal on this investment will be repaid fully over the 25-year project life. Interest will be paid biannually at 10.5% coupon based on the average principal outstanding over the relevant 6-month period. Midlothian Energy Ltd In 2021/22, the Council entered into a 50:50 joint venture with Vattenfall Heat UK to create Midlothian Energy Limited, a company set up specifically to generate, distribute and supply energy within Midlothian. The carrying value of the Council investment in Midlothian Energy Limited represents the funds invested in 2022. The published results for Midlothian Energy Limited for the year ended 31 December 2024 are summarised below. Page 366 of 396
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WWW.MIDLOTHIAN.GOV.UK 68 Notes to the Accounts Year to 31 Dec 23 Year to 31 Dec 24 £000 Midlothian Energy Ltd £000 Profit/Loss: 48 Profit/(Loss) before taxation (347) (41) Taxation 1 7 Profit/(Loss) after Tax (346) Other relevant Financial Information: 11,220 Shares issued during the period 20,400 (2,758) Accumulated Losses (3,104) 8,462 Total Equity 17,296 Income, Expenses, Gains and Losses 2023/24 2024/25 Income, Expenses, Gains and Losses Surplus or deficit on the provision of services £000 Other comprehensive income and expenditure £000 Surplus or deficit on the provision of services £000 Other comprehensive income and expenditure £000 Net gains/losses on: • Investments in equity instruments designated at fair value through other comprehensive income 0 (165) 488 Total net gains/(losses) 0 (165) 488 Interest revenue: • Financial assets measured at amortised cost 4,590 0 2,438 0 Total Interest Revenue 4,590 0 2,438 0 Interest Expense 9,752 0 11,460 Fee Expense: • Financial assets or financial liabilities that are not at fair value through profit and loss 167 0 153 0 Total Fee Expense 167 0 153 0 Fair Value of Financial Assets and Liabilities Except for the financial assets carried at fair value through other comprehensive income, all other financial liabilities and financial assets held by the Council are carried in the Balance Sheet at amortised cost. The fair values calculated for these instruments are as follows: 31 Mar 2024 31 Mar 2025 Carrying Amount £000 Fair Value £000 ` Financial Liabilities Carrying Amount £000 Fair Value £000 306,526 209,199 PWLB Loans (Level 2) 346,227 231,469 20,812 18,666 Lender Option/Borrower Option (LOBO) Loans (Level 2) 20,803 16,818 16,430 13,469 Loans from commercial lenders and other local authorities (Level 2) 15,681 12,226 33,331 33,331 Creditors 24,398 24,398 0 0 IFRS 16 – Lease Liabilities 1,734 1,734 76,699 76,699 PPP Finance Lease Liability 74,324 74,324 12,039 12,039 PPP Donated Asset Account Liability 11,466 11,466 465,837 363,403 Total 494,633 372,435 The fair value for borrowings have been arrived at using a discounted cash flow analysis, with the most significant inputs being the discount rate. The fair value of borrowing is lower than the carrying amount because the Council’s portfolio of loans includes a number of loans where the interest rate payable is lower than the prevailing rates at the balance Page 367 of 396
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WWW.MIDLOTHIAN.GOV.UK 69 Notes to the Accounts sheet date. The commitment to pay interest below current market rates reduces the amount the Council would have to pay if the lender requested or agreed to early repayment of the loans. 31 Mar 2024 31 Mar 2025 Carrying Amount £000 Fair Value £000 ` Financial Assets Carrying Amount £000 Fair Value £000 30,017 30,017 Short/long-term Deposits 70 70 22,878 22,878 Debtors 19,158 19,158 52,895 52,895 Total 19,228 19,228 Short-term debtors and creditors are carried at cost as this is a fair approximation of their value. The fair value for financial liabilities and financial assets that are not measured at fair value can be assessed by calculating the present value of the cash flows that will take place over the remaining term of the instruments, using the following assumptions: Financial Assets Financial Liabilities - The valuation of fixed term deposits (maturity deposits) is made by comparison of the fixed term deposit with a comparable deposit with the same/similar lender for the remaining period of the deposit. - No early repayment is recognised. - The fair value of receivables is taken to be the invoiced or billed amount. - Estimated ranges of interest rates at 31 March 2025 for loans payable based on new lending rates for equivalent loans at that date. - The fair value of payables is taken to be the invoiced or billed amount. 20. Nature and Extent of Risks arising from Financial Instruments The Council’s activities expose it to a variety of financial risks including: • Credit risk – the possibility that other parties might fail to pay amounts due to the Council; • Liquidity risk – the possibility that the Council might not have funds available to meet its commitments to make payments; • Market risk – the possibility that financial loss might arise for the Council as a result of the changes in such measures as interest rates and stock market movements. The Council has fully adopted CIPFA’s Code of Treasury Management in the Public Services Code of Practice and set treasury management indicators to control key financial instrument risks in accordance with CIPFA’s Prudential Code. The Council’s management of treasury risks actively works to minimise the Council’s exposure to the unpredictability of financial markets and to protect the financial resources available to fund services. Credit Risk Credit risk arises from deposits with banks and financial institutions, as well as credit exposures to the Council’s customers. The risk is minimised through the Council’s Treasury Management Strategy, which is set annually and is monitored throughout the year. The strategy sets out the limits on both duration and maximum levels of deposits. The lower an institution’s creditworthiness the lower the maximum duration and level of deposit will be. These Counterparties are chosen, by officers, using credit data supplied by the Council’s treasury advisers (based on data from the three main credit rating agencies, overlaid by: • Credit watches and credit outlooks from credit rating agencies; • Credit Default Swap (CDS) spreads to give early warning of likely changes in credit ratings; Page 368 of 396
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WWW.MIDLOTHIAN.GOV.UK 70 Notes to the Accounts • Sovereign ratings to select counterparties from only the most creditworthy countries. It is the policy of the Council to place deposits only with a limited number of banks and building societies whose credit rating is independently assessed as sufficiently secure by the Council’s treasury advisers and to restrict lending to a prudent maximum amount for each institution. The Council also has a policy of limiting deposits to £15 million per institution, other than for UK Nationalised and Part-Nationalised institutions where the maximum is extended to £30 million. No credit limits were exceeded during the financial year. The expected credit loss for the Council’s financial assets held at amortised cost has been calculated to be £0.001 million (2023/24 £0.010 million). The Council deems this immaterial and therefore has not included any impact of this with the Comprehensive Income and Expenditure Statement (CIES). The expected credit loss for the Council’s financial assets held at FVOCI is expected to be zero, calculated on the following basis: • Lothian Buses Shareholding – There was no dividend received during 2024/25, 2023/24 was the first dividend received since 2019; it was previously estimated that dividend would not be received until 2026; • Subordinated Debt Investment in Newbattle DBFM Co SPV – Whilst there is no directly observable indicators which would allow an expected credit loss for this investment to be accurately calculated, there are no indications of adverse performance with the DBFM Co or any indications that future scheduled lifecycle maintenance will not be able to take place or senior and/or subordinated debt will not be able to be repaid. The Council will continue to review the performance of the SPC on an annual basis; • Midlothian Energy Ltd – Whilst there is no directly observable indicators which would allow an expected credit loss for this investment to be accurately calculated, there are no indications of adverse performance. The Council will continue to review the performance of the company on an annual basis. An age analysis of cash and cash equivalents and short-term deposits is shown in the table below: 2023/24 £000 Financial Assets 2024/25 £000 27,505 Less than three months 27,018 10,006 Between three and six months 0 20,011 Between six months and one year 0 0 More than one year 0 57,522 Total 27,018 Liquidity Risk The Council manages its liquidity position through the approval of treasury investment strategy reports and through a comprehensive cash flow management system as required by CIPFA Code of Practice. This seeks to ensure that cash is available as needed. If unexpected movements happen, the Council has ready access to borrowings from the money markets and the Public Works Loan Board. There is no significant risk that it will be unable to raise finance to meet its commitments under financial instruments. Instead the risk is that the Council will be bound to replenish a significant proportion of its borrowings at a time of unfavourable interest rates. The Council sets limits on the proportion of its fixed rate borrowing during specified periods. The strategy is that loan maturities are spread across financial years to mitigate refinancing risk, through a combination of careful planning of new loans taken out and (where it is economic to do so) making early repayments. The maturity analysis of financial liabilities is as follows: Page 369 of 396
