The Directors present their Strategic report and financial statements for the year ended 31 December 2020.
Capita Insurance Services Limited is a wholly owned subsidiary (indirectly held) of Capita plc. Capita plc along with all its subsidiaries is hereafter referred as "the Group". The Company operates within the Group's Customer Management and Specialist Services divisions.
The business continues to look for opportunities to win outsourced insurance business, including claims management work, to replace the contracts that have ended during 2018. There are opportunities currently under discussion with prospective clients. In the meantime, the business will continue to review and reduce the cost base to keep it in line with the revenue generated and will reallocate resource to other parts of the Group where appropriate.
During the review, it was observed that one of the contracts entered by the Company in 2012 was inadvertently invoiced and booked by a nother Group company, Capita Business Services Limited (CBSL) from 2012-2020. Accordingly, the management concluded that the revenue and costs should be transferred to the Company from CBSL and thus the comparative information at 31 December 2019 has been restated resulting in increase in retained earnings by £3, 084,000 with a corresponding increase in intercompany receivables and income tax payable. Refer to note 19 for further details.
As shown in the Company’s income statement on page 10, revenue decreased from £7,797,000 in 2019 (restated) to £6,324,000 in 2020 and operating profit decreased from £1,867,000 (restated) to £1,347,000 over the same period. The primary reason for the decrease in revenue and operating profit is the cessation of one of the main contract of the Company and reduction in volumes for a few clients.
The balance sheet on pages 12 and 13 of the financial statements shows the Company's financial position at the year end. Net assets have increased from £95,031,000 as at 31 December 2019 (restated) to £95,434,000 as at 31 December 2020. Details of amounts owed by/to its parent company and fellow subsidiary undertakings are shown in notes 10 and 13 to the financial statements.
Key performance indicators used by Capita plc are operating margins, free cash flow, capital expenditure and return on capital employed. Capita plc and its subsidiaries manage their operations on a divisional basis and as a consequence, some of these indicators are monitored only at a divisional level. The performance of the Customer Management and Specialist Services divisions of Capita plc is discussed in the Group's annual report which does not form part of this report.
Principal risks and uncertainties
The Company is subject to various risks and uncertainties during the ordinary course of its business, many of which result from factors outside of its control. The Company’s risk management framework provides reasonable (but cannot provide absolute) assurance that significant risks are identified and addressed. An active risk management process identifies, assesses, mitigates and reports on strategic, financial, operational and compliance risk.
The principal themes of risk for the Company are:
Strategic: changes in economic and market conditions such as contract pricing and competition.
Financial: significant failures in internal systems of control and lack of corporate stability.
Operational: including recruitment and retention of staff, maintenance of reputation and strong supplier and customer relationships, operational IT risk, and failures in information security controls.
Compliance: non-compliance with laws and regulations. The Company must comply with an extensive range of requirements that govern and regulate its business.
To mitigate the effect of these risks and uncertainties, the Company adopts a number of systems and procedures, including:
Regularly reviewing trading conditions to be able to respond quickly to changes in market conditions.
Applying procedures and controls to manage compliance, financial and operational risks, including adhering to internal control framework.
Capita plc has also implemented appropriate controls and risk governance techniques across all of its businesses these are discussed in the Capita plc’s annual report which does not form part of this report.
Capita plc’s section 172 statement applies to both the Division and the Company to the extent it relates to the Company’s activities. Common policies and practices are applied across the Group through divisional management teams and a common governance framework. The following disclosure describes how the Directors have regard to the matters set out in section 172(1)(a) to (f) and forms the Directors’ statement as required under section 414CZA of the Companies Act 2006.
Further details of the Group’s approach to each stakeholder are provided in Capita plc’s section 172 statement on pages 38 and 39 of Capita plc’s 2020 Annual Report.
Stakeholders
Our People |
|
What matters to them? |
Flexible working, learning and development opportunities leading to career progression, fair pay and benefits as a reward for performance, two-way communication, and feedback. |
How we engaged? |
People surveys, regular all-employee communications. |
Topics of Engagement |
Protection of employees during Covid-19, human resources policies during Covid-19, future ways of working as a result of Covid-19, and creating an inclusive workplace. |
Outcomes and actions |
Issue of Capita specific Covid-19 guidance and regular updates, new and temporary human resource policies (eg. furlough and flexible working). |
Key Metrics |
Employee net promoter score, people survey completion level |
Clients & Customers |
|
What matters to them? |
High-quality service delivery, sustainability, and rapid response to support pandemic planning. |
How we engaged? |
Client meetings and surveys, regular meetings with key clients and customers. |
Topics of Engagement |
Remote working on client services as a result of Covid-19, current service delivery, possible future services, co-creation of client value propositions. |
Outcomes and actions |
Receipt of regular detailed feedback summaries; application of standard Capita plc policies and procedures which includes the establishment of Group contract review committee to ensure delivery against contractual obligations. |
Key Metrics |
Customer net promoter score, specific feedback on client engagements. |
Supplier & Partners |
|
What matters to them? |
Payments made within agreed payment terms, clear and fair procurement process, building lasting commercial relationships, and working inclusively with all types of business. |
How we engaged?
