The Directors present their Strategic report and financial statements for the year ended 31 December 2022.
Capita Property and Infrastructure Limited (“the Company”) is a wholly owned subsidiary (indirectly held) of Capita plc. Capita plc along with its subsidiaries are hereafter referred to as “the Group”. The Company operates within the Capita Public service division.
The principal activity of the Company is to provide a comprehensive range of property and regulatory-related professional services across building services, engineering, cost and project management, planning and building control within the public sector. The Directors are not aware, at the date of this report, of any likely major changes in the Company's activities in the next year.
On 1 January 2022, in accordance with the terms of the business and asset transfer agreement, the Company transferred its business and assets relating to the Real Estate and Infrastructure business and associated services, to Capita (Real Estate & Infrastructure) Limited for a consideration equal to the book value of the business and assets based on the balance sheet as at 31 December 2021, after deduction of the liabilities such consideration was settled as part of the intragroup loan account.
On 22 September 2022, Capita (Real Estate & Infrastructure) Limited, the wholly owned subsidiary of the Company, was sold to WSP UK Limited thereby recognizing loss on disposal of £4,890,811.
As shown in the Company's income statement on page 12, the Company's revenue has decreased from £106,773,794 in 2021 to £48,104,202 in 2022 and operating profit has decreased from £6,963,348 in 2021 to £465,689 in 2022. The main reason for the decrease is transfer of it's business and assets relating to the Real Estate and Infrastructure business and associated services.
The balance sheet on pages 14 - 15 of the financial statements shows the Company's financial position at the year end. Net assets have decreased from £63,506,480 in 2021 to £54,575,739 in 2022. Details of amounts owed by/to its parent Company and fellow subsidiary undertakings are shown in notes 16, 18 and 26 to the financial statements.
Key financial performance indicators used by the Capita plc are adjusted profit before tax, adjusted earnings per share, operating margins, free cash flows before business exits and gearing ratio. 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 Public service division of Capita plc is discussed in the Group's annual report which does not form part of this report. The Strategic report in the Annual Report of the Group provides further detail and is available to the public and may be obtained from Capita plc’s website on http://investors.capita.com.
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 not 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 our businesses which are discussed in the Group’s annual report which does not form part of this report.
Section 172 Statement
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 47 and 48 of Capita plc’s 2021 Annual Report.
Our People
Why they are important
What matters to them?
How we engaged?
Topics of Engagement
Outcomes and actions
Risks to stakeholder relationship
Key Metrics |
They deliver our business strategy; they support the organisation to build a values-based culture; and they deliver our products and services ensuring client satisfaction.
Flexible working, learning and development opportunities leading to career progression, fair pay and benefits as a reward for performance, two-way communication, and feedback.
People surveys, regular all-employee communications, employee director participation in Board discussions, employee focus groups and network groups and workforce engagement on remuneration, leadership council, regular breakfast sessions with Executive committee for our colleagues.
Creating an inclusive workplace, Speak Up policy, health and wellbeing, Directors’ remuneration, acting on survey feedback.
The 2022 employee survey showed improvement across all metrics. We are developing and delivering a range of action plans, including ensuring our leaders feel confidence in, and ownership of Capita’s strategy, plans and successes, developing inclusive opportunities for internal career mobility. We developed a global career path framework which defines career levels, career job content, and reward framework and introduced mentoring schemes.
Our ability to recruit due to the national and global labor market demand for resources, our ability to retain people, impacting our quality of service, our ability to evolve our culture and practices in line with our responsible business agenda.
Employee Net Promoter Score, Employee Engagement Index and people survey completion level. |
Clients and Customers Why they are important
What matters to them?
How we engaged?
Topics of Engagement
|
They are recipients of Capita’s services; and Capita’s reputation depends on delighting them.
High-quality service delivery; delivery of transformation projects within agreed timeframes; and responsible and sustainable business credentials.
Client meetings and surveys, Regular meetings with government stakeholders and annual review with Cabinet Office, creation of Customer Advisory Boards and created a senior client partner programme giving an experienced, single point of contact for key clients and customers.
Current service delivery, Capita’s digital transformation capabilities, possible future services, co-creation of client value propositions, Ongoing benefits of hybrid working on client services. |
Section 172 Statement (continued)
Outcomes and actions
Risks to stakeholder relationship
Key Metrics | Feedback provided to business units to address any issues raised, client value propositions team supporting divisions with co‑creation ideas; direct customer and sector feedback; and senior client partner programme undertaking client-focused growth sprints to build understanding of client issues and ideas to help address them.
Loss of business by not providing the services that our clients and customers want, damage to reputation by not delivering to their requirements of our clients and customers.
Customer Net Promoter Score; specific feedback on client engagements. |
Supplier and Partners
Why they are important
What matters to them?
How we engaged?