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WWW.MIDLOTHIAN.GOV.UK 71 Notes to the Accounts 2023/24 £000 Financial Liabilities 2024/25 £000 3,797 Less than one year 5,015 1,275 Between one and two years 11,771 22,362 Between two and five years 45,387 60,177 Between five and ten years 60,177 42,582 Between ten and twenty years 22,447 41,681 Between twenty and thirty years 61,031 81,887 Between thirty and forty years 81,883 100,000 Between forty and fifty years 90,000 5,000 More than fifty years 5,000 343,768 Total 382,711 All trade and other payables are due to be paid in less than one year. Market Risk Interest Rate Risk The Council is exposed to interest rate risk in terms of its exposure to interest rate movements on its borrowings and investments. Movements in interest rates have a complex impact on the Council. For instance, a rise in interest rates would have the following effects: The current interest rate risk for the Council is summarised below: • Borrowings at variable rates - the interest charged to the surplus or deficit on the provision of services will rise; • Borrowings at fixed rates – the fair value of the liabilities will fall; • Deposits at variable rates - the interest income credited to the surplus or deficit on the provision of services will rise; • Deposits at fixed rates - the fair value of the assets will fall. Borrowings are not carried at fair value, so normal gains and losses on fixed rate borrowings would not impact on the surplus or deficit on the provision of services of other comprehensive income and expenditure. However, changes in interest payable and receivable on variable rate borrowings and deposits will be posted to the surplus or deficit on the provision of services and affect the General Fund balance. The Council has a number of strategies for managing interest rate risk. The Council’s policy is to aim to keep a maximum of 30% of its borrowings in variable rate loans. During periods of falling interest rates, and where economic circumstances make it favourable, fixed rate loans will be repaid early to limit exposure to losses. The treasury management team has an active strategy for assessing interest rate exposure that feeds into the setting of the annual budget and which is used to update the budget quarterly during the year. This allows any adverse changes to be accommodated. The analysis will also advise whether new borrowing taken out is fixed or variable. According to this assessment strategy, at 31 March 2025, if interest rates had been 1% higher with all other variables held constant, the financial effect would be: Page 370 of 396
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WWW.MIDLOTHIAN.GOV.UK 72 Notes to the Accounts 2023/24 £000 2024/25 £000 Impact on taxpayer and rent payer: 0 Increase in interest payable on variable rate borrowings 0 1,047 Increase in interest receivable on variable rate instruments 485 1,047 Impact on Surplus/Deficit on the Provision of Services Other presentational changes: (28,791) Decrease in fair value of fixed rate borrowing liabilities (no impact on the Surplus/Deficit on the Provision of Services or Other Comprehensive Income and Expenditure) (29,001) The impact of a 1% fall in interest rates would be as above but with the movements being reversed. Price Risk There is no price risk associated with the Council’s available for sale investments specified in Note 19 of the Financial Statements. Foreign Exchange Risk The Council has no financial assets or liabilities denominated in foreign currencies and thus has no exposure to loss arising from movements in exchange rates. 21. Assets Held For Sale 2023/24 £000 Assets Held for Sale 2024/25 £000 1,080 Balance at 1 April 1,690 216 Assets newly qualified as held for sale 0 394 Revaluations and restatements (425) 0 Assets sold (455) 1,690 Balance at 31 March 810 22. Inventories 2023/24 £000 Inventories 2024/25 £000 1,023 Balance at 1 April 972 973 Purchases 1,027 (1,024) Recognised as an expense in the year (1,014) 972 Balance at 31 March 985 23. Debtors 2023/24 £000 Current Debtors 2024/25 £000 7,096 Central Government Bodies 11,909 5,293 Other Public Sector Bodies 2,227 Other entities and individuals (net of impairment for bad debts*): 12,777 • Council Tax and Non-domestic rates 117 3,608 • Rents 3,659 9,340 • Other debtors 5,121 38,114 Total 23,033 Page 371 of 396
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WWW.MIDLOTHIAN.GOV.UK 73 Notes to the Accounts * For impairment, significant individual balances are considered before a collective impairment of all remaining debtors based on their age profile. Impairment is applied to all outstanding debt at the balance sheet date for Council Tax and Non-Domestic Rates of £46.826 million (2023/24 £44.466 million) and Rents of £4.100 million (2023/24 £3.380 million). For sundry debtors, all debts that are over six months past their payment date impairment will be applied of £0.843 million (2023/24 £2.689 million), of which £1.765 million relates to housing benefit overpayments (2023/24 £1,761 million). 24. Cash and Cash Equivalents The balance of cash and cash equivalents is made up of the following elements: 2023/24 £000 Cash and Cash Equivalents 2024/25 £000 441 Cash held by the Council 478 26,793 Short-term Deposits 26,414 271 Bank current accounts (14) 27,505 Total 26,878 25. Creditors 2023/24 £000 Creditors 2024/25 £000 311 Central government bodies 71 2,199 Other public sector bodies 2,592 48,450 Other entities and individuals 50,799 50,960 Total 54,035 26. Provisions Uninsured Losses (1) Total £000 £000 Balance at 1 April 2024 1,294 1,294 New provisions made during the year 760 760 Increase/(decrease) to existing insurance provisions during the year 122 122 Amounts used during the year (1,171) (1,171) Balance at 31 March 2025 1,005 1,005 Notes: 1. This relates to potential uninsured losses arising from insurance claims made against the Council. 27. Grants Received in Advance The Council has received a number of grants and contributions that have yet to be recognised as income as they have conditions attached to them that will require the monies to be returned to the grantor. The balances at year-end are as follows: 2023/24 £000 Grants Received in Advance 2024/25 £000 44,731 Balance at 1 April 40,821 New capital grants received , conditions of use not yet met: 366 Scottish Government Place Based Investment Fund 30 8,327 Section 75 contributions from private developers 11,248 25 Other grants received in advance 0 8,718 Balance at 31 March 11,278 (12,628) Amounts released to CIES, conditions of use met (6,044) 40,821 Balance at 31 March 46,055 Page 372 of 396
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WWW.MIDLOTHIAN.GOV.UK 74 Notes to the Accounts 28. Usable Reserves Movements in the Council’s usable reserves are detailed in the Movement in Reserves Statement. 29. Unusable Reserves 2023/24 2024/25 £000 Unusable Reserves £000 (319,859) Revaluation Reserve (319,151) (5,243) Financial Instruments Revaluation Reserve (5,732) (386,625) Capital Adjustment Account (341,521) 1,310 Financial Instruments Adjustment Account 1,143 7,612 Pensions Reserve 6,433 8,995 Accumulated Absences Account 10,144 (693,810) Total (648,684) Revaluation Reserve The Revaluation Reserve contains the gains made by the Council arising from increases in the value of its Property, Plant and Equipment and Intangible Assets. The balance is reduced when assets with accumulated gains are: • Revalued downwards or impaired and the gains are lost; • Used in the provision of services and the gains are consumed through depreciation; or • Disposed of and the gains are realised. The reserve contains only revaluation gains accumulated since 1st April 2007, the date the reserve was created. Accumulated gains arising before that date are consolidated into the balance on the Capital Adjustment Account. 2023/24 2024/25 £000 Revaluation Reserve £000 (325,527) Balance at 1 April (319,859) (16,939) (Surplus) or deficit on revaluation of non-current assets not posted to the surplus or deficit on the provision of services (22,748) 22,502 Difference between fair value depreciation and historical cost depreciation 23,276 Amounts written off to the Capital Adjustment Account 105 Accumulated (gains)/losses on assets sold or scrapped 180 105 Amount written off to the Capital Adjustment Account 180 (319,859) Balance at 31 March (319,151) Financial Instruments Revaluation Reserve The Financial Instruments Revaluation Reserve contains the gains made(319,151) by the Council arising from increases in the value of its investments that at measured at fair value through other comprehensive income. The balance is reduced when investments with accumulated gains are: • Revalued downwards and the gains are lost; • Disposed of and the gains are realised. 2023/24 2024/25 £000 Financial Instruments Revaluation Reserve £000 (5,408) Balance at 1 April (5,243) 163 (Upward)/Downward Revaluation of Investments (489) (5,243) Balance at 31 March (5,732) Page 373 of 396