|
Supplier meetings throughout source to procure process, regular reviews with suppliers and supplier questionnaires. |
Topics of Engagement |
Supplier payments, sourcing requirements, supplier performance and the Supplier Charter. |
Outcomes and actions |
Alignment of payments with agreed terms, Supplier feedback on improvements to procurement process, improvement plans and innovation opportunities and improved adherence to the Supplier Charter. |
Key Metrics |
Percentage of supplier payments within agreed terms, supplier relationship management feedback score, and supplier diversity profile. |
Section 172 statement (continued)
Society |
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What matters to them? |
Social mobility, youth skills and jobs, digital inclusion, diversity and inclusion, climate change and business ethics. |
How we engaged? |
Memberships of non-governmental organisations and charitable and community partnerships. |
Topics of Engagement |
Youth employment, tackling digital exclusion, workplace inequalities and carbon reduction targets. |
Outcomes and actions |
Implementation of real living wage, youth and employability programme, and commitments to tackle racism and enhance ethnic diversity. |
Key Metrics |
Percentage reduction in carbon footprint, amount of community investment, and responsible business report 2020: capita.com/responsiblebusiness. |
On behalf of the board
The Directors present their Directors' report and financial statements for the year ended 31 December 2020.
The results for the year are set out on page 10.
No interim or final dividend was paid or proposed during the year (201 9 : £n il).
The Directors who held office during the year and up to the date of signature of the financial statements were as follows:
KPMG LLP , have indicated its willingness to continue in office and will be deemed to be reappointed as auditor under section 487(2) of the Companies Act 2006.
The C ompany has granted an indemnity to the D irectors of the C ompany against liability in respect of proceedings brought by third parties, subject to the conditions set out in the Companies Act 2006. Such qualifying third party indemnity provision remains in force as at the date of approving the D irectors' report.
Basis for opinion
Material uncertainty related to going concern
We draw attention to note 1 to the financial statements which indicates that the Company is reliant on its ultimate parent undertaking, Capita plc, in regard to its ability to continue as a going concern. The most recent financial statements of Capita plc include material uncertainties that may cast significant doubt on its ability to continue as a going concern. The reliance of the Company on Capita plc accordingly means that these events and conditions constitute a material uncertainty that may cast significant doubt on the Group’s and in turn, the Company’s ability to continue as a going concern.
Our opinion is not modified in respect of this matter.
Going concern basis of preparation
The directors have prepared the financial statements on the going concern basis. As stated above, they have concluded that a material uncertainty related to going concern exists.
Based on our financial statements audit work, we consider that the directors’ use of the going concern basis of accounting in the preparation of the financial statements is appropriate.
Fraud and breaches of laws and regulations – ability to detect
Identifying and responding to risks of material misstatement due to fraud
To identify risks of material misstatement due to fraud (“fraud risks”) we assessed events or conditions that could indicate an incentive or pressure to commit fraud or provide an opportunity to commit fraud. Our risk assessment procedures included:
Enquiring of directors and inspection of policy documentation as to the Company’s high-level policies and procedures to prevent and detect fraud, as well as whether they have knowledge of any actual, suspected or alleged fraud.
Reading Board minutes.
Considering remuneration incentive schemes and performance targets for management.
Using analytical procedures to identify any unusual or unexpected relationships.
Fraud and breaches of laws and regulations – ability to detect (continued)
We communicated identified fraud risks throughout the audit team and remained alert to any indications of fraud throughout the audit.
As required by auditing standards, and taking into account possible pressures to meet profit and revenue targets, we perform procedures to address the risk of management override of controls and the risk of fraudulent revenue recognition, in particular the risk that long term contract revenue is recorded in the wrong period and the risk that management may be in a position to make inappropriate accounting entries.
We did not identify any additional fraud risks.
We performed procedures including identifying journal entries and other adjustments to test based on risk criteria and comparing the identified entries to supporting documentation. These included those posted by senior finance management and those posted to unusual accounts.
Identifying and responding to risks of material misstatement due to non-compliance with laws and regulations
We identified areas of laws and regulations that could reasonably be expected to have a material effect on the financial statements from our general commercial and sector experience and through discussion with the directors and other management (as required by auditing standards) and discussed with the directors and other management the policies and procedures regarding compliance with laws and regulations.
We communicated identified laws and regulations throughout our team and remained alert to any indications of non-compliance throughout the audit.
The potential effect of these laws and regulations on the financial statements varies considerably.
Firstly, the Company is subject to laws and regulations that directly affect the financial statements including financial reporting legislation (including related companies legislation), distributable profits legislation and taxation legislation and we assessed the extent of compliance with these laws and regulations as part of our procedures on the related financial statement items.
Secondly, the Company is subject to many other laws and regulations where the consequences of non-compliance could have a material effect on amounts or disclosures in the financial statements, for instance through the imposition of fines or litigation. We identified the following areas as those most likely to have such an effect: health and safety, anti-bribery, employment law and certain aspects of company legislation recognising the nature of the Company’s activities. Auditing standards limit the required audit procedures to identify non-compliance with these laws and regulations to enquiry of the directors and other management and inspection of regulatory and legal correspondence, if any. Therefore if a breach of operational regulations is not disclosed to us or evident from relevant correspondence, an audit will not detect that breach.
Context of the ability of the audit to detect fraud or breaches of law or regulation
Owing to the inherent limitations of an audit, there is an unavoidable risk that we may not have detected some material misstatements in the financial statements, even though we have properly planned and performed our audit in accordance with auditing standards. For example, the further removed non-compliance with laws and regulations is from the events and transactions reflected in the financial statements, the less likely the inherently limited procedures required by auditing standards would identify it.
