Getting to grips with the funding and accounting challenges facing digital investment

Catherine Mitchell profile picture

14 January 2022

Catherine Mitchell
Head of Costing and Value
Healthcare Financial Management Association


Digital technologies such as digital medicine, artificial intelligence and robotics have a huge potential to transform the delivery of healthcare. These technologies can empower patients to participate actively in their care, with a greater focus on wellbeing and prevention. They also support the prediction of individual disease risk and personalise the management of long-term conditions.

NHS Providers' guide Making the right technology decisions highlights the important role board members have in making the case for digital technology investment: 'Constructive challenge is critically important – board members shouldn't shy away from asking tough questions.'

Board members do need to have an overview of the funding and accounting challenges facing digital investments.

Catherine Mitchell    Head of Costing and Value

What do board members need to be aware of from a finance perspective? While they can turn to their finance colleagues for expert technical advice, board members do need to have an overview of the funding and accounting challenges facing digital investments.

The Healthcare Financial Management Association (HFMA) briefing Accounting for revenue and capital: implications for the digital age explores the key funding and accounting issues that need to be considered when developing business cases for digital transformation projects.

The funding and accounting arrangements for innovative digital technologies can be complex, and not having a good understanding of these early on can put the whole project at risk.
Business cases need to address the following questions:

  • how will the investment be funded and what conditions are attached to the funding?
  • does the expenditure, in part or whole, meet the definition of a capital expenditure?
  • does the classification of the expenditure align with the conditions attached to the funding?
  • if the expenditure is capital, does the organisation have sufficient capital budget to invest in the digital project?


Capital expenditure is money spent on purchasing an asset (tangible or intangible) that has the potential to earn income or will be used to provide services in the future. The asset will be controlled by the organisation and used for more than a year.

Tangible assets include buildings but also computers and equipment. Intangible assets can include software that is either developed in house or specifically for the NHS body. Revenue expenditure is usually described as day-to-day running costs. Any expenditure that does not meet the definition of capital is revenue.

Capital funding cannot be used to finance expenditure that is classified as revenue expenditure and vice versa. This can be a challenge for digital projects that are often funded as capital but do not meet the accounting criteria for capital expenditure.

It is important to understand whether expenditure on a new digital product or service meets the definition of capital expenditure.

Catherine Mitchell    Head of Costing and Value

It is important to understand whether expenditure on a new digital product or service meets the definition of capital expenditure, as there is a limit on the amount of capital expenditure that the NHS as a whole can incur in any one year. This is called the Department for Health and Social Care's (DHSC) capital departmental expenditure limit (CDEL). Integrated care systems are given an annual capital allocation that are, in turn, allocated to NHS bodies for locally agreed projects.

NHS demand for capital expenditure each year exceeds the annual CDEL, which means that health systems cannot deliver all the capital projects they would like to. If digital projects are determined to be revenue, then there is a risk that they cannot go ahead without revenue funding but, equally, that the capital resource cannot be used on other capital projects and will be lost.

The financial arrangements for digital technologies are no different to any other project in the NHS. However, it is particularly important to understand the financial regime when developing innovative digital ways of working, so that challenges can be addressed early on. Some of the particular challenges include:

  • The rapid development of digital technologies means that the accounting treatment has to be considered from first principles. The changing way that digital technologies are delivered is raising new challenges for how software should be accounted for. The HFMA briefing describes the most recent conclusions on when software should be capitalised.

  • Complex, multi-agency digital innovations that are not yet business as usual mean that it is not always immediately clear whether new digital investments are capital or revenue expenditure and the reality is that many projects will involve a mixture of both types of expenditure. The HFMA briefing includes illustrations to highlight the impact these issues may have on plans for digital innovation.

  • Often funding is for capital expenditure, but spending on digital technology may not meet the definition of capital, meaning that there is a mismatch between accounting and funding. The accounting treatment is based on the substance of the transaction not the source of the funding. There is unlikely to be a simple solution to this conundrum.

  • Where the digital technology does meet the definition of capital, the annual CDEL limit for the DHSC cannot be exceeded. The project must therefore be within budget, and expenditure must be made in the year for which it is planned as there are no carry-forward arrangements.


Early consideration of the funding and accounting issues of digital investment should help ensure they are not obstacles to delivering the transformational benefits.

You can find out more about the HFMA's Delivering value with digital technologies programme here.

About the author

Catherine Mitchell profile picture

Catherine Mitchell
Head of Costing and Value

Catherine Mitchell has been head of costing and value at the Healthcare Financial Management Association (HFMA) since 2014.

Catherine qualified as a chartered accountant with Arthur Young and then worked for KPMG, before working with the Audit Commission for 18 years. She was national mental health lead for her last four years at the Audit Commission, following which she was deputy director of Intelligence at Mental Health Strategies.

She has a strong background in helping health services maximise the use of their resources for the benefit of patients, and her innovative approaches to the use of data have supported health services to improve their understanding of service delivery and performance.

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