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WWW.MIDLOTHIAN.GOV.UK 75 Notes to the Accounts Capital Adjustment Account The Capital Adjustment Account absorbs the timing differences arising from the different arrangements for accounting for the consumption of non-current assets and for financing the acquisition, construction or enhancement of those assets under statutory provisions. The account is debited with the cost of acquisition, construction or subsequent costs such as depreciation, impairment losses and amortisations are charged to the Comprehensive Income and Expenditure Statement. The account is credited with the amounts set aside by the Council as finance for the costs of acquisition, construction and subsequent expenditure. The account contains revaluation gains accumulated on property, plant and equipment before the 1st April 2007, the date that the Revaluation Reserve was created to hold such gains. Note 7 provides further details of transactions posted to the account, apart from those involving the revaluation reserve. 2023/24 2024/25 £000 Capital Adjustment Account £000 £000 (435,891) Balance at 1 April (386,625) 20,463 Opening Balance adjustment – Service concessions 5,526 (415,428) Revised Opening Balance (381,099) Reversal of items relating to capital expenditure debited or credited to the Comprehensive Income and Expenditure Statement (CIES): 27,704 • Charges for depreciation and impairment on non-current assets 26,949 45,580 • Revaluation movements on property, plant and equipment 52,666 124 • Amortisation of intangible assets 50 74 • Revenue expenditure funded from capital under statute 69 179 • Amounts of non-current assets written off on disposal or sale as part of the gain/loss on disposal to the CIES 573 73,661 80,307 (105) Adjusting amounts written out of the Revaluation Reserve (180) 73,556 Net written out amount of the cost of non-current assets consumed in the year 80,127 Capital financing applied in the year: (249) Use of capital receipts to finance new capital expenditure (528) (33,554) Capital grants and contributions credited to the CIES that have been applied to capital financing (28,231) (11,116) Statutory provision for the financing of capital investment charged against the General Fund and HRA balances (14,701) 2,608 Application of Service concessions 2,796 (1,822) Use of Capital Fund reserve to finance Capital Expenditure 528 (44,133) (40,136) (620) Other movements (413) (386,625) Balance at 31 March (341,521) Financial Instruments Adjustment Account The Financial Instruments Adjustment Account absorbs the timing differences arising from the different arrangements for accounting for income and expenses relating to certain financial instruments and for bearing losses or benefiting from gains per statutory provisions. 2023/24 2024/25 £000 Financial Instruments Adjustment Account £000 1,491 Balance at 1 April 1,310 (159) Premiums incurred in the year (155) (22) Amount by which finance costs charged to the CIES are different from finance costs chargeable in year in accordance with statutory requirements (12) 1,310 Balance at 31 March 1,143 Page 374 of 396
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WWW.MIDLOTHIAN.GOV.UK 76 Notes to the Accounts Pensions Reserve The Pension Reserve absorbs the timing differences arising from the different arrangements for accounting for post-employment benefits and for funding benefits in accordance with statutory provisions. The Council accounts for post-employment benefits in the Comprehensive Income and Expenditure Statement (CIES) as the benefits earned by employees accruing years of service, updating the liabilities recognised to reflect inflation, changing assumptions and investment returns on any resources set aside to meet the costs. However, statutory arrangements require benefits earned to be financed as the Council makes employers contributions to pension funds or eventually pays any pensions for which it is directly responsible. The pension reserve mirrors the net pension asset/liability, as detailed in Note 35. 2023/24 2024/25 £000 Pensions Reserve £000 7,800 Balance at 1 April 7,612 (182,768) Re-measurements of the net defined benefit liability/(asset) (189,245) 8,453 Reversal of items relating to net changes for retirement benefits charged to Surplus or Deficit on the Provision of Services in the CIES 11,042 (20,014) Employers’ pension contributions (17,117) 194,141 Restriction Adjustment under IFRIC 14 194,141 7,612 Balance at 31 March 6,433 Accumulated Absences Account The Accumulated Absences Account absorbs the differences that would otherwise arise on the General Fund Balance from accruing for compensated absences earned but not taken in the year, e.g. annual leave entitlement carried forward at 31 March. Statutory arrangements require that the impact on the General Fund Balance is neutralised by transfers to or from the account. 2023/24 2024/25 £000 Accumulated Absences Account £000 £000 8,602 Balance at 1 April 8,995 (8,602) Settlement or cancellation of accrual made at the end of the preceding year (8,995) 8,995 Amounts accrued at the end of the current year 10,144 393 Amount by which officer remuneration charged to the CIES on an accruals basis is different from remuneration chargeable in the year in accordance with statutory requirements 1,149 8,995 Balance at 31 March 10,144 30. External Audit Costs The estimated fee payable by the Council to Audit Scotland in respect of the work conducted for external audit services is £0.295 million (2023/24 £0.290) million). Where further additional work is required, fees will be agreed with management and reported to the Audit Committee. 31. Related Parties The Council is required to disclose material transactions with related parties - bodies or individuals that have the potential to control or influence the Council, or to be controlled or influenced by the Council. Disclosure of these transactions allows readers to assess the extent to which the Council might have been constrained in its ability to operate independently or might have secured the ability to limit another party’s ability to bargain freely with the Council. The Scottish Government The Scottish Government has significant influence over the general operations of the Council – it is responsible for providing the statutory framework within which the Council operates, provides much of its Page 375 of 396
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WWW.MIDLOTHIAN.GOV.UK 77 Notes to the Accounts funding in the form of grants, and prescribes the terms of many of the transactions that the Council has with other parties (such as Council Tax bills and Housing Benefits). Further information is contained with Note 11 Taxation and Non-specific Grant Income and Note 12 Grant Income in the Annual Accounts. Elected Members Elected members of the Council have direct control over the Council’s financial and operating policies. The total of members’ allowances paid in 2024/25 is shown in the Remuneration Report. Members’ Register of Interests can be viewed on the Council’s website. A review of these interests has been conducted. Related party interests for which transactions exist in 2024/25 were declared by nine members: • With voluntary bodies or charitable organisations that received funding totalling an estimated value of £0.216 million; • With businesses or other organisations that have contracted for goods and services with the Council to the estimated value of £0.738 million. In addition to the above many members have relationships or hold positions with other public bodies and voluntary organisations with which the Council does not have a financially material relationship but with which the Council has a financial or influential relationship. Officers There are no related party transactions with officers of the Council. Other Public Bodies The Council has a number of joint working arrangements with other local authorities. In 2024/25 payments of £1.521 million were made to other local authorities and income of £0.710 million was received from other local authorities. Midlothian Integration Joint Board The Council works in partnership with NHS Lothian, providing a range of Health and Social Care services across Midlothian. NHS Lothian transferred £4.903 million of resource transfer funding to the Council in 2024/25 in respect of activities delegated to the Midlothian Integration Joint Board, as well as an additional £4.816 million in relation to Social Care Fund, £1.324 million from the Integrated Care Fund. The funding supports various Adult Social Care services, both purchased and in-house. NHS Lothian employs the Joint Director of Health and Social Care. Midlothian Council is recharged for 50% of the cost of this post. Details are included in the Remuneration Report. The Council delegated resources totalling £69.072 million to the Midlothian Integration Joint Board in 2024/25. These resources were allocated to the Council for the provision of Adult Social Care services. NHS Lothian also delegated financial resources to the Board. The Board provides the strategic direction in relation to the delivery of Health and Adult Social Care Services in Midlothian. The Council provides assistance in kind in terms of Board staff (Chief Officer) and administrative support for the operation of the Board. In addition no charge is made for central support functions provided over and above the resources delegated which relate specifically to Adult Social Care. As at 31 March 2025 the Council held £0.007 million on behalf of the Board. Other Entities Controlled or Significantly Influenced by the Council During the year, the Council entered into material transactions with the Lothian Valuation Board. This amounted to £0.613 million (2023/24 £0.562 million). There was no balance due to or from the Lothian Valuation Board as at 31 March 2025. Page 376 of 396