In addition, as with any audit, there remained a higher risk of non-detection of fraud, as these may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal controls. Our audit procedures are designed to detect material misstatement. We are not responsible for preventing non-compliance or fraud and cannot be expected to detect non-compliance with all laws and regulations.
The directors are responsible for the strategic report and the directors’ report. Our opinion on the financial statements does not cover those reports and we do not express an audit opinion thereon.
Our responsibility is to read the strategic report and the directors’ report and, in doing so, consider whether, based on our financial statements audit work, the information therein is materially misstated or inconsistent with the financial statements or our audit knowledge. Based solely on that work:
we have not identified material misstatements in the strategic report and the directors’ report;
in our opinion the information given in those reports for the financial year is consistent with the financial statements; and
in our opinion those reports have been prepared in accordance with the Companies Act 2006.
A fuller description of our responsibilities is provided on the FRC’s website at www.frc.org.uk/auditorsresponsibilities .
This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members, as a body, for our audit work, for this report, or for the opinions we have formed.
Share capital – The balance classified as share capital is the nominal proceeds on issue of the Company’s equity share capital, comprising 17,010,001 ordinary shares.
Share premium – The amount paid to the company by shareholders, in cash or other consideration, over and above the nominal value of shares issued to them.
Retained earnings – Net profits kept to accumulate in the Company after dividends are paid and retained in the business as working capital.
The notes on pages 15 to 37 form an integral part of financial statements.
Capita Insurance Services Limited is a company incorporated and domiciled in the U nited Kingdom .
The financial statements are prepared under the historical cost basis except where stated otherwise and in accordance with applicable accounting standards.
In determining the appropriate basis of preparation for the annual report and financial statements for the year ended 31 December 2020, the Company’s Directors (“the Directors”) are required to consider whether the Company can continue in operational existence for the foreseeable future, being a period of at least 12 months following the approval of these accounts. The Directors have concluded that it is appropriate to adopt the going concern basis, having undertaken a rigorous assessment of the financial forecasts, key uncertainties, and sensitivities, as set out below.
Board assessment
Base case scenario
The financial forecasts used for the going concern assessment are derived from the 2021-2023 financial projections for the Company which have been subject to review and challenge by management and the Directors. The Directors have approved the projections. The financial projections captures the benefits that the Capita group-wide transformation plan is anticipated to deliver, including sales growth together with margin improvements and cost out targets, and the costs to achieve these. Covid-19 has introduced unprecedented economic uncertainties and has led to increased judgement particularly in forecasting future financial performance. The forecast impact of Covid-19 has been incorporated within the base case forecasts, however the continuing uncertainty over how the COVID-19 pandemic might evolve, including the speed and timing of economic recovery, makes precise forecasting challenging.
Severe but plausible downside
In addition to the base case, the Directors considered severe but plausible downside scenarios, recognising the execution risk associated with the transformation programme and the broader uncertainty arising from COVID-19. The downside scenarios include trading downside risks, which assumes the transformation plan is not successful in delivering the anticipated revenue growth, together with increased attrition, and further impacts of Covid-19. In addition, the downside scenario includes potential adverse financial impacts that could arise from unforeseen operational issues leading to contract losses and cash outflows.
Offsetting these risks the Directors have considered available mitigations within the direct control of the Company, including continued reductions to variable pay rises, setting aside any bonus payments and limiting discretionary spend.
Finally, the assessment has considered the extent to which the Company is reliant on the Group. The Company is reliant on the Group in respect of the following:
provision of certain services, such as administrative support services and should the Group be unable to deliver these services, the Company would have difficulty in continuing to trade;
participation in the Group’s notional cash pooling arrangements, of which £8 31 , 206 was held at 3 1 July 2021. In the event of a default by the Group, the Company may not be able to access its cash balance within the pooling arrangement; and
recovery of receivables of £ 95,493,096 from fellow Group undertakings as of 3 1 July 2021. If these receivables are not able to be recovered when forecast by the Company, then the Company may have difficulty in continuing to trade.
As with any company placing reliance on other group entities for financial support, the D irectors acknowledge that there can be no certainty that this support will continue although, at the date of approval of these financial statements, they have no reason to believe that it will not do so.
Given the reliance the Company has on the Group, the Directors have considered the financial position of the ultimate parent undertaking as disclosed in its most recent financial statements, being for the six months ended 3 0 June 202 1 .
Ultimate parent undertaking – Capita plc
The Capita plc Board (‘the Board’) concluded that it was appropriate to adopt the going concern basis, having undertaken a rigorous assessment of the financial forecasts, key uncertainties and sensitivities, when preparing the Group’s condensed consolidated financial statements to 30 June 2021. These financial statements were approved by the Board on 5 August 2021 and are available on the Group’s website (www.capita.com/investors). Below is a summary of the position as at 5 August 2021:
Accounting standards specify that the foreseeable future for going concern assessment covers a period of at least 12 months from the date of approval of these condensed consolidated financial statements, although those standards do not specify how far beyond 12 months a Board should consider. In its going concern assessment, the Board has considered the period from the date of approval of these condensed consolidated financial statements to 31 December 2022 ('the going concern period'), in recognition of the fact that there are scheduled debt repayments totalling £433m over that period, including £156m scheduled in November 2022.
Absent any mitigating actions, liquidity headroom shown in the Group’s financial forecasts under the severe but plausible downside scenario over the period to 31 December 2022 reduces substantially such that there is a risk of liquidity being insufficient.