Topics of Engagement
Outcomes and actions
Risks to stakeholder relationship
Key Metrics
|
They share our values and help us deliver our purpose; maintain high standards in our supply chain; and achieve social, economic and environmental benefits aligned to the Social Value Act.
Payments made within agreed payment terms, clear and fair procurement process, building lasting commercial relationships, and working inclusively with all types of business.
Supplier meetings throughout source to procure process, regular reviews with suppliers, supplier questionnaires and risk assessments.
Supplier payments, sourcing requirements, supplier performance, responsible business, science-based targets SBTs and the Supplier Charter.
Alignment of payments with agreed terms; supplier feedback on improvements to procurement process; improvement plans and innovation opportunities; and improved adherence to supplier charter, suppliers committing to SBTs.
Environmental issues, commitment to tackling SBTs, supply chain resilience
99% of supplier payments within agreed terms; SME spend allocation; and supplier diversity profile.
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Section 172 Statement (continued)
Society Why they are important
What matters to them?
How we engaged?
Topics of Engagement
Outcomes and actions
Risks to stakeholder relationship
Key Metrics
|
Capita is a provider of key services to government impacting a large proportion of the population.
Social mobility, youth skills and jobs; digital inclusion; diversity and inclusion; climate change; business ethics and accreditations and benchmarking; and cost of living crisis.
Memberships of non-governmental organisations, charitable and community partnerships, external accreditations and benchmarking and working with clients, suppliers and the Cabinet Office.
Youth employment, promoting digital inclusion, workplace inequalities, Diversity & inclusion and Climate change.
Publication of net zero plan and verification during 2022 of Science Based Targets; continued commitment and accreditation as a real living wage employer; youth and employability programme; Capita’s investment in WithYouWithMe, a workplace technology platform that finds employment for military veterans and other overlooked groups through delivering innovative aptitude testing and digital skills training; highly commended by the Employers Network for Equality & Inclusion for our approach to intersectionality; recognised as a 'Leading Light' by the UK Social Mobility awards; and joined the Cost-of-living Taskforce.
Lack of understanding of the issues important to them and insufficient communication or involvement in shaping and influencing strategies and plans
Net zero by 2035; community investment; workforce diversity and ethnicity data, including pay gaps.
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On behalf of the board
The Directors present their Directors' report and financial statements for the year ended 31 December 2022.
The results for the year are set out on page 12.
During the year, the Company did not propose or pay any dividend (2021: £nil).
KPMG LLP, having indicated its willingness to continue in office, will be deemed to be reappointed as auditor under section 487(2) of the Companies Act 2006.
The Company has granted an indemnity to the Directors of the Company against liability in respect of proceedings brought by third parties, subject to the conditions set out in the Companies Act 2006. This qualifying third party indemnity provision remains in force as at the date of approving the Directors' report.
Basis for opinion
The directors have prepared the financial statements on the going concern basis as they do not intend to liquidate the Company or to cease its operations, and as they have concluded that the Company’s financial position means that this is realistic. They have also concluded that there are no material uncertainties that could have cast significant doubt over its ability to continue as a going concern from the date of approval of the financial statements to 31 December 2024 (“the going concern period”).
In our evaluation of the directors’ conclusions, we considered the inherent risks to the Company’s business model and analysed how those risks might affect the Company’s financial resources or ability to continue operations over the going concern period.
Our conclusions based on this work:
we consider that the directors’ use of the going concern basis of accounting in the preparation of the financial statements is appropriate;
we have not identified, and concur with the directors’ assessment that there is not, a material uncertainty related to events or conditions that, individually or collectively, may cast significant doubt on the Company's ability to continue as a going concern for the going concern period.
However, as we cannot predict all future events or conditions and as subsequent events may result in outcomes that are inconsistent with judgements that were reasonable at the time they were made, the above conclusions are not a guarantee that the Company will continue in operation.
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, internal audit and inspection of policy documentation as to the Company’s high-level policies and procedures to prevent and detect fraud, including the internal audit function, and the Company’s channel for “whistleblowing”, as well as whether they have knowledge of any actual, suspected or alleged fraud.
Reading Board Meeting minutes.
Considering the remuneration incentive schemes and performance targets for management and directors including the short-term incentive plan and long-term incentive plan for management remuneration.
Using analytical procedures to identify any unusual or unexpected relationships.
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, our overall knowledge of the control environment, we perform procedures to address the risk of management override of controls and risk of fraudulent revenue recognition in particular :
The risk that management may be in a position to make inappropriate accounting entries ; and
The risk that revenue is overstated through recording revenues inaccurately and in the wrong period; and
The risk that year end balance of work in progress is overstated through usage of wrong inputs while computing percentage of completion as of year end.
We did not identify any additional fraud risk.
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, those posted to unusual accounts and those posted with unusual description.