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WWW.MIDLOTHIAN.GOV.UK 78 Notes to the Accounts Midlothian Energy Limited was set up in 2021/22 as a 50:50 joint venture with Vattenfall Heat UK to generate, distribute and supply energy. The company has been consolidated into the Group Accounts and details of all other entities in which the Council has significant interest are explained in the Group Accounts in Note 39. 32. Capital Expenditure and Capital Financing The total amount of capital expenditure incurred in the year is shown in the table below (including the value of assets acquired under finance leases and PPP contracts), together with the resources that have been used to finance them. 2023/24 2024/25 £000 Capital Expenditure and Capital Financing £000 431,462 Opening Capital Financing Requirement 505,516 20,463 Opening Balance Adjustment – Service concessions 0 451,925 Revised Opening Capital Financing Requirement 505,516 Capital Investment: 20,495 Council Dwellings 12,830 3,3820 Buildings 1,911 0 Land 28 6,253 Vehicles, Plant & Equipment 10,734 138 Community Assets 374 59,977 Assets under Construction 66,331 7,560 Infrastructure Assets 9,279 0 Heritage Assets 1 26 Intangible Assets 395 74 Revenue Expenditure funded by Capital Under Statute 69 2 Public, Private Partnership (PPP) 0 98,345 Total Capital Investment 101,952 Sources of Finance: (60) Capital Receipts (175) 2,608 Application of Service Concessions 2,796 (2,000) Capital Fund Applied 0 (31,494) Government Grants and Other Contributions (28,056) (400) Donated asset (573) (13,408) Loans fund and PPP Finance lease repayments (14,122) 0 Closing Balance Adjustment – IFRS 16 PPP Finance Lease Remeasurement 338 (44,754) Total Sources of Finance (39,792) 53,591 Increase/(decrease) in Capital Financing Requirement 62,160 505,516 Closing Capital Financing Requirement 567,676 The 2023/24 closing capital financing requirement has changed from the figure presented in 2023/24 audited accounts due to a 2023/24 audit adjustment of £0.489 million for a capital accrual against assets under construction not being reflected in this note in the 2023/24 audited accounts. 33. Leases The Council’s lease contracts comprise leases of operational land and buildings, plant and equipment and motor vehicles. Most are individually immaterial, however material leases include: • The lease for Millerhill Food Waste Plant, more detail behind this lease can be found in Note 34. Right-of-use assets This table shows the change in the value of right-of-use assets held under leases by the Council. Page 377 of 396
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WWW.MIDLOTHIAN.GOV.UK 79 Notes to the Accounts 2023/24 £000 Right of Use Assets 2024/25 £000 0 Balance at 1 April 1,859 0 Depreciation (371) 0 Additions 0 0 Reclassification of Assets and other movements 1,267 0 Balance at 31 March 2,755 Transactions under leases The Council incurred the following expenses and cash flows in relation to leases. 2023/24 £000 Lease Transactions 2024/25 £000 Comprehensive income and expenditure statement 0 Interest expense on lease liabilities 118 0 Expense relating to short-term leases 229 0 Expense relating to low value items 335 Cash flow statement 0 Minimum lease payment 418 Maturity analysis of lease liabilities The lease liabilities are due to be settled over the following time bands (measured at the undiscounted amounts of expected cash payments). 2023/24 £000 Maturity Analysis 2024/25 £000 0 Less than one year ( Short-term creditors) 352 0 One to five years (Long-term liabilities) 498 0 More than five years (Long-term liabilities) 884 0 Total Undiscounted Liabilities 1,734 34. Public Private Partnership (PPP) and Similar Contracts The Council has entered into five such contracts: Dalkeith Schools Campus This is a 30-year PPP contract with Dalkeith SPV Ltd for the provision and facilities management of the Campus. When the agreement ends in 2034 the Campus facilities will transfer to the Council with a guaranteed maintenance - free life of five years. The contractor does not have any right of renewal on contract expiry. Termination of contract is either at contract end date or following the issue of a contractor default notice of voluntary termination with one contract months’ notice. Midlothian Schools Ltd This is a PPP contract for the provision and facilities management of Stobhill, Gorebridge, Tynewater, Moorfoot, Loanhead and St Margaret’s, Lawfield and Strathesk Primary Schools. When the agreement ends in 2037 the facilities will transfer to the Council in a usable condition as defined by the contract. The contractor does not have any right of renewal on contract expiry. Termination of contract is either at contract end date or following the issue of a contractor default notice of voluntary termination with six months’ notice. Newbattle Community Campus This is a 25-year Not for Profit Distributing Model (NPDM) contract with hubCo for the provision and lifecycle maintenance of the Campus. The facility opened in the financial year 2018/19 on 25th May 2018. Page 378 of 396
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WWW.MIDLOTHIAN.GOV.UK 80 Notes to the Accounts When the agreement ends in 2043 the facilities will transfer to the Council in a useable condition as defined by the contract. The contractor does not have any right of renewal on contract expiry. Termination of contract is either at contract end date or following the issue of a contractor default notice of voluntary termination with variable notice periods as defined in the contract. Food Waste Treatment Plant, Millerhill This is a 20- year Design, Build, Finance and Maintain (DBFM) contract which was jointly procured between Midlothian and the City of Edinburgh Council. At the end of the concession period in 2036 the asset will not revert back to the partner Councils and will remain under the full control of the DBFO operator, who has the option to continue to operate the asset from year 20 through to year 40, paying the market rent for the lease of the land over this period. At the end of the 40th year, the asset will be decommissioned and the decommissioned site transferred back to the ownership of the Councils. Termination of contract is either at contract end date or following the issue of a contractor default notice or voluntary termination with 40 days’ notice. As this is a non-service concession contract the liability for the contract is included within Note 33 Leases. Residual Waste Treatment Plant, Millerhill This is a 25- year DBFM contract which was jointly procured between Midlothian and the City of Edinburgh Council. At 1 April 2020, the contract was in the commissioning phase, with full service commencement achieved on 17 April 2019. The asset will be fully maintained throughout the life of the contract in accordance with the Partner Council’s requirements and will be inspected 18 months prior to the end of the contract (contract end date 6 May 2044) to ensure that it has been maintained. The asset will then be handed back to the Partner Councils in a condition that is commensurate with such maintenance. The contractor does not have any right of renewal on contract expiry. Termination of contract is either at contract end date or following the issue of a contractor default notice, the issue of a Partner Council Default notice, or voluntary termination by the Partner Councils with variable notice periods as defined in the contract. Property, Plant and Equipment The assets used to provide the services at the Dalkeith Schools Community Campus, the Primary Schools, the Newbattle Community Campus and the Millerhill Residual Waste Plant are recognised in the Council’s Balance Sheet under the Property, Plant and Equipment category in Note 14. Payments The council makes an agreed payment each year that is increased annually by inflation and can be reduced if the contractor fails to meet availability and performance standards in any year but which is otherwise fixed. There is also a donated asset account associated with the financing of the Millerhill Residual Waste asset. The recognition of donated asset income is on a flat line basis over the 25 years of the contract. Payments remaining to be made under these contracts at 31 March 2025 are as follows: Liability Interest Service Charge Total Dalkeith Schools Campus £000 £000 £000 £000 Within 1 Year 1,333 1,720 2,432 5,485 Within 2 to 5 Years 6,836 5,371 9,727 21,934 Within 6 to 10 Years 8,587 2,119 8,591 19,297 Total Remaining Contract 16,756 9,210 20,750 46,716 Page 379 of 396
