The Department for Environment, Food & Rural Affairs (Defra) has published its 2024-25 accounts. Gareth Davies, the Comptroller and Auditor General (C&AG), has issued a clean audit opinion, providing assurance to Parliament on the financial statements.

This is the first time the C&AG has provided a clean opinion on the Defra financial statements since 2018-19. The C&AG’s Report on accounts commends the Department and Environment Agency for the progress they have made in the asset data supporting their valuation of key infrastructure, and sets out opportunities to build on this progress.

Here we share highlights from his audit certificate. You can read the full certificate and report on the accounts in context in Defra’s annual report and accounts.

Opinion on financial statements

In my opinion, the financial statements:

  • give a true and fair view of the state of the Department and the Departmental Group’s affairs as at 31 March 2025 and their net expenditure for the year then ended; and
  • have been properly prepared in accordance with the Government Resources and Accounts Act 2000 and HM Treasury directions issued thereunder.

Opinion on regularity

In my opinion, in all material respects:

  • the Statement of Outturn against Parliamentary Supply properly presents the outturn against voted Parliamentary control totals for the year ended 31 March 2025 and shows that those totals have not been exceeded; and
  • the income and expenditure recorded in the financial statements have been applied to the purposes intended by Parliament and the financial transactions recorded in the financial statements conform to the authorities which govern them.

Key audit matters

Affecting the Department (Core and Agencies columns) and Departmental Group

Basic Payments Scheme delinked payments

Description of risk

The Department (including the Rural Payments Agency) administers several grant schemes set out in Note 3.3 of the Group accounts.

The Department is implementing a significant transition away from the area-based Basic Payments Scheme (BPS), towards schemes more focused on specific environmental outcomes, such as Countryside Stewardship and the Sustainable Farming Incentive. A temporary element of this transition is the payment to BPS customers between scheme years 2024 and 2027 of amounts which do not require eligible recipients to perform ongoing actions, such as active farming. These ‘delinked payments’ are based on previous BPS entitlements which establish reference amounts. The Department set out an expectation that these will have progressive reductions applied over time, as has been the case for the Basic Payments Scheme since scheme year 2021 (see Notes 1.21 and 15.3).

Because of the lack of ongoing performance obligations for recipients, or further claims required by recipients following their final BPS claim, the Department recognised liabilities in 2023-24 reflecting the full extent of its obligations under the delinked payments scheme. At 31 March 2024 these included a provision of £799 million (note 15.1) relating to the 2025-27 payments for which no announcements have been made at year end on the speed of progressive reductions. In the absence of better information, the Department assumed a pattern close to a straight line tapering of payments.

Alongside the newly elected government’s first budget in October 2024, an announcement of 2025 rates was made which set out a steeper progressive reduction regime. The Department judged in respect of its 2023-24 accounts that this reflected new conditions arising after the year end, and that this was a non-adjusting event for those accounts. The impact of that announcement on reducing the provision value for the lifetime cost of the delinked payments scheme has therefore crystallised in 2024-25.

This year, management again faced a judgement on whether a post-year-end announcement in June 2025 reflected conditions at the period end, or new events arising since that time. This announcement further accelerated the rate of progressive reduction, in respect of the remaining scheme years. Management noted that final decisions on Spending Review 2025 were taken as a whole following the year end, but ultimately considered enough events had occurred within the reporting period to suggest that the changes announced in June should inform their best estimate at the period end of the cost of future obligations, and therefore the provision value.

Taken together, the two events accelerating the rate of progressive reductions which have been recognised in year have produced a write-back of the delinked payments provision by £531 million (notes 15.1 and 15.3), reducing the Department’s net expenditure by the same amount.

I considered management’s judgement on whether to recognise the 2025 event within 2024-25 as an audit risk.

Key observations

I obtained sufficient assurance over this risk through my substantive testing. Management adjusted their position in respect of in-year recognition as a result of refreshed analysis following initial audit challenge.

Regularity of agri-environmental grants

Description of risk

The Department (including the Rural Payments Agency) delivers both capital and current grant payments to land managers, which are recognised in note 3.3. While historically dominated by area-based subsidies, expenditure on current grants is now dominated by schemes which provide payments for compliance with various environmental conditions. Grant schemes are designed by the Department, after which the Secretary of State issues detailed requirements and guidance for each scheme. These must comply with the broad frameworks approved by Parliament in statutory regulation.

The Department makes an estimate of the extent to which its expenditure is irregular – meaning that payments have not been made in accordance with scheme rules, and/or have not been applied in line with those rules by grant recipients. For the largest schemes – Countryside Stewardship and the Sustainable Farming Incentive – grant expenditure in 2024-25 totalled £1,122 million (note 3.3) of which the Department estimates that £39 million was irregular. The agency measures irregularity based on site visits and remote verification, both of which determine the extent to which the scheme requirements are being met. Where identified, irregularity is measured in proportion to the taxpayer loss it implies.