There are mitigations, under the direct control of the Group, that could be implemented to address any immediate shortfalls. These includes reductions in variable pay rises, setting aside any bonus payments and limiting discretionary spend. While these are available as possible short-term mitigations and would be actioned if required to ensure sufficient liquidity, the Board is mindful that such restrictions may be detrimental to the longer-term success of the Group. In addition, such actions would not necessarily address potential liquidity requirements beyond the going concern period should all the downside risks materialise.
Accordingly, the principal mitigation to the possibility of insufficient liquidity is that the Board has approved a disposal programme which covers businesses that do not align with the longer-term strategy. In March 2021, the Group announced its target of realising future gross proceeds of £700m from the ongoing disposal programme. With around 75% of this target having been achieved through the ESS and AXELOS disposals, the Board is confident that the disposal programme will be delivered, thereby introducing substantial net cash proceeds to the Group, albeit with a corresponding removal of consolidated profits and cash flows associated with the disposal businesses.
In addition to the ongoing disposal programme, the Group may seek to mitigate the liquidity risks which might arise in the downside scenario by seeking further sources of financing beyond its existing committed funding facilities. Notwithstanding the extension of Revolving Credit Facility availability from August 2022 to August 2023 agreed in June 2021 coupled with the ongoing successful delivery of the disposal programme, the Board continues to assess the potential for such a refinancing.
Material uncertainties related to the group
The Board recognises that the disposal programme requires agreement from third parties, that major disposals may be subject to shareholder and, potentially, lender approval. Such agreements and approvals, and also any refinancing, are outside the direct control of the Company. Therefore, given that certain of the mitigating actions which might be taken to strengthen the Group's liquidity position in the severe but plausible downside scenario are outside the control of the group, this gives rise to material uncertainties, as defined in accounting standards, relating to events and circumstances which may cast significant doubt about the Group’s ability to continue as a going concern and to realise its assets and discharge its liabilities in the normal course of business.
Reflecting the Board’s confidence in the benefits expected from completion of the transformation programme and execution of the approved disposal programme coupled with the potential to obtain further financing beyond its existing committed funding facilities, the Group continues to adopt the going concern basis in preparing these condensed consolidated financial statements. The Board has concluded that the Group will continue to have adequate financial resources to realise its assets and discharge its liabilities as they fall due over the period to 31 December 2022. Consequently, these condensed consolidated financial statements do not include any adjustments that would be required if the going concern basis of preparation were to be inappropriate.
Conclusion
Although the Company has a reliance on the Group as detailed above, even in a severe but plausible downside for both the Company and the Group, the Directors are confident the Company will continue to have adequate financial resources to release its assets and discharge its liabilities as they fall due over the period to 31 December 2022 (the “going concern period”). Consequently, the annual report and financial statements have been prepared on the going concern basis.
However, as the Group’s condensed consolidated financial statements have identified material uncertainties giving rise to significant doubt over the Group’s ability to continue as a going concern in a severe but plausible downside scenario, and given the Company’s reliance on the Group as set out above, this in turn gives rise to a material uncertainty relating to events and circumstances which may cast significant doubt about the Company’s ability to continue as a going concern and, therefore, that the Company may be unable to realise its assets and discharge its liabilities in the normal course of business. The financial statements do not include any adjustments which would be required if the going concern basis of preparation were to be deemed inappropriate.
The Company has applied FRS101 – Reduced Disclosure Framework in the preparation of its financial statements. The Company has prepared and presented these financial statements by applying the recognition, measurement and disclosure requirements of international accounting standards in conformity with the requirements of the Companies Act 2006.
The Company's ultimate parent undertaking, Capita plc, includes the Company in its consolidated statements. The consolidated financial statements are prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 and International Financial Reporting Standards (IFRSs) adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union and are available to the public and may be obtained from Capita plc’s website on https://www.capita.com/investors.
In these financial statements, the Company has applied the disclosure exemptions available under FRS 101 in respect of the following disclosures:
A cash flow statement and related notes;
Comparative period reconciliations for share capital, plant, property and equipment and intangible assets;
Disclosures in respect of transactions with wholly owned subsidiaries;
Disclosures in respect of capital management;
The effects of new but not yet effective IFRSs;
An additional balance sheet for the beginning of the earliest comparative period following the retrospective change in accounting policy;
Certain disclosures as required by IFRS 15; and
Disclosures in respect of the compensation of key management personnel.
As the consolidated financial statements of Capita plc include equivalent disclosures, the Company has also taken the disclosure exemptions under FRS 101 available in respect of the following disclosure:
Certain disclosures required by IFRS 2 Share Based Payments in respect of Group settled share based payments;
Certain disclosures required by IAS 36 Impairments of assets in respect of the impairment of goodwill and indefinite life intangible assets;
Certain disclosures required by IFRS 3 Business Combinations in respect of business combinations undertaken by the Company, in the current and prior periods including the comparative period reconciliation for goodwill; and
Certain disclosures required by IFRS 13 Fair Value Measurement and the disclosures required by IFRS 7 Financial Instrument Disclosures.