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WWW.MIDLOTHIAN.GOV.UK 81 Notes to the Accounts Liability Interest Service Charge Total Midlothian Primary Schools £000 £000 £000 £000 Within 1 Year 1,230 1,737 2,759 5,726 Within 2 to 5 Years 5,891 5,984 11,742 23,617 Within 6 to 10 Years 10,126 4,718 16,406 31,250 Within 11 to 15 Years 6,836 881 9,057 16,774 Total Remaining Contract 24,083 13,320 39,964 77,367 Liability Interest Service Charge Total Newbattle Community Campus £000 £000 £000 £000 Within 1 Year 984 1,426 166 2,576 Within 2 to 5 Years 4,461 5,179 707 10,347 Within 6 to 10 Years 6,968 5,081 988 13,037 Within 11 to 15 Years 8,918 3,132 1,118 13,168 Within 16 to 20 Years 7,290 725 779 8,794 Total Remaining Contract 28,621 15,543 3,758 47,922 Donated Asset Liability Interest Service Charge Total Millerhill Residual Waste £000 £000 £000 £000 £000 Within 1 Year 573 55 914 1,342 2,884 Within 2 to 5 Years 2,292 204 3,559 5,786 11,841 Within 6 to 10 Years 2,867 638 4,110 7,937 15,552 Within 11 to 15 Years 2,867 1,443 3,204 8,972 16,486 Within 16 to 20 Years 2,867 2,524 1,201 8,217 14,809 Total Remaining Contract 11,466 4,864 12,988 32,254 61,572 Although the payments made to the contractor are described as unitary payments, they have been calculated to compensate the contractor for the fair value of the services they provide, the capital expenditure incurred and interest payable while the capital expenditure remains to be reimbursed. The liability outstanding to be paid to the contractors for capital expenditure incurred is as follows: 2023/24 2024/25 Liability Donated Asset Total Liability Donated Asset Total £000 £000 £000 Liabilities £000 £000 £000 79,819 12,613 92,432 Balance Outstanding at 1 April 76,699 12,039 88,738 (3,120) 0 (3,120) Payments during the year (3,602) 0 (3,602) 0 (574) (574) Other Movements 1,227 (573) 654 76,699 12,039 88,738 Balance at 31 March 74,324 11,466 85,790 2023/24 £000 Included in the Balance Sheet 2024/25 £000 3,920 Current (Short-term Creditors) 4,175 84,818 Non-Current (Other Long-term Liability) 81,615 88,738 Balance at 31 March 85,790 Page 380 of 396
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WWW.MIDLOTHIAN.GOV.UK 82 Notes to the Accounts Service Concession Arrangements (SCA’s) Midlothian Council has adopted the revised accounting arrangements under Local Government Finance Circular 10/2022 – Finance Leases and Service Concession Arrangements. The current repayment charges for each SCA have been compared against an annuity repayment profile based on the estimated useful asset lives. The calculation of the repayment charges of each SCAs or Public Private Partnership (PPP) scheme using the asset life annuity basis is compared to the current charges which are made over the contract period and summarised as follows: Year Current Repayment £000 Revised Repayment £000 Total (reduction)/Cost £000 NPV £000 Pre 2023/24 23,783 3,320 (20,463) (20,463) 2023/24 3,120 512 (2,608) (2,520) Yrs 2 to 5 14,973 2,486 (12,487) (11,045) Yrs 6 to 10 26,182 4,441 (21,741) (16,443) Yrs 11 to 25 35,541 30,466 (5,075) (5,387) Yrs 26 to 40 0 43,663 43,663 14,375 Yrs 41+ 0 18,711 18,711 4,250 Total Saving 103,599 103,599 0 (37,233) The total cumulative statutory adjustment up to the 31st March 2023 which would result from changing the calculation of the repayment of debt liability on the four SCAs using a 60-year, 50-year and a 26-year annuity period respectively is £20.463m. This is a one off in year reduction, compared to the current schedule of repayments. In the financial years up to the expiry date of each contract date(s) there would be further reductions. In the remaining years following the end of the SCAs, the rescheduled debt repayments continue until the debt liability has been extinguished. Over the full life of the SCAs the total repayment for the debt liability remains the same. However, when a Net Present Value (NPV) is applied the reprofiled charges would result in a total reduction in NPV terms of £37.233m. 35. Pension Schemes Accounted for as Defined Benefit Contribution Schemes Teachers employed by the Council are members of this Scottish Teachers Superannuation scheme, administered by the Scottish Government. The Scheme provides teachers with specified benefits upon their retirement, and the Council contributes towards the costs by making contributions based on a percentage of members’ pensionable salaries. The scheme is technically a defined benefit scheme. However, the scheme is unfunded and the Scottish Government uses a notional fund as the basis for calculating the employers’ contribution rate by local authorities. The Council is not able to identify its share of underlying financial position and performance of the scheme with sufficient reliability for accounting purposes. For the purposes of this Statement of Accounts, it is therefore accounted for on the same basis as a defined contribution scheme. In 2024/25 the Council paid £15.202 million (2023/24 £12.439 million) to the Scottish Government in respect of teachers’ pension costs. The rate of contribution was 26% for 2024/25 (2023/24 23%). The Council is responsible for the costs of any additional benefits awarded upon early retirement outside the terms of the teachers’ scheme. These costs are accounted for on defined benefit basis (detailed in note 35). The Council is not liable to the scheme for any other entities’ obligations under the plan. Page 381 of 396
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WWW.MIDLOTHIAN.GOV.UK 83 Notes to the Accounts 36. Defined Benefit Pension Schemes As part of the terms and conditions of employment and its officers, the Council makes contributions towards the cost of post-employment benefits. Although these benefits will not actually be payable until employees retire, the Council has a commitment to make the payments (for those benefits) and to disclose at the time that employees earn their future entitlement. The Council participates in the Local Government Pension (Scotland) Scheme. Employees other than teachers are eligible to join this scheme. The scheme is administered by City of Edinburgh Council through Lothian Pension Fund. This is a funded defined benefit final salary scheme, meaning the Council and employees pay contributions into a fund, calculated at a level intended to balance the pension’s liabilities with the investment assets. The principal risks to the Council of the scheme are the longevity assumptions, statutory changes to the scheme, and structural changes to the scheme (i.e. large-scale withdrawals from the scheme), changes to inflation, bond yields and the performance of equity investments held by the scheme. These are mitigated to a certain extent by the statutory requirements to charge the General Fund and Housing Revenue Account the amounts required by statute as described in the accounting policies note. Transactions Relating to Post-Employment Benefits The cost of retirement benefits in the reported cost of services is recognised when they are earned by employees, rather than when the benefits are eventually paid as pensions. However, the charge that is required to be made against council tax is based on cash payable in the year, so the real cost of post- employment/retirement benefits is reversed out of the General Fund and Housing Revenue Account via the Movement in Reserves Statement. The following transactions have been made in the Comprehensive Income and Expenditure Statement and the General Fund balance via the Movement in Reserves Statement during the year. 2023/24 2024/25 £000 Comprehensive Income and Expenditure Statement (CIES) £000 Cost of services: Service Cost Comprising: 17,484 • Current service cost 19,766 0 • Past service cost (including curtailments) 156 Financing and Investment Income and Expenditure: (9,031) • Net interest (income)/expense (8,880) 8,453 Total Post-employment Benefit Charged to the Surplus or Deficit on the Provision of Services 11,042 Other Post Employment Benefit charged to the Other Comprehensive Income & Expenditure Statement: Re-measurement of the Net Defined Benefit Asset Comprising: (9,603) • Return on plan assets 15,001 (19,560) • Actuarial (gains)/losses arising on changes in financial assumptions (89,635) (11,007) • Actuarial (gains)/losses arising on changes in demographic assumptions (911) (2,122) • Actuarial (gains)/losses arising on changes in the effect of limiting a net defined benefit asset to the asset ceiling 86,235 53,665 • Other re-measurement experiences (5,794) 11,373 Total post-employment benefits charged to the Other Comprehensive Income & Expenditure Statement 4,896 19,826 Total post-employment benefits charged to the CIES 15,938 2023/24 £000 Movement in Reserves Statement 2024/25 £000 (8,453) Reversal of net charges made to the surplus or deficit for the provision of services for post-employment benefits in accordance with the code (11,042) 20,014 Employers Contributions payable to the scheme 17,117 11,561 Total Charged to the Movement in Reserves 6,075 Page 382 of 396