Verified the accuracy of ageing of work in progress balance by verifying appropriate supporting documents.
Tested that the project codes closed during the year had charges made to them appropriately.
Inspected all the high risk journals which involves transfer of cost from one project code to another and ensured those entries are supported with business rationale and evidences
Selecting samples of revenue in the period and either side of the year, in addition to amounts recorded within accrued income at year end. For all entries selected, we obtained and agreed back to source documentation (i.e. supplier invoices to support the originating transaction) to assess whether revenue is recorded correctly in the right period.
Identifying and responding to risks of material misstatement related to 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 noncompliance throughout the audit.
As the Company is regulated, our assessment of risks involved gaining an understanding of the control environment including the entity’s procedures for complying with regulatory requirements. 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: data protection laws, 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.
Strategic report and directors’ report
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.
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.
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, sensitivities, and mitigations when preparing the Group’s condensed consolidated financial statements at 30 June 2023. These condensed consolidated financial statements were approved by the Board on 3 August 2023 and are available on the Group’s website (www.capita.com/investors). Below is a summary of the position at 3 August 2023:
Accounting standards require that ‘the foreseeable future’ for going concern assessment covers a period of at least twelve months from the date of approval of these condensed consolidated financial statements, although those standards do not specify how far beyond twelve 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 2024, which is just less than seventeen months from the date of approval of these condensed consolidated financial statements ('the going concern period') and aligns to a year end for the Group.
The base case financial forecasts used in the going concern assessment are derived from financial projections for 2023-2024 as approved by the Board in July 2023.
The base case projections used for going concern assessment purposes reflect business disposals completed up to the date of approval of these condensed consolidated financial statements but do not reflect the benefit of any further disposals that are in the pipeline. The liquidity headroom assessment in the base case projections reflects the Group’s existing committed financing facilities and debt redemptions. The base case financial forecasts demonstrate liquidity headroom and compliance with all debt covenant measures throughout the going concern period to 31 December 2024.
In considering severe but plausible downside scenarios, the Board has taken account of the potential adverse financial impacts resulting from the following risks:
revenue growth falling materially short of plan;
operating profit margin expansion not being achieved;
additional inflationary cost impacts which cannot be passed on to customers;
unforeseen operational issues leading to contract losses and cash outflows;
increased interest rates;
reduction in deferred cash consideration in respect of completed disposals;
non-availability of the Group’s non-recourse receivables financing facility; and
unexpected financial costs linked to incidents such as data breaches and/or cyber-attacks.
The likelihood of simultaneous crystallisation of the above risks is considered by the directors to be relatively low. Nevertheless, in the event that simultaneous crystallisation were to occur, the Group would need to take action to mitigate the risk of insufficient liquidity and covenant headroom. In its assessment of going concern, the Board has considered the mitigations, under the direct control of the Group, that could be implemented including reductions in capital investment, substantially reducing (or removing in full) bonus and incentive payments and significantly reducing discretionary spend. Taking these mitigations into account, the Group’s financial forecasts, in a severe but plausible downside scenario, demonstrate sufficient liquidity headroom and compliance with all debt covenant measures throughout the going concern period to 31 December 2024.
Adoption of going concern basis by the Group:
Reflecting the continued benefits from the transformation programme completed in 2021 coupled with the Board’s ability to implement appropriate mitigations should the severe but plausible downside materialise, the Group continues to adopt the going concern basis in preparing these condensed consolidated financial statements. The Board has concluded that the Group will be able to continue in operation and meet its liabilities as they fall due over the period to 31 December 2024.
Conclusion
Although the Company has inter-dependencies with 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 continue in operation and discharge its liabilities as they fall due over the period to 31 December 2024 (the “going concern period”). Consequently, the annual report and financial statements have been prepared on the going concern basis.
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 financial statements are prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 and with UK-adopted International Financial Reporting Standards (IFRSs) and the Disclosure and Transparency Rules of the UK's Financial Conduct Authority. These 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 movements for share capital, tangible fixed assets 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;
Disclosures in respect of the compensation of key management personnel;
Disclosures in respect of IFRS 9;
Certain Disclosures in respect of IFRS 15; and
Certain Disclosures in respect of IFRS 16.
Since 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 disclosures:
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 Disclosures required by IFRS 7 Financial Instrument Disclosures.
The Company has adopted the new amendments to standards detailed below but they do not have a material effect on the Company’s financial statements.
New amendments or interpretation | Effective date |
Onerous Contracts – Cost of Fulfilling a Contract (Amendments to IAS 37) | 1-Jan-22 |
Annual Improvements to IFRS Standards 2018–2020 | 1-Jan-22 |
Property, Plant and Equipment: Proceeds before Intended Use (Amendments to IAS 16) | 1-Jan-22 |
Reference to the Conceptual Framework (Amendments to IFRS 3) | 1-Jan-22 |
The revenue shown in the profit and loss account represents the value of fees and services rendered, exclusive of value added tax. Revenue from the supply of services represents the value of services provided under contracts to the extent that there is a right to consideration which is recorded at the fair value of the consideration received or receivable. Revenue is recognised over time rather than a point in time.