The accounting policies adopted are consistent with those of the previous financial year except for the new amendments to standards detailed below but they do not have a material effect on the Company’s financial statements:
New amendments |
Effective date |
Amendments to References to the Conceptual Framework in IFRS Standards |
1 January 2020 |
Definition of Material (Amendments to IAS 1 and IAS 8) |
1 January 2020 |
Interest Rate Benchmark Reform (Amendments to IFRS 9, IAS 39 and IFRS 7) |
1 January 2020 |
Definition of a Business (Amendments to IFRS 3) |
1 January 2020 |
Revenue is earned within the United Kingdom.
The C ompany operates a number of businesses and revenue recognition is based on the principles set out in IFRS 15 and the delivery of performance obligations.
The revenue and profits recognised in any period are based on the delivery of performance obligations. Most revenue is recognised when the performance obligation in the contract has been performed. Some revenue is accrued and depends upon future events such as the agreement of contractual KPIs achieved. This revenue is inherently subjective until performance and the associated revenue is agreed at which point any adjustment to the amount accrued is reflected.
Where payments made are greater than the revenue recognised at the period end date, a deferred income liability is recognised for the difference. Where revenue is greater than payments received, an accrued income asset is recognised for the difference.
The Company may enter into contracts which contain extension periods, where either the customer or both parties can choose to extend the contract or there is an automatic annual renewal, and/or termination clauses that could impact the actual duration of the contract. In those circumstances, judgement is applied to assess the impact that these clauses have when determining the appropriate contract term. The term of the contract impacts both the period over which revenue from performance obligations may be recognised and the period over which contract fulfilment assets and capitalised costs to obtain a contract are expensed.
For each performance obligation, the Company determines if revenue will be recognised over time or at a point in time. Where the Company recognises revenue over time for long term contracts, this is in general due to the Company performing and the customer simultaneously receiving and consuming the benefits provided over the life of the contract.
For each performance obligation to be recognised over time, the Company applies a revenue recognition method that faithfully depicts the Company’s performance in transferring control of the goods or services to the customer. This decision requires assessment of the real nature of the goods or services that the Company has promised to transfer to the customer. The Company applies the relevant output or input method consistently to similar performance obligations in other contracts.
When using the output method, the Company recognises revenue on the basis of direct measurements of the value to the customer of the goods and services transferred to date relative to the remaining goods and services under the contract. Where the output method is used, for long term service contracts where the series guidance is applied (see below for further details), the Company often uses a method of time elapsed which requires minimal estimation.
If performance obligations in a contract do not meet the over time criteria, the Company recognises revenue at a point in time (see below for further details).
The Company disaggregates revenue from contracts with customers by contract type, as management believe this best depicts how the nature, amount, timing and uncertainty of the Company’s revenue and cash flows are affected by economic factors.
Long term contractual - greater than 2 years
The nature of contracts or performance obligations categorised within this revenue type includes (i) long term outsourced service arrangements in private sectors .
The Company considers that the services provided meet the definition of a series of distinct goods and services as they are (i) substantially the same and (ii) have the same pattern of transfer (as the series constitutes services provided in distinct time increments (e.g., daily, monthly, quarterly or annual services)) and therefore treats the series as one performance obligation. Even if the underlying activities performed by the Company to satisfy a promise vary significantly throughout the day and from day to day, that fact, by itself, does not mean the distinct goods or services are not substantially the same.
For long service contracts with customers in this category, the Company recognises revenue using the output method as it best reflects the nature in which the Company is transferring control of the goods or services to the customer.
Transactional (Point in time) contracts
The Company delivers both services that are transactional services and services that are short term services for which charges are agreed annually and for which revenue is recognised at the point in time. The nature of contracts or performance obligations categorised within this revenue type includes fees received in relation to delivery of professional services.
Contract modifications
The Company’s contracts are amended when there are new or changes to the existing enforceable rights and obligations. This is very limited in relation to this business. The facts and circumstances of any contract modification are considered individually as the types of modifications will vary contract by contract and may result in different accounting outcomes.
Deferred and accrued income
The Company’s customer contracts include a diverse range of payment schedules dependent upon the nature and type of goods and services being provided. The Company often agrees payment schedules at the inception of long term contracts under which it receives payments throughout the term of the contracts. These payment schedules may include performance-based payments or progress payments as well as regular monthly or quarterly payments for ongoing service delivery. Payments for transactional goods and services may be at delivery date, in arrears or part payment in advance.
Where payments made are greater than the revenue recognised at the period end date, the Company recognises a deferred income contract liability for this difference. Where payments made are less than the revenue recognised at the period end date, the Company recognises an accrued income contract asset for this difference.
At each reporting date, the Company assesses whether there is any indication that accrued income assets may be impaired by considering whether the revenue remains highly probable that no revenue reversal will occur. Where an indicator of impairment exists, the Company makes a formal estimate of the asset’s recoverable amount. Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount.
I ntangibles are valued at cost less accumulated amortisation. Amortisation is calculated to write off the cost in equal annual instalments over their estimated useful life, which is typically 5 years. In the case of capitalised software development costs, research expenditure is written off to the statement of profit and loss in the period in which it is incurred. Development expenditure is written off in the same way unless and until the C ompany is satisfied as to the technical, commercial and financial viability of individual projects. In these cases, the development expenditure is capitalised and amortised over the period during which the C ompany is expected to benefit.
Depreciation is recognised so as to write off the cost or valuation of assets less their residual values over their useful lives on the following bases:
The Company has elected not to recognise right of use assets and lease liabilities for lease of low-value assets and short-term leases. The Company recognises the lease payments associated with these leases as an expense on a straight-line basis over the lease term.