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WWW.MIDLOTHIAN.GOV.UK 84 Notes to the Accounts Pension Assets and Liabilities Recognised in the Balance Sheet Net Asset Restriction The actuary has calculated the Council’s IAS 19 defined benefit surplus for 2024/25 to be £273.943 million (2023/24 £186.529 million) as detailed in the tables below. IAS 19 states that when an entity has a surplus in the defined benefit plan it should measure the net defined benefit of the asset as the lower of: • The surplus in the defined benefit plan, and • The asset ceiling has been calculated by the actuary as the present value of any economic benefits available. Reductions in future contributions to the plan was used as the basis to determine the amount of the economic benefit as Midlothian Council has no unconditional right to a refund from the Fund and therefore there is no economic benefit available as a refund. For IFRIC 14 purposes, the actuary has calculated the net present value of the future contributions of £913.931 million exceeds the value of the future service costs of £658.215 million, a negative contribution of £255.716 million. As a result of this calculation IFRIC 14 advises that no defined benefit plan asset should be recognised in the Council’s Balance Sheet and there is no requirement to recognise the difference as a liability, however, is required to reflect the liability in relation to present value of unfunded obligations of £6.433 million. The amount included in the Balance Sheet arising from the Council’s obligation in respect of its defined benefit plans is as follows: 2023/24 2024/25 £000 Pensions Assets and Liabilities Recognised in the Balance Sheet £000 (550,295) Present value of the defined benefit obligation (486,187) 736,824 Fair value of Plan Assets 760,130 186,529 Net (liability)/asset arising from defined benefit obligation 273,943 (194,141) Restriction Adjustment under IFRIC 14 (280,376) (7,612) Revised Net (liability)/asset arising from defined benefit obligation (6,433) 2023/24 £000 Reconciliation of the present value of the scheme liabilities (defined benefit obligation) 2024/25 £000 510,236 Opening Balance at 1 April 550,295 17,484 Current service cost 19,766 24,316 Interest Cost 26,531 5,105 Contributions by Scheme Participants 5,419 Re-measurement (gains)/losses (19,560) • Changes in financial assumptions (89,635) (11,007) • Changes in demographic assumptions (911) 45,063 • Other (5,794) 0 Past service cost (including curtailments) 156 (751) Estimated Unfunded Benefits Paid (751) (20,591) Estimated Benefits Paid (18,889) 550,295 Closing Balance at 31 March 486,187 Page 383 of 396
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WWW.MIDLOTHIAN.GOV.UK 85 Notes to the Accounts 2023/24 2024/25 £000 Reconciliation of the movements in the fair value of scheme assets £000 698,699 Opening fair value of scheme assets 736,824 33,347 Interest Income 35,411 Re-measurement gains/(losses): 9,603 • Return on assets excluding amounts included in net interest (15,001) (8,602) • Other 0 19,263 Contributions from Employer 16,366 5,105 Contributions from employees into the scheme 5,419 (20,591) Benefits Paid (18,889) 751 Contributions in respect of Unfunded Benefits 751 (751) Unfunded Benefits Paid (751) 736,824 Closing Balance at 31 March 760,130 Local Government legislation provides that Local Authorities have an obligation to meet their share of the expenditure of the Joint Boards of which they are constituent members. At 31 March 2025, the liability for Pensions sits at £1.275 million (2023/24 £1.082 million). As a consequence the Council has additional assets arising from the pension surplus of the Lothian Valuation Joint Board. Basis for Estimating Assets and Liabilities Recognised Liabilities have been assessed on an actuarial basis using the projected unit credit method, an estimate of the pensions that will be payable in future years are dependent on assumptions about mortality rates, salary levels etc. The Local Government Pension Scheme liabilities have been estimated by Hymans Robertson LLP, an independent firm of actuaries and estimates for the pension fund are based on the latest full valuation of the scheme as at 31 March 2025. The significant assumptions used by the actuary have been: 2023/24 Mortality Assumptions 2024/25 Longevity at 65 for Current Pensioners: 20.1 - Men (Years) 20 23 - Women (Years) 23 Longevity at 65 for Future Pensioners: 20.9 - Men (Years) 20.8 24.6 - Women (Years) 24.5 Financial Assumptions 2.8% Rate of Inflation/increase in pensions 2.8% 3.5% Rate of increase in salaries 3.5% 4.8% Rate for discounting scheme liabilities 5.8% 6.1% Actual Rate of Investment Returns 2.8% The estimation of the defined benefit obligations is sensitive to the actuarial assumptions set out in the table above. The sensitivity analysis below have been determined based on possible changes of the assumptions occurring at the end of the reporting period and assumes for each change that the assumption analysed changes while all the other assumptions remain constant. The estimations in the sensitivity analysis have followed the accounting policies for the scheme, i.e. on an actuarial basis using the projected unit credit method. The methods and types of assumptions used in preparing the sensitivity analysis below did not change from those used in the previous period. Page 384 of 396
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WWW.MIDLOTHIAN.GOV.UK 86 Notes to the Accounts Pension Sensitivities at 31 March 25 Approximate % increase to the Employer Obligation Approximate monetary amount £000 0.1% decrease Real Discount Rate 2% 8,454 1 year increase in member life expectancy 4% 19,447 0.1% increase in the Salary Increase Rate 0% 494 0.1 % increase in the Pension Increase Rate (CPI) 2% 8,188 Local Government Pension Schemes Comprised 2023/24 2023/24 Fair Value of Scheme Assets Percentage of Total Assets Quoted prices in active markets Quoted prices not in active markets Total Fair Value of Scheme Assets Percentage of Total Assets £000 Pension Fund Assets £000 £000 £000 27,363 4% Cash and Cash Equivalents 26,070 0 26,070 3% Equity Instruments: 87,027 12% Consumer 96,319 0 96,319 13% 101,191 14% Manufacturing 91,509 0 91,509 12% 40,028 5% Energy and Utilities 42,516 0 42,516 6% 43,382 6% Financial Institutions 42,441 0 42,441 6% 47,614 6% Health and Care 48,054 0 48,054 6% 36,530 5% Information Technology 23,498 17 23,515 3% 45,196 6% Other 51,223 0 51,223 7% 400,968 54% Sub-total Equity 395,560 17 395,577 53% Bonds: 11,893 2% Corporate 0 0 0 0% 99,052 13% Government 132,552 0 132,552 17% 12,757 2% Other 12,478 0 12,478 2% 123,702 17% Sub-total bonds 145,030 0 145,030 19% Property: 37,652 5% UK 0 28,588 28,588 4% 2,501 0% Overseas 0 0 0 0% 40,153 5% Sub-total Property 0 28,588 28,588 4% Investment Trusts and Unit Trusts: 0 0% Equities 1,322 0 1,322 0% 8,165 1% Commodities 0 0 0 0% 18,742 3% Bonds 11,085 13,005 24,090 3% 111,081 15% Infrastructure 0 2,944 2,944 0% 0 0% Other 6,300 0 6300 1% 137,988 19% Sub-total Trusts 18,707 15,949 34,656 4% 6,767 1% Private Equity (all) 1,168 128,895 130,063 17% (117) 0% Derivatives: Forward Foreign Exchange Contracts 146 0 146 0% 736,824 100% Total Assets 586,681 173,449 760,130 100% Impact on Council Cash Flows The objectives of the scheme are to keep employers’ contributions at as constant a rate as possible. The fund has agreed a strategy with the scheme’s actuary to achieve a funding level of 100% of the overall liabilities of the fund in the longer term. Funding levels are monitored on an annual basis. The next triennial valuation will be performed at 31 March 2026, with results being published by 31 March 2027 and will impact contribution rates from 1 April 2027. The Council anticipates to pay £16.256 million in contributions to the scheme to 31 March 2026. The weighted average duration of the defined benefit obligation scheme members is 17 years for 2024/25 (17 years 2023/24). Page 385 of 396
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WWW.MIDLOTHIAN.GOV.UK 87 Notes to the Accounts 37. Contingent Liabilities The assimilation of the stand-alone Lothian Buses Pension Fund into the general Lothian Pension Fund required all four Council shareholders in Lothian Buses Limited to enter into a deed of guarantee and function as guarantors for Lothian Buses Limited contributions to the general fund. Previously, whilst there was no formal guarantee in place for the stand alone Lothian Buses Fund, in the event of a default then the City of Edinburgh Council (as administering authority) would have looked to the four Council shareholders to make good any liability. 38. Trusts and Bequests There are some 15 active trusts, bequest and community funds of varying size managed by the Council, each of which has specific objectives and conditions. None of the funds are currently registered charities. The main funds are: 2023/24 £000 Trusts, Bequests, Common Good and Community Funds 2024/25 £000 8 Dalkeith Common Good Fund 8 2 Penicuik Common Good Fund 2 52 Community Mining Funds 55 108 Other Funds 115 170 Total 180 A total £0.115 million (2022/23 £0.108 million) has been committed to be spent from these funds. The funds do not represent assets of the Council and are included in the Balance Sheet as creditors except the Community Mining Funds that are held in separate bank accounts. 39. Notes to the Group Accounts The Code of Practice on Local Council Accounting in the United Kingdom 2024/25 (The Code) applies to Local Authorities or similar bodies defined in section 106 of the Local Government (Scotland) Act 1973 e.g. statutory bodies such as Integration Joint Boards and Valuation Boards. Authorities are required to prepare a full set of group accounts in addition to their own Council’s accounts where they have a material interest in such entities. The Group Accounts of Midlothian Council are prepared in accordance with the accounting policies of the Council with the additions and exceptions shown below. The Group Accounts consolidate the results of the Council with other entities. These organisations are entirely independent of the Council under law and for taxation. Valuation of Property, Plant and Equipment The basis of valuation across the combining entities is in accordance with the Code and there are no material inconsistencies with the policies adopted by Midlothian Council. The Integration Joint Board has no Property, Plant or Equipment. Depreciation The basis of valuation across the combining entities is in accordance with the Code and there are no material inconsistences with the policies adopted by Midlothian Council. Goodwill The Council has acquired its share of the net assets of its associates for nil consideration and no goodwill has been included in the Group Balance Sheet. Basis of Consolidation Subsidiaries are consolidated on a line-by-line basis. All other entities are accounted for under the accounting conventions of the “acquisition basis” using the equity method – the Council’s share of the Page 386 of 396