The Company’s preferred method of revenue recognition is the output method in which revenue is recognised based on the units of work performed and the price allocated thereto. This method is applied provided that the progress of the work performed can be measured based on the contract and during the contract’s performance. Under the output method the units of work completed under each contract are measured monthly and the corresponding output is recognised as revenue. Where it is not practicable to apply this ‘units of production’ output method the percentage of completion method is used. Under this input method costs are recognised as incurred and revenue is recognised based on the proportion of total costs at the reporting date to the estimated total cost of the contract.
Principal and agent considerations:
Management have considered whether the Company acts as principal or agent for those contracts which involve another subcontracting party in the provision of goods or services to the customer.
An entity is a principal if it controls the specified good or service before that good or service is transferred to a customer. An entity that is a principal may satisfy its performance obligation to provide the specified good or service itself or it may engage another party (for example, a subcontractor) to satisfy some or all of the performance obligation on its behalf.
Capita has autonomy to select and appoint the subcontractors who perform the construction and civils work. Capita apply a margin to the subcontracted costs, and are responsible for supervising, managing and acting as site foreman on the schemes. Materially therefore Capita is in control of the transaction with the subcontractor and would be considered a principal for the contract. The Company therefore recognises revenue in the gross amount of consideration to which it expects to be entitled in exchange for the specified good or service transferred.
Gain-share arrangements:
The Company has contracts which include gain-sharing arrangements. Capita utilise the historical, current and forecast information, to determine the variable consideration for the promised services, using the expected value method permitted by IFRS 15 Revenue from Contracts with Customers..
At inception of each performance obligation, Capita will include in the transaction price an amount of variable consideration estimated only to the extent that it is highly probable that a significant reversal of cumulative revenue recognised will not occur. Capita recognise 75% of the gain share revenue subsequent to customer sign off and the residual 25% after payment from the customer.
The Company has determined that the following costs may be capitalised as contract assets
legal fees to draft a contract (once the Company has been selected as a preferred supplier for a bid); and
sales commissions that are directly related to winning a specific contract. Costs incurred prior to selection as preferred supplier are not capitalised but are expensed as incurred.
Utilisation, de-recognition and impairment of contract fulfilment assets and capitalised costs to obtain a contract
The Company amortizes contract fulfilment assets and capitalised costs to obtain a contract to cost of sales over the expected contract period using a systematic basis that mirrors the pattern in which the Company transfers control of the service to the customer. Judgement is applied to determine this period, for example whether this expected period would be the contract term or a longer period such as the estimated life of the customer relationship for a particular contract if, say, renewals are expected.
A contract fulfilment asset or capitalised costs to obtain a contract is derecognised either when it is disposed of or when no further economic benefits are expected to flow from its use or disposal.
Management is required to determine the recoverability of contract related assets within property, plant and equipment, intangible assets, contract fulfilment assets, capitalised costs to obtain a contract, accrued income and trade receivables. At each reporting date, the Company determines whether or not the contract fulfilment assets and capitalised costs to obtain a contract are impaired by comparing the carrying amount of the asset to the remaining amount of consideration that the Company expects to receive less the costs that relate to providing services under the relevant contract. In determining the estimated amount of consideration, the Company uses the same principles as it does to determine the contract transaction price, except that any constraints used to reduce the transaction price are removed for the impairment test.
Where the relevant contracts or specific performance obligations demonstrate marginal profitability or other indicators of impairment exist, judgement is required in ascertaining whether or not the future economic benefits from these contracts are sufficient to recover these assets. In performing this impairment assessment, management is required to make an assessment of the costs to complete the contract.
The ability to accurately forecast such costs involves estimates around cost savings to be achieved over time, anticipated profitability of the contract, as well as future performance against any contract-specific KPIs that could trigger variable consideration, or service credits. Where a contract is anticipated to make a loss, these judgements are also relevant in determining whether or not an onerous contract provision is required and how this is measured.
Onerous contracts
The Company reviews its long-term contracts bi-annually to ensure that the expected economic benefits to be received are in excess of the unavoidable costs of meeting the obligations under the contract. The unavoidable costs are the lower of the net costs of termination or the costs of fulfilment of the contractual obligations. The Company recognises the excess of the unavoidable costs over economic benefits due to be received as an onerous contract provision.