Fixed asset investments are stated at cost less provision for diminution in value.
The Company participates in a number of defined contribution schemes where contributions are charged to the income statement in the year in which they are due. These schemes are funded and contributions are paid to separately administered funds. The assets of these schemes are held separately from the Company. The Company remits monthly pension contributions to Capita Business Services Ltd, a fellow subsidiary undertaking, which pays the Group liability centrally. Any unpaid contributions at the year-end have been accrued in the accounts of Capita Business Services Ltd.
The Company also has employees who were members of a defined benefit scheme operated by the Group – the Capita Pension & Life Assurance Scheme (the “Capita DB Scheme”).
As the Company no longer has any active members in the Capita DB Scheme, this triggered a cessation event which means a Section 75 debt (which is a statutory debt due from a participating employer to the trustees of a multi-employer defined benefit pension scheme which is in deficit) would have become due. However, the Trustee of the Capita DB Scheme agreed that the pension liabilities attributable to the Company would be transferred to Capita Business Services Ltd (the Principal Employer of the Capita DB Scheme), which removed the Section 75 debt due from the Company. This Flexible Apportionment Arrangement was agreed in early 2018. As a result of the arrangement, the Company is no longer a formal participating employer in the Capita DB Scheme. In return for the Trustee granting this Flexible Apportionment Arrangement, the Company has provided a guarantee to the Capita DB Scheme that puts the Company into the same position as if it had remained a participating employer. However, the probability of any liability crystallising on the guarantee has been assessed as remote.
As there is no contractual agreement or stated Group policy for charging the net defined benefit cost of the Capita DB Scheme to any participating entities, the net defined benefit cost of the Capita DB Scheme is recognised fully by the Principal Employer. During the period that the Company was a formal participating employer in the Capita DB Scheme it recognised a cost equal to its contribution payable for the period.
A full funding assessment of the Capita DB Scheme is carried out every three years by an independent actuary for the Trustee, with the last full assessment carried out at 31 March 2020. The next scheme funding assessment is expected to be carried out with an effective date of 31 March 2023.
In addition, the Company has a ring-fenced section in an industry-wide pension scheme which require contributions to be made to a separate trustee-administered fund. The costs of providing benefits under this scheme is determined using the projected unit credit method, which attributes entitlement to benefits to the current period (to determine current service cost) and to the current and prior periods (to determine the present value of the defined benefit obligation) and is based on actuarial advice.
Past service costs are recognised immediately in the income statement.
When a settlement (eliminating all obligations for benefits already accrued) or a curtailment (reducing future obligations as a result of a material reduction in the scheme membership or a reduction in future entitlement) occurs the obligation and related plan assets are re-measured using current actuarial assumptions and the resultant gain or loss recognised in the income statement during the period in which the settlement or curtailment occurs.
Re-measurements of the net defined benefit asset/liability, which comprise actuarial gains and losses, the return on plan assets (excluding interest) and the effect of the asset ceiling (if any, excluding interest), are recognized immediately in other comprehensive income and reflected immediately in retained earnings and will not be reclassified to the income statement. The Company determines the net interest expense/income on the net defined benefit asset/liability for the period by applying the discount rate used to measure the defined benefit obligation at the beginning of the period to the then net defined benefit asset/liability, taking into account any changes in the net defined benefit asset/liability during the period as a result of contributions and benefit payments.
Current and past service costs are charged to operating profit while the net interest cost is included within net finance costs.
The liability on the balance sheet in respect of this defined benefit pension scheme comprises the present value of the defined benefit obligation (using a discount rate based on high quality corporate bonds), less any past service cost not yet recognised and less the fair value of plan assets out of which the obligations are to be settled directly. Fair value is based on market price information and in the case of quoted securities is the published bid price. The value of a net pension benefit asset is restricted to the sum of any unrecognised past service costs and the present value of any amount the Company expects to recover by way of refunds from the plan or reductions in the future contributions.
Tax on the profit or loss for year comprises current and deferred tax. Tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity or other comprehensive income.
Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.
Deferred tax is provided, using the liability method, on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.
Deferred tax liabilities are recognised for all taxable temporary differences:
except where the deferred tax liability arises from the initial recognition of goodwill;
except where the deferred tax liability arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
in respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, except where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.
Deferred tax assets are recognised for all deductible temporary differences, carry-forward of unused tax assets and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences and the carry-forward of unused tax assets and unused tax losses can be utilised, except where the deferred income tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss.
The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date.
The financial statements present information about the C ompany as an individual undertaking and not about its group. The C ompany has not prepared group accounts as it is fully exempt from the requirement to do so by section 400 of the Companies Act 2006 as it is a subsidiary undertaking of Capita plc, a company incorporated in England and Wales, and is included in the consolidated accounts of that C ompany.
Investments and other financial assets
(i) Classification
T he Company classifies its financial assets in the following measurement categories:
those to be measured subsequently at fair value (either through OCI or through profit or loss); and
those to be measured at amortised cost.
The classification depends on the entity’s business model for managing the financial assets and the contractual terms of the cash flows.
(ii) Recognition and derecognition
Regular way purchases and sales of financial assets are recognised on trade date (that is, the date on which the group commits to purchase or sell the asset). Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or have been transferred and the Company has transferred substantially all the risks and rewards of ownership.