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WWW.MIDLOTHIAN.GOV.UK 88 Notes to the Accounts entities results and its share of other gains and losses (recognised in the Group CIES). With the exception of Midlothian Energy Ltd, whose reporting date is 31 December, all entities have the same reporting date as the Council. Restrictions of the Transfer of Funds The Council’s share of the reserves of its associate and joint ventures is unusable i.e. it cannot be used to fund the Council’s services to reduce taxation. Further details for each entity are as follows: Entity Percentage Share in Entity Share of Assets £000 Share of Liabilities £000 Net Share of Assets £000 Share of Revenues £000 Share of (Profit)/Loss £000 Subsidiaries: Trusts, Bequests, Common Good and Community Funds 100 180 (180) 0 (10) (10) Pacific Shelf 826 Ltd* 100 0 0 0 0 (58) 180 (180) 0 (10) (68) Associates: Lothian Valuation Joint Board 9 341 (353) (12) (1,758) (1) Joint Ventures: Midlothian Integration Joint Board 50 474 0 474 (102,045) (75) Midlothian Energy Ltd 50 16,338 (7,689) 8,649 174 174 Total Joint Ventures & Associates 17,153 (8,042) 9,111 (103,629) 98 Total for Group 17,333 (8,222) 9,111 (103,639) 30 *Pacific shelf was dissolved during 2024/25 The information above agrees to the group accounts after the elimination of inter-company transactions. Combining Entities The following table provided further details about the entities incorporated into the Council’s Group Accounts: Group Entities Nature of Body Accounts Available From Subsidiaries: Trusts, Bequests, Common Good and Community Funds To award grants across Midlothian. Midlothian Council, Midlothian House, Buccleuch Street, Dalkeith Associates: Lothian Joint Valuation Board Maintains the electoral, council tax and non-domestic rates registers for the Edinburgh, Midlothian, West Lothian and East Lothian Councils. The Treasurer, Lothian Joint Valuation Board, Edinburgh Council, Waverly Court, Edinburgh Joint Ventures: Midlothian Integration Joint Board Its purpose is to improve the well-being of families, our communities and of people who use health and social care services. The Integration Scheme determines when the Council will have shared responsibility for additional funding with NHS Lothian and is linked to demographic shifts and demand volumes linked to service delivery. Midlothian Council, Midlothian House, Buccleuch Street, Dalkeith Midlothian Energy Limited Energy generation, distribution and supply. Midlothian Council, Midlothian House, Buccleuch Street, Dalkeith Non-material Interests in Other Entities In addition to the organisations outlined above, the Council also has an interest in Seemis Group LLP who provide Scottish Local Authorities with an Education Management System. Midlothian have a 1.90% interest in Seemis. Page 387 of 396
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WWW.MIDLOTHIAN.GOV.UK 89 Supplementary Statements Supplementary Statements Housing Revenue Account The HRA Income and Expenditure Statement shows the economic cost in the year of providing housing services in accordance with generally accepted accounting practices, rather than the amount to be funded from rents and government grants. The Council charge rents to cover expenditure in accordance with the legislative framework; this may be different from the accounting cost. The increase or decrease in the year, on the basis which rents are raised, is shown in the movement on the Housing Revenue Account Statement. 2023/24 2024/25 £000 HRA Income and Expenditure Statement £000 £000 Expenditure: 8,739 Repairs and Maintenance 12,062 5,427 Supervision and Management 5,259 55,608 Depreciation, impairment and revaluation non-current assets 63,310 670 Movement in the allowance for bad debtors 720 0 Void rent and council tax* 1,432 2,396 Other Expenditure 2,384 72,840 Total Expenditure 85,167 Income: (31,372) Dwelling Rents (35,575) (342) Non-dwelling Rents (704) (155) Service Charge Income (159) (91) Other Income (69) (31,960) Total Income (36,507) 40,880 Net Expenditure or (Income) of HRA services as included in the Comprehensive Income and Expenditure Statement 48,660 332 HRA Share of Corporate and Democratic Core 348 41,212 Net (Income)/expenditure for HRA Services 49,008 HRA share of the operating income and expenditure included in the whole authority Comprehensive Income and Expenditure Statement: 0 (Gain) or Loss on sale of HRA non-current assets 455 8,588 Interest payable and similar charges 10,398 (1,534) Interest and investment income (1,853) (55) Net interest on the net defined liability benefit liability (asset) (50) 6,999 8,950 48,211 (Surplus)/Deficit for the year on HRA Services 57,958 *Netted off against rent in 2023/24 Movement in the Housing Revenue Account 2023/24 2024/25 £000 Movement on the HRA Statement £000 £000 (32,143) Balance on the HRA at the end of the previous reporting period (33,182) 48,211 (Surplus) or deficit for the year on the HRA Income and Expenditure Statement 57,958 Adjustments between accounting basis and funding basis under statute: (55,608) Depreciation, impairment and revaluation non-current assets (63,309) 0 Gain or (Loss) on sale of HRA non-current assets (455) 4,221 Loans Fund Principal 7,047 66 Net charges made for retirement benefits in accordance with IAS 19 31 (51,321) Total Adjustments between accounting basis and funding basis under statute (56,686) 2,071 Transfer to General Fund Reserve 0 (1,039) (Increase) or Decrease in year on the HRA 1,272 (33,182) Balance on the HRA at the end of the current reporting period (31,910) Page 388 of 396
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WWW.MIDLOTHIAN.GOV.UK 90 Supplementary Statements Notes to the Housing Revenue Account Housing Stock The number of council dwellings for the year can be analysed as follows: 2023/24 Housing Stock 2024/25 1,083 1 Bedroom 1,132 4,128 2 Bedroom 4,149 1,975 3 Bedroom 2,006 332 4 Bedroom 336 11 5/6 Bedroom 11 7,529 Total Housing Stock at 31 March 7,634 This represents an increase in the year of 105 units (2023/24 258), which is represented in the table below: 2023/24 Increase/(decrease) in Housing Stock 2024/25 233 New Build Completions 100 27 Open Market Purchases 7 (2) Re-purposed units for temporary accommodation (2) 0 Demolition/Disposal 0 258 Net increase in Housing Stock at 31 March 105 Other Information 2023/24 2024/25 £000 Other Information* £000 6,979 Total Rent Arrears 7,755 3,380 Bad Debt Provision 4,100 *void rent now shown as an expense within the main HRA Income and Expenditure Statement. Page 389 of 396
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WWW.MIDLOTHIAN.GOV.UK 91 Supplementary Statements Council Tax Income Account The Council Tax Income Account (Scotland) shows the gross income raised from Council Taxes levied and deductions made under statute. The resultant net income is transferred to the Comprehensive Income and Expenditure Statement of the Council. Local Authorities raise taxes from its residents through Council Tax, which is based on property values. Each dwelling in a local Council area is placed into one of eight valuation bands, A to H. The Council declares a tax for Band D properties and all other properties are charged a proportion of this, lower valued properties (Bands A to C) pay less; higher valued properties (Bands D to F) pay more. 2023/24 2024/25 £000 Council Tax Income Account £000 72,406 Gross Council Tax levied and Contributions in Lieu 73,857 Less: (5,671) Council Tax Reduction Scheme (5,876) (6,942) Other Discounts and Reductions (7,219) (2,443) Write-off of Uncollectable Debts and Allowances for impairment (2,487) (44) Prior year adjustments 19 57,306 Net Council Tax Income transferred to General Fund 58,294 Midlothian Council Tax Charge and Properties by Band 2023/24 2023/24 2024/25 2024/25 Property Numbers £ per Property Band Property Numbers £ per Property 1 842 A - Disabled 1 842 603 1,010 A 598 1,010 8,532 1,178 B 8,516 1,178 8,741 1,346 C 8,699 1,346 5,231 1,515 D 5,253 1,515 5,056 1,990 E 5,135 1,990 4,397 2,461 F 4,498 2,461 2,896 2,966 G 3,009 2,966 178 3,711 H 180 3,711 35,635 35,889 Page 390 of 396