Goodwill is stated at cost less accumulated impairment losses. It is not amortised but is tested annually for impairment which is in accordance with FRS 101.A2.8. This is not in accordance with the Large and Medium-sized Companies and Group (Accounts and Reports) Regulations 2008 which requires that all goodwill be amortised. The Directors consider that this would fail to give a true and fair view of the profit for the period and that the economic measure of performance in any period is properly made by reference only to any impairment that may have arisen. It is not practicable to quantify the effect on the financial statements of this departure. On adoption of FRS 101, the Company restated business combinations that took place between 1 January 2014 and 31 December 2014. The Company, therefore, restated its opening balances in 2014 to reflect the position had IFRS 3 'Business Combinations' been in effect since 1 January 2014.
All investments are initially recorded at their cost. Subsequently they are reviewed for impairment if events or changes in circumstances indicate the carrying value may not be recoverable.
The Company leases various assets, comprising land and buildings and equipment.
The determination whether an arrangement is, or contains, a lease is based on whether the contract conveys a right to control the use of an identified asset for a period of time in exchange for consideration. The following sets out the Company’s lease accounting policy for all leases with the exception of leases with low value and term of 12 months or less for which the exemption contained in IFRS16 Leases has been adopted and the costs expensed to the income statement as incurred.
The Company as a lessee - Right-of-use assets and lease liabilities
At the inception of the lease, the Company recognises a right-of-use asset and a lease liability. A lease liability is recognised in the balance sheet at the present value of minimum lease payments determined at the inception of the lease. A right-of-use asset of equivalent value is also recognised. Right-of-use assets are depreciated using the straight-line method over the shorter of estimated life or the lease term. Depreciation is included within the line item administrative expenses in the income statement.
Right-of-use assets are measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the adoption date of IFRS16 Leases, less any lease incentives received at or before the adoption date of IFRS16 Leases. Right-of-use assets are reviewed for impairment when events or changes in circumstances indicate the carrying value may not be fully recoverable.
Lease liabilities are measured at amortised cost using the effective interest rate method. Lease payments are apportioned between a finance charge and a reduction of the lease liability based on the constant interest rate applied to the remaining balance of the liability. Interest expense is included within the line item net finance costs in the income statement.
The lease payments comprise fixed payments, including in-substance fixed payments such as service charges and variable lease payments that depend on an index or a rate, initially measured using the minimum index or rate at inception date. The payments also include any lease incentives and any penalty payments for terminating the lease, if the lease term reflects the Company exercising that option.
The lease term determined comprises the non-cancellable period of the lease contract. Periods covered by an option to extend the lease are included if the Company has reasonable certainty that the option will be exercised and periods covered by the option to terminate are included if it is reasonably certain that this will not be exercised.
Tax on the profit or loss for the 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 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 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 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.
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.
For investments in equity instruments that are not held-for-trading, this will depend on whether the Company has made an irrevocable election at the time of initial recognition to account for the equity investment at fair value through other comprehensive income (FVOCI). The Company reclassifies debt investments when and only when its business model for managing those assets changes.
(ii) Recognition and derecognition
Regular way purchases and sales of financial assets are recognised on trade date (i.e. the date on which the Company 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.
Financial instruments (Continued)
(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 to the income statement.
Debt instruments
Subsequent measurement of debt instruments depends on the Company’s business model for managing the asset and the cash flow characteristics of the asset. There are three measurement categories into which the group classifies its debt instruments:
Amortised cost: Assets that are held for collection of contractual cash flows, where those cash flows represent solely payments of principal and interest, are measured at amortised cost. Interest income from these financial assets is included in finance income using the effective interest rate method. Any gain or loss arising on derecognition is recognised directly in income statement and presented in other gains/(losses) together with foreign exchange gains and losses. Impairment losses are presented as a separate line item in income statement.
FVOCI: Assets that are held for collection of contractual cash flows and for selling the financial assets, where the assets’ cash flows represent solely payments of principal and interest, are measured at FVOCI. Movements in the carrying amount are taken through OCI, except for the recognition of impairment gains or losses, interest income and foreign exchange gains and losses, which are recognised in income statement. When the financial asset is derecognised, the cumulative gain or loss previously recognised in OCI is reclassified from equity to income statement and recognised in other gains/(losses). Interest income from these financial assets is included in finance income using the effective interest rate method. Foreign exchange gains and losses are presented in other gains/(losses), and impairment expenses are presented as a separate line item in the income statement.
FVPL: Assets that do not meet the criteria for amortised cost or FVOCI are measured at FVPL. A gain or loss on a debt investment that is subsequently measured at FVPL is recognised in income statement and presented net within other gains/(losses) in the period in which it arises.
Equity instruments
The Company subsequently measures all equity investments at fair value. Where the Company’s management has elected to present fair value gains and losses on equity investments in OCI, there is no subsequent reclassification of fair value gains and losses to income statement following the derecognition of the investment. Dividends from such investments continue to be recognised in the income statement as other income when the group’s right to receive payments is established.