(iii) Measurement
At initial recognition, the Company measures a financial asset at its fair value plus, in the case of a financial asset not at fair value through profit or loss (FVPL), transaction costs that are directly attributable to the acquisition of the financial asset. Transaction costs of financial assets carried at FVPL are expensed in profit or loss.
(iv) Impairment
T he Company assesses, on a forward-looking basis, the expected credit losses associated with its debt instruments carried at amortised cost and FVOCI. The impairment methodology applied depends on whether there has been a significant increase in credit risk.
For trade receivables, the Company applies the simplified approach permitted by IFRS 9, which requires expected lifetime losses to be recognised from initial recognition of the receivables .
Trade and other receivables
The Company assesses on a forward-looking basis the expected credit losses associated with its receivables carried at amortised cost. The impairment methodology applied depends on whether there has been a significant increase in credit risk. For trade receivables, the Company applies the simplified approach permitted by IFRS 9, resulting in trade receivables recognised and carried at original invoice amount less an allowance for any uncollectible amounts based on expected credit losses.
Cash and cash equivalents
Cash and short-term deposits in the balance sheet comprise cash at bank and in hand and short-term deposits with an original maturity of 3 months or less. Bank overdrafts are shown within current financial liabilities.
The preparation of financial statements in conformity with generally accepted accounting principles requires the Directors to make judgements and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingencies at the date of the financial statements and the reported income and expense during the reported periods. Although these judgements and assumptions are based on the Directors' best knowledge of the amount, events or actions, actual results may differ.
The key sources of estimation uncertainty that have a significant risk of causing material adjustment to the carrying amounts of assets and liabilities within the next financial year are as follows:
The measurement of revenue and resulting profit recognition - due to the size and complexity of some of the Company's contracts, requires judgements to be applied, including the measurement and timing of revenue recognition and the recognition of assets and liabilities, including an assessment of onerous contract, that result from the performance of the contract.
The total revenue of the C ompany for the year has been derived from its principal activity wholly undertaken in the United Kingdom.
Audit fees are borne by the ultimate parent undertaking, Capita plc. The audit fee for the current period was £10,500 (2019: £15,502). The Company has taken advantage of the exemption provided by regulations 6(2)(b) of The Companies (Disclosure of Auditor Remuneration and Liability Limitation Agreements) Regulations 2008 not to provide information in respect of fees for other (non-audit) services as this information is required to be given in the Company accounts of the ultimate parent undertaking, which it is required to prepare in accordance with the Companies Act 2006.
The reconciliation between tax charge and the accounting profit multiplied by the UK corporation tax rate for the years ended 31 December 2020 and 2019 is as follows:
A change to the main UK corporation tax rate was substantively enacted on 17 March 2020. The rate applicable from 1 April 2020 now remains at 19 percent, rather than the previously enacted reduction to 17 percent. The UK deferred tax asset at 31 December 2020 has been calculated based on this rate, resulting in a £102k tax credit to the income statement in 2020.
On 3 March 2021, it was announced in the Budget that the UK tax rate will increase from 19% to 25% from 1 April 2023 onwards. This will increase the company’s future income tax charge from 2023. If this rate change had theoretically been applied to the deferred tax balances at 31 December 2020, the deferred tax asset would have increased by £242k.
The average monthly number of employees were:
Their aggregate remuneration comprised:
The Directors' remuneration , including expenses incurred whilst performing director responsibilities, was borne by another subsidiary of Capita plc without recharge. As no qualifying services were provided by the D irectors on the C ompany's affair, no D irectors' remuneration has been allocated to the C ompany.
During the year, the Company furloughed employees unable to work as a result of the Covid-19 pandemic and applied to the Coronavirus Job Retention Scheme (CJRS) operated by the UK Government. Amounts received under CJRS are treated as a government grant and deducted from the relevant cost in the Company’s income statement. During the year, the Company received £180,000 under CJRS. These amounts are included within the relevant cost headings in the table above.
The nominal proceeds on issue of the C ompany's equity share capital, comprising £1 ordinary shares.
Capita DB Scheme
The Capita DB Scheme is a non-segregated scheme but there are around 200 different sections in the scheme where each section provides benefits on a particular basis (some based on final salary, some based on career average earnings) to particular groups of employees.
As the Company no longer has any active members in the Capita DB Scheme, this triggered a cessation event which means a Section 75 debt (which is a statutory debt due from a participating employer to the trustees of a multi-employer defined benefit pension scheme which is in deficit) would have become due. However, the Trustee of the Capita DB Scheme agreed that the pension liabilities attributable to the Company would be transferred to Capita Business Services Ltd (the Principal Employer of the Capita DB Scheme and a fellow subsidiary undertaking), which removed the Section 75 debt due from the Company. This Flexible Apportionment Arrangement was agreed in early 2018. As a result of the arrangement, the Company is no longer a formal participating employer in the Capita DB Scheme. In return for the Trustee granting this Flexible Apportionment Arrangement, the Company has provided a guarantee to the Capita DB Scheme that puts the Company into the same position as if it had remained a participating employer. However, the probability of any liability crystallising on the guarantee has been assessed as remote.
The pension charge for the Company in relation to the Capita DB Scheme for the year was £nil (2019: £nil)
A full statutory funding assessment of the Capita DB Scheme is carried out every three years by an independent actuary for the Trustee, with the last full assessment carried out at 31 March 2020. Amongst the main purposes of the assessment is to agree a contribution plan such that the pension scheme has sufficient assets available to meet future benefit payments, based on assumptions agreed between the Trustee and the Principal Employer. The 31 March 2020 assessment showed a funding deficit of £182m (31 March 2017: £185m). This equates to a funding level of 88.8% (31 March 2017: 86.1%).