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WWW.MIDLOTHIAN.GOV.UK 92 Supplementary Statements Calculation of Council Tax Base (shown as numbers of properties) 2024/25 A (Disabled) A B C D E F G H Total No of Properties Number of Properties 0 988 12,834 11,352 6,108 5,804 4,801 3,159 189 45,235 Properties subject to Empty Homes Premium 0 5 57 58 34 24 17 17 4 216 Properties subject to Disabled Relief 2 36 43 (49) 12 5 (12) (34) (3) 0 Less: Exempt Properties 0 68 506 296 109 195 71 29 6 1,280 Properties Entitled to 25% Discounts 0 147 1,497 989 472 342 167 82 4 3,700 Properties Entitled to 50% Discounts 0 0 4 5 3 3 2 2 0 19 Properties Entitled to Other Discounts 0 7 20 15 5 3 7 3 1 61 Reduction in Tax Base due to Council Tax Reduction 1 209 2,391 1,357 312 155 60 17 0 4,502 Total Equivalent Properties 1 598 8,516 8,699 5,253 5,135 4,499 3,009 179 35,889 Ratio to Band D 0.56 0.67 0.78 0.89 1 1.31 1.63 1.96 2.45 Band D Equivalent Properties 0 399 6,624 7,732 5,253 6,746 7,310 5,893 440 40,397 Contributions in Lieu - Band D Equivalents 230 Sub-total 40,627 Less Bad Debt Provision at 3.75% (1,642) Total Council Tax Base 38,985 2023/24 A (Disabled) A B C D E F G H Total No of Properties Band D Equivalent Properties 0 402 6,636 7,770 5,231 6,643 7,145 5,671 437 39,935 Contributions in Lieu - Band D Equivalents 199 Sub-total 40,134 Less Bad Debt Provision at 3.75% (1,613) Total Council Tax Base 38,521 Page 391 of 396
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WWW.MIDLOTHIAN.GOV.UK 93 Supplementary Statements Non-domestic Rate Account The Non-domestic Rate Account (Scotland) is a statement that reflects the statutory obligation for billing authorities to maintain a separate non-domestic rate account. The statement shows the gross income from the rates and deductions made under statute. The net income is paid to the Scottish Government as a contribution to the national non-domestic rate pool. 2023/24 2024/25 £000 Non-Domestic Rate Income Account £000 47,637 Gross Council Tax levied and Contributions in Lieu 49,794 Less: (10,790) Reliefs and other deductions (10,398) (938) Write-off of Uncollectable Debts and Allowances for impairment (1,066) 35,909 Net Non-Domestic Rates Income 38,330 (711) Prior year adjustments (2,260) 0 Non-domestic rates income retained by the council (BRIS) 0 35,198 Contribution to Non-Domestic Rate Pool 36,070 Allocated: 35,954 Contribution to non-domestic rate pool 36,212 (756) Council Rate Income - non-pool (142) 35,198 36,070 35,215 Amount distributed to Midlothian Council from non-domestic rate pool 34,944 The Business Rate Incentivisation Scheme (BRIS) permits the Council to retain 50 percent share of the Non-domestic rates income, which exceeds the income target set by Scottish Government. Net Rateable Value Calculation Occupiers of non-domestic property pay rate based on the valuation of the property within the valuation roll for Midlothian. The NNDR poundage is determined by the Scottish Government and was 49.8p (2023/24 49.8p) per £, where the rateable value was less than £51,000 (2023/24 £51,000), 54.5p where the rateable value is between £51,000 and £100,000 (2023/24 51.1p between £51,000 and £100,000,) and 55.9p per £ where the rateable value exceeded £100,000 (2023/24 52.4p greater than £100,000). 2023/24 2023/24 2024/25 2024/25 Numbers £000 Analysis of Rateable Values and Number of Premises Numbers £000 1,831 49,831 Shops, Offices and Other Commercial Subjects 1,836 49,835 973 19,913 Industrial and Freight Transport 960 19,560 304 23,379 Miscellaneous (Schools, etc.) 302 23,320 3,108 93,123 Total 3,098 92,715 Page 392 of 396
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WWW.MIDLOTHIAN.GOV.UK 94 Glossary of Terms Glossary of Terms While much of the terminology used in this report is intended to be self-explanatory, the following additional definitions and interpretation of terms may be of assistance. Actuarial Gains and Losses (Pension) For a defined benefit scheme, the changes in actuarial deficits or surpluses that arise because events have not coincided with the actuarial assumptions made for the last valuation (experience gains and losses) or the actuarial assumptions have changed. Amortisation Amortisation is the cost of reducing the value of an intangible asset over its useful economic life. A charge is made against services for the value of the assets they have used during the year. Assets An asset is any item that has value including cash, investments, properties, vehicles, etc. Assets are classified as current, which will be consumed within the current year, or non-current, which will be used to provide services over more than one year. Associate An entity other than a subsidiary or joint venture in which the reporting Council has a participating interest and over whose operating and financial policies, the reporting Council is able to exercise significant influence. Capital Expenditure This is expenditure incurred in creating, acquiring or improving assets where the expenditure is normally financed by borrowing with repayment over a period of years, or by using the income from the sale of existing assets. Capital Financed from Current Revenue This heading covers the costs of creating, acquiring or improving assets where the expenditure is charged directly to the Revenue Account. Corporate and Democratic Core Corporate and Democratic Core costs include the costs of policymaking and all other Councillor based activities together with costs that relate to the general running of the Council. The Best Value Accounting Code of Practice stipulates that such costs are to be excluded from the “total cost” relating to service activity. Community Assets Long-term assets that have no determinable useful economic life and are held in perpetuity by the Council, including parks and open spaces. Creditors Creditors are a kind of liability. They represent payments owed by the Council to another person or organisation for past events. Debtors Debtors are a kind of asset. They represent payments owed to the Council by another person or organisation for past events. Page 393 of 396
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WWW.MIDLOTHIAN.GOV.UK 95 Glossary of Terms Defined Benefit Pension Scheme A Defined Benefit Pension Scheme is a scheme where the benefits due to participants are predetermined based on earnings, length of service and age and are not directly dependant on the contributions paid or investment returns realised. Depreciation Depreciation is the measure of the cost of wearing out, consuming or reducing the useful life of the Council’s assets. A charge is made against services for the value of the assets they have used during the year. Entity A body corporate, partnership, trust, unincorporated association, or statutory body that is delivering a service, or carrying on a trade or business, with or without a view to profit. It should have a separate legal personality and is legally required to prepare its own single-entity accounts. Fair Value The fair value of an asset or liability is the price at which it could be exchanged or settled in an arm’s length transaction between two willing, knowledgeable parties. Financial Instrument A financial instrument is any contract, which gives rise to a financial asset or liability or an equity instrument in another entity, this includes cash, debtors, creditors, loans, borrowings and shares in other companies. Infrastructure Assets Non-current assets that cannot be transferred or sold, including roads, bridges and footpaths. Inventories Inventories are raw materials or goods which have been purchased but which have not yet been consumed in the delivery of Council services. Liabilities A liability represents a payment owed to another person or organisation including loans, outstanding invoices, provisions, contributions owed to third parties, etc. Short-term liabilities are due to be paid within the current year. Long-term liabilities are amounts that will not be paid until a later year. Non-Distributable Costs Non Distributable Costs represent costs that cannot be allocated to specific services and again, under the Best Value Accounting Code of Practice, are excluded from the total cost relating to service activity. Examples of Non Distributable Costs are charges for added pension years and early retirement. Other Costs This heading covers items of expenditure that cannot be accommodated in any of the other categories. Provisions A provision is a kind of liability. Where a payment for a liability is certain or highly likely to occur but the exact amount and timing is not known, an amount must be put aside to meet the estimated future costs. Revaluation / Impairment Revaluations and impairments are adjustments to the value of an asset, either positively or negatively, to align the carrying value of an asset to an independent assessment of the asset’s fair value. Page 394 of 396
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WWW.MIDLOTHIAN.GOV.UK 96 Glossary of Terms Revenue Expenditure Revenue expenditure includes the day-to-day costs of providing services including salaries and wages, property costs, transport costs, supplies, and services. It also includes the costs of the repayment of loans used to finance capital expenditure. Page 395 of 396
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