Changes in the fair value of financial assets at FVPL are recognised in other gains/(losses) in the income statement as applicable. Impairment losses (and reversal of impairment losses) on equity investments measured at FVOCI are not reported separately from other changes in fair value.
(iv) Impairment
The 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.
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.
Trade and other payables
Trade and other payables are recognised initially at cost (being same as fair value). Subsequent to initial recognition they are measured at amortised cost using the effective interest method.
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 three months or less. Bank overdrafts are shown within current financial liabilities.
Interest-bearing loans and borrowings
All loans and borrowings are initially recognised at their fair value less any directly attributable transaction costs.
After initial recognition, loans and borrowings are subsequently measured at amortised cost. Any difference between the proceeds (net of transaction costs) and the redemption amount is recognised in the income statement over the period of the borrowings using the effective interest method.
Gains and losses are recognised in the income statement when the liabilities are derecognised, as well as through the amortisation process.
Group Accounts
The financial statements present information about the Company as an individual undertaking and not about its group. The Company has not prepared consolidated financial statements because it is exempt from the requirement to do so by section 400 of the Companies Act 2006 since it is a subsidiary undertaking of Capita plc, a company incorporated in England and Wales, and is included in the consolidated financial statements of that company.
The Group classifies a non-current asset (or disposal group) as held-for-sale if its carrying amount will be recovered principally through a sale transaction instead of continued use. For this to be the case, the asset (or disposal group) must be available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets (or disposal groups) and its sale must be highly probable. For the sale to be highly probable, the appropriate level of management must be committed to a plan to sell the asset (or disposal group), and an active programme to locate a buyer and complete the plan must have been initiated. Further, the asset (or disposal group) must be actively marketed for sale at a price that is reasonable in relation to its current fair value. In addition, the sale should be expected to qualify for recognition as a completed sale within one year from the date of classification.
Guarantees
The preparation of financial statements in accordance 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 presented 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 :
Revenue : Due to the size and complexity of some of the Company's contracts, there are significant judgements to be applied, specifically in assessing: (i) the recoverability of contract fulfilment assets; and (ii) the completeness of the customer and onerous contract provisions. These judgements are dependent on assessing the contract’s future profitability. It is possible that outcomes within the next financial year may be different from management’s assumptions and could require a material adjustment to the carrying amounts of contract assets and onerous contract provisions. It should be noted that while management must make judgements in relation to applying the revenue recognition policy and recognition of related balance sheet items (trade receivables; deferred income; and accrued income) these are not considered significant judgements.
Contract fulfilment assets : Judgement is applied when determining what costs qualify to be capitalised in particular when considering whether these costs are incremental and when considering if costs generate or enhance resources to be used to satisfy future performance obligations and whether costs are expected to be recoverable.
The measurement of defined benefit obligations : the accounting cost of these benefits and the present value of pension liabilities involve judgements about uncertain events including such factors as the life expectancy of members, the salary progression of current employees, price inflation and the discount rate used to calculate the net present value of the future pension payments. The Group uses estimates for all of these factors in determining the pension costs and liabilities incorporated in the financial statements. The assumptions reflect historical experience and judgement regarding future expectations.
The Group continued to set RPI inflation in accordance with the market break-even expectations less an inflation risk premium. The inflation risk premium has remained at 0.25% pa. For CPI, the Group reduced the assumed difference between the RPI and CPI by 0.1% pa to an average of 0.65% pa. The estimated impact of the change in the methodology is approximately a £5m increase in the defined benefit obligation in respect of the CPLAS scheme.
*In 2022, the Company received dividend from Capita Symonds India Private Limited in advance of its liquidation. In 2021, the Company had received dividend from Capita Glamorgan Consultancy Limited.
The reconciliation between tax charge and the accounting profit multiplied by the UK corporation tax rate for the years ended 31 December 2022 and 2021 is as follows:
Deferred tax
A change to the main UK corporation tax rate was substantively enacted on 24 May 2021. The rate applicable from 1 April 2023 increases from 19% to 25%. The deferred tax asset at 31 December 2022 has been calculated based on this rate. A deferred tax liability of £13,962 was transferred from deferred tax liabilities held-for-sale to deferred tax listed on the balance sheet.
a) During the year, the Company has impaired its investments in Capita India Symonds Limited by £21,426 in advance of its liquidation.
b) The Company performs an impairment test at the balance sheet date comparing the carrying value of subsidiaries held by the Company with their recoverable amount, determined via a discounted cash flow model or net asset value, whichever is higher. As a part of this review the Company identified an instance where the recoverable value i.e., net asset value has increased since the last assessment. Accordingly previously recorded impairment on investments in Capita Property and Infrastructure (Structures) Limited has been reversed to the extent of £60,949.
c) As a part of group restructuring programme, the Company has transferred its investments in Urban Vision Partnership Limited (£55,218), RE (Regional Enterprise) Limited (£51) to Capita Business Service Ltd and investments in Capita Glamorgan Consultancy Limited (£51) to Capita (Real Estate & Infrastructure) Limited. All transfers were made at book value.