In addition to the £176m deficit payments agreed as part of the 2017 statutory funding assessment (which were fully paid between 2018 and early 2021), and as a result of the 2020 statutory funding assessment, the Principal Employer and the Trustee have agreed the payment of additional contributions totalling £124m between July 2021 and December 2023 with the intention of removing the deficit calculated as at 31 March 2020 by December 2023 (after allowing for contributions made by the Principal Employer between the funding assessment date and the date of the funding agreement). Further to this, the Principal Employer has also agreed to pay an additional £45m between 2024 and 2026 in order to target a low-risk funding arrangement with low reliance on the covenant provided by the Group.
The Principal Employer also agreed an average employer contribution rate of 36.0% (excluding employee contributions made as part of a salary sacrifice arrangement) towards the expected cost of benefits accruing.
The next statutory scheme funding assessment is expected to be carried out with an effective date of 31 March 2023.
For the purpose of the consolidated accounts of Capita plc, an independent qualified actuary projected the results of the 31 March 2020 funding assessment to 31 December 2020 taking account of the relevant accounting requirements.
The principal assumptions for the valuations at 31 December 2020 were as follows: rate of increase in the RPI/CPI price inflation - 2.9% pa/2.15% pa (2019: 3.0% pa/2.0% pa); rate of salary increase - 2.9% pa (2019: 3.0% pa); rate of increase for pensions in payment (where RPI inflation capped at 5% pa applies) – 2.85% pa (2019: 2.95% pa); discount rate - 1.3% pa (2019: 2.05% pa).
The Capita DB Scheme assets at fair value at 31 December 2020 totalled £1,568.8m (2019: £1,378.1m). The actuarially assessed value of Capita DB Scheme liabilities at 31 December 2020 was £1,810.6m (2019: £1,623.8m) indicating that the Capita DB Scheme had a net liability of £241.8m (2019: net liability of £245.7m). These figures are quoted gross of deferred tax. The full disclosure is available in the consolidated accounts of Capita plc. The above figures reflect that Capita’s segregated section of a multi-employer defined benefit scheme (the Water Associated Employers Pension Scheme (WAEPS)) merged with the Capita DB Scheme on 31 March 2020 (with the 2019 comparators adjusted to include the WAEPS values for consistency).
IWCSSS (CIS section)
Responsibility for the governance of the IWCSSS (CIS section) lies with the Industry-Wide Coal Staff Superannuation Scheme Trustees Limited (the “Trustees”) which is independent of the Company. The Trustees are required by law to act in the interest of the IWCSSS (CIS section)’s beneficiaries in accordance with the rules of the IWCSSS (CIS section) and relevant legislation (which includes the Pension Schemes Act 1993, the Pensions Act 1995 and the Pensions Act 2004). The nature of the relationship between the Company and the Trustees is also governed by the rules of the IWCSSS (CIS section) and relevant legislation.
The assets of the IWCSSS (CIS section) are held in a separate fund (administered on behalf of the Trustees) to meet long-term pension liabilities to beneficiaries. The Trustees invest the assets in line with their Statement of Investment Principles, which is regularly reviewed.
The most recent funding assessment of the IWCSSS (CIS section) which was carried out as at 31 December 2018 showed a funding deficit of £0.9m. This equates to a funding level of 95.7%. Whilst there was a funding deficit, the Company is not required to make any shortfall contributions to the IWCSSS (CIS section); however it is required to make contributions for the future accrual of benefits and for the expenses and other regulatory levies in the running of the IWCSSS (CIS section). The Company is expected to make contributions totalling £0.1m to the IWCSSS (CIS section) during 2021.
The next scheme funding assessment is expected to be carried out with an effective date of 31 December 2021. For the purpose of the consolidated accounts of Capita plc (and shown here), a qualified actuary projected the results of the 31 December 2018 assessment to 31 December 2020.
The Company continued to set RPI inflation in line with the market break-even expectations less an inflation risk premium. The inflation risk premium has been increased from 0.2% pa at 31 December 2019 to 0.25% pa at 31 December 2020, reflecting an allowance for developments linked to the RPI reform proposals. The estimated impact of the change in the methodology is approximately a £0.2m reduction in the defined benefit obligation in respect of the IWCSSS (CIS section).
A further UK High Court judgement was made on 20 November 2020 relating to the gender equalisation of guaranteed minimum pensions for historical transfers out of occupational pension schemes. The Company has already made an estimate of the financial impact and included this in its accounts as at 31 December 2018.
For the purposes of IFRIC14, a net pension asset is deemed to be recoverable as the Company has a right to a future refund in the event the scheme is wound-up and there remains a surplus.
The C ompany's immediate parent undertaking is Capita Insurance Services Holdings Limited, a company incorporated in England and Wales.
The Company's ultimate parent undertaking is Capita plc, a company incorporated in England and Wales. The accounts of Capita plc are available from the registered office at 65 Gresham Street, London, England, EC2V 7NQ.
The Company continues to be part of Group’s restructuring and multiyear transformation plan. On 1 January 2021, part of the business and assets of the Company was sold to Capita Employee Benefits Limited for a consideration of £ 1.07 m.
*The restatement is within intercompany receivables.