Amounts due from parent and fellow subsidiary undertakings are repayable on demand. These are not chargeable to interest except for amount due from Capita Plc, on which interest is charged as per the prevailing Bank of England rates.
Amounts due to parent and fellow subsidiary undertakings are repayable on demand.
Insurance represents professional indemnity provisions. The Directors make professional indemnity/litigation provisions for potential claims against the Company where appropriate. These may be established when internal controls identify potential issues or external notification of intent to make a claim is received.
The property provision represents dilapidation provisions. The Company is required to perform repairs on leased properties prior to the properties being vacated at the end of their lease term. Dilapidation provisions for such costs are where a legal obligation is identified and the liability can be reasonably quantified.
Other provisions includes restructuring provisions which is in respect of the major restructuring activities undertaken by the Group.
The Company participates in both defined benefit and defined contribution pension schemes.
The pension charge for the defined contribution pension schemes for the year is £1,360,076 (2021 Re-presented*: £2,595,887).
*The pension charged excludes pension contributions paid by the Company on behalf of employees via a salary sacrifice arrangement. The 2021 comparative figure has also been re-presented to reflect this.
The Company has current and former employees who are members of: a number of public sector defined benefit pension schemes; the Capita Pension and Life Assurance Scheme (the "Capita DB Scheme") - a defined benefit pension scheme; and two sections of the Industry-Wide Coal Staff Superannuation Scheme - Capita Symonds HQ Employer Fund ("IWCSSS (HQ)") and Capita Symonds On site Employer Fund ("IWCSSS (OS)") – also a defined benefit pension scheme.
Public sector defined benefit pension schemes
Where the Company participates in public sector defined benefit pension schemes, this is for a finite period and there are contractual protections in place allowing actuarial and investment risk to be passed on to the end customer via recoveries for contributions paid. The nature of these arrangements vary from contract to contract but typically allows for the majority of contributions payable to the schemes in excess of an initial rate agreed at the inception to be recovered from the end customer, as well as exit payments payable to the schemes at the cessation of the contract (where applicable), such that the Company’s net exposure to actuarial and investment risk is immaterial. Therefore the costs in relation to all of the above schemes are reported on a defined contribution basis recognising a cost equal to its contribution payable during the period. No amounts are recognised on the Company’s balance sheet.
The pension charge for these public sector defined benefit pension schemes is included in the above pension charge for the defined contribution pension schemes.
Capita DB Scheme
The Company has current employees who continue to accrue benefits in the Capita DB Scheme.
The Capita DB Scheme is a non-segregated scheme with 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.
Responsibility for the operation and governance of the scheme lies with a Trustee Board (the CPLAS Trustees Limited) which is independent of the Company. The Trustee Board is required by law to act in the interest of the scheme’s beneficiaries in accordance with the rules of the scheme 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 Trustee Board is also governed by the rules of the scheme and relevant legislation.
The assets of the scheme are held in a separate fund (administered by the Trustee Board) to meet long-term pension liabilities to beneficiaries. The Trustee Board invest the assets in accordance with their Statement of Investment Principles, which is regularly reviewed.
A full actuarial valuation of the Capita DB Scheme is carried out every three years by an independent qualified actuary for the Trustee of the Capita DB Scheme, with the last full valuation carried out as at 31 March 2020. Amongst the main purposes of the valuation 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 of the Capita DB Scheme and the Principal Employer. The 31 March 2020 valuation showed a funding deficit of £182.2m (31 March 2017: £185.0m). This equates to a funding level of 89.0% (31 March 2017: 86.1%).
As a result of the full actuarial valuation, the Principal Employer and the Trustee Board agreed a funding plan to eliminate the deficit – the Principal Employer has agreed to pay additional contributions totalling £124m between July 2021 and December 2023.
In addition, the Principal Employer has agreed to make additional, non-statutory, contributions of £15m each year in 2024, 2025 and 2026 to meet a secondary funding target. The aim of which is to target, by 2026, the position of having sufficient assets to invest in a portfolio of low risk assets that will generate income to pay members’ benefits as they fall due.
Finally, the Principal Employer 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 full actuarial valuation is due 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 full actuarial valuation to 31 December 2022 taking account of the relevant accounting requirements.
The principal assumptions for the accounting valuation as at 31 December 2022 were as follows: rate of increase in RPI/CPI price inflation - 3.15% pa/2.50% pa (2021: 3.30% pa/2.65% pa); rate of salary increase - 3.15% pa (2021: 3.30% pa); rate of increase for pensions in payment (where RPI inflation capped at 5% pa applies) - 3.05% pa (2021: 3.20% pa); discount rate - 4.75% pa (2021: 1.90% pa).
The Capita DB Scheme assets at fair value as at 31 December 2022 totalled £1,126.3m (2021: £1,732.5m). The actuarially assessed value of Capita DB Scheme liabilities as at 31 December 2022 was £1,087.0m (2021: £1,725.3m) indicating that the Capita DB Scheme had a net asset of £39.3m (2021: net asset of £7.2m). These figures are quoted gross of deferred tax. The full disclosure is available in the consolidated accounts of Capita plc.
For the purpose of these accounts, this Company’s interest in the Capita DB Scheme is reported on a defined contribution basis recognising a cost equal to its contributions paid over the period. The pension charge for the Company in relation to the Capita DB Scheme for the year was £318,375 (2021: £643,807).
IWCSSS (HQ) and IWCSSS (OS)
Responsibility for the operation and governance of the sections lies with the Industry-Wide Coal Staff Superannuation Scheme Trustees Limited ('IWCSSSTL') which is independent of the Company. The IWCSSSTL is required by law to act in the interest of the section’s beneficiaries in accordance with the rules of the Industry-Wide Coal Staff Superannuation Scheme ('Scheme') 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 IWCSSSTL is also governed by the rules of the Scheme and relevant legislation.
The assets of the sections are held in a separate fund (administered by the IWCSSSTL) to meet long-term pension liabilities to beneficiaries. The IWCSSSTL invest the assets in accordance with their Statement of Investment Principles, which is regularly reviewed.
The most recent full actuarial valuation of the sections was carried out as at 31 December 2021. For IWCSSS (HQ) it showed a funding surplus of £176,000 (funding level of 112%) and for IWCSSS (OS) it showed a funding deficit of £28,000 (funding level of 96%). Based on the results of this actuarial valuation, the Company is not expected to make any contributions to IWCSSS (HQ) during 2023. However, it is expected to contribute £10,000 to IWCSSS (OS) during 2023. The next full actuarial valuation is due to be carried out with an effective date of 31 December 2024.
For the purpose of the consolidated accounts of Capita plc, a qualified actuary projected the results of the 31 December 2021 valuation to 31 December 2022.
For the purposes of IFRIC 14, a net pension asset is deemed to be recoverable because the Company has the right to a future refund in the event the scheme is wound-up and there remains a surplus.
The pension charge for the sections for the year was £20,000 (2021: £20,000).
The fair value of plan assets at the reporting period end was as follows:
Risks associated with the Company’s pension schemes
The Capita DB Scheme, IWCSSS (HQ) and IWCSSS (OS) expose the Company to various risks, with the key risks set out below:
Investment risk: If the invested assets under-perform the returns assumed in setting the funding target then additional contributions may be required at subsequent valuation dates for each of these schemes.
Interest rate risk: the discount rate is derived from yields available on good quality corporate bonds of suitable duration. If these yields decrease, then in isolation, this would increase the value placed on the defined benefit obligation and result in a worsening of the funding position of the schemes.
Inflation risk: the obligations of the schemes are linked to future levels of inflation. If future inflation is higher than expected then this would result in the cost of providing the benefits increasing and thereby worsening the funding position of the schemes.
Longevity risk: if members live longer than expected, then pensions will be paid for a longer time which will increase the value placed on the obligations and therefore worsen the funding position of the schemes.
To manage these risks, the Company and the trustees carry out regular assessments of these risks. Refer to the full disclosures available in the consolidated financial statements of Capita plc for further information.
The average monthly number of employees (including non-executive Directors) were:
Their aggregate remuneration comprised:
The above includes payroll costs for temporary staff as well as recharges to other Group entities in respect of various services delivered by the Company throughout the year.
*The 2021 comparative figures have been re-presented to reflect the reclassification of employee contributions from pensions costs to wages and salaries. This has resulted in increase in wages and salaries by £2,421,571 and decrease in pension costs by the same amount. There is no impact on net assets, total profit or retained earnings as a result of this reclassification.
For the year ended 2021, Two Directors were paid by the Company and other Directors were paid by another company within Capita. The other Directors had not provided qualifying services to the Company and were paid by other companies within the Capita Group. Such remuneration had not been allocated to the Company. In addition to the above, the Directors of the Company were reimbursed for the expenses incurred by them whilst performing business responsibilities.
For the year ended 2022, all directors are paid by other companies within the Capita Group. The Company has not paid any fees or other remuneration to the Group based Directors related to the directorship role they provided to the Company as a part of their Group-wide executive management role. The Company has estimated that allocation of the qualifying services that these Group based Directors provided to the Company is inconsequential.
Retirement benefits under defined contribution schemes are accrued for no Directors during the year (2021 - Two).
The number of Directors who exercised share options during the year was One (2021 - Two).
There are no significant post balance sheet events