These irregularities will in many cases represent genuine error by grant recipients, though some may reflect fraud, for example if an agreement holder makes an annual declaration knowingly overstating delivery. It is often impracticable to distinguish between these scenarios based on the evidence available; and both involve under-delivery based on the scheme rules, implying a taxpayer loss.

Scheme design affects the inherent risk of irregularity, or non-compliance. A subsidy scheme based predominantly on farm area (as in the previously dominant Basic Payments Scheme) has an inherently lower risk of non-compliance compared to multi-option agri-environmental schemes, both because of these schemes’ complexity and their ambition in specifying particular outcomes. These scheme-level considerations do not imply that a policy with a lower regularity risk is better value for money; it is for the Department’s Accounting Officer to evaluate the mechanisms best suited to delivering the government’s desired outcomes. The estimate of irregularity does not include any measurement of over-delivery by grant recipients which – while not exceeding the implied taxpayer losses from under-delivery – is relevant to a wider consideration of taxpayer value.

I assessed the extent of irregularity in respect of Countryside Stewardship and the Sustainable Farming Incentive, and the accuracy of management’s estimation of it, as an audit risk.

Key observations

I obtained sufficient assurance over this risk through my substantive testing. I concluded that in the round, these levels were not so high as to require me to qualify my opinion on the regularity of the Department’s transactions for 2024-25.

Affecting the Departmental Group only

Depreciated Replacement Cost valuation of operational infrastructure assets

Description of risk

The Environment Agency – the Departmental Group’s largest component – manages a portfolio of operational infrastructure assets, predominantly to respond to risks of flooding.

The accounting framework set for Government bodies by HM Treasury dictates that these specialised assets should be valued under the Depreciated Replacement Cost (DRC) method, reflecting the theoretical cost of an as-new modern equivalent asset portfolio, adjusted to reflect the portfolio’s actual condition.

As at 31 March 2023 the Environment Agency implemented a DRC valuation on this portfolio for the first time. I previously qualified my opinion on 31 March 2023 and 2024 figures because I was unable to obtain sufficient appropriate audit evidence arising from issues with the accuracy and completeness of source data on assets. Management’s preparation of the 2024-25 accounts follows significant progress in a project aimed to improve the quality of asset data. For some assets, management has not yet captured dimensional measurements relevant to valuation; in these cases, it has applied statistical approaches, informed by management’s civil engineering expertise, to arrive at reasonable ‘fixed average’ attribute data to apply to the population remaining unmeasured.

Building on this improved source data both on the assets held and their dimensional attributes, as well as existing costing information for which management worked with a cost estimation expert and management’s own data on asset condition, the Department has updated its operational infrastructure assets valuation. At 31 March 2025 it estimates these assets’ net book value at £9,066 million as disclosed in Note 5, which also describes the method of preparation and the estimation uncertainty connected with this estimate in more detail.

The Department has also applied an adjustment to apply its revised dataset and assumptions retrospectively to 31 March 2023 and 2024 figures, and the 2023-24 comparative year, through a prior period adjustment (Note 19). In doing so, management have relied on the relative stability of the Environment Agency’s asset base, and their ability to compensate retrospectively for known additions, reclassifications, and estimated changes in current cost based on relevant construction indices.

Noting the high estimation uncertainty in respect of this estimate, I assessed an audit risk in respect of:

  1. asset source data on the quantity, nature and extent of assets within the Environment Agency’s control (in respect of accuracy, rights and completeness);
  2. modelling and assumptions supporting valuation (for example, models for the replacement cost of asset types, and the derivation of fixed averages for dimensional inputs used where data for specific assets is unavailable);
  3. whether indices to bring the estimate to current cost were appropriately chosen and properly applied;
  4. the depreciation factors applied to reflect an adjustment between the as-new modern equivalent asset value and the depreciated replacement cost of the actual portfolio;
  5.  the sufficiency and accuracy of estimation uncertainty disclosures; and
  6. the reasonableness of management’s assertion that the valuation can be applied retrospectively through a prior period adjustment, and the accuracy of that application.

Key observations

I obtained sufficient assurance over this risk through my substantive testing. Management adjusted the estimate as a result of audit work in respect of costing rates and the derivation of fixed averages.

I have obtained sufficient assurance over the restated balances as at 31 March 2024 and 31 March 2023. I had previously qualified my audit opinion in respect of these periods, when reporting on the 2023-24 financial statements.

Valuation of defined benefit pension balances (Environment Agency)

Description of risk

The Environment Agency is responsible for a significant funded defined benefit pension scheme – the Active Scheme – for which the Group discloses £2,948 million of defined benefit pension obligations and £4,309 million of recognised scheme assets. While on an IAS 19 basis the scheme is in an underlying surplus position, the Group recognises a net balance of £nil since this is the ‘asset ceiling’ management assess this year, in response to accounting rules (IFRIC 14) which restrict the recognition of a surplus based on the extent minimum funding requirements may prevent the entity from fully accessing its economic benefits (31 March 2024: full recognition of £797 million surplus).

In light of the judgement and estimation uncertainty inherent in this area, I assessed as an audit risk the valuation of the assets and liabilities contributing to this scheme’s net position, as well as the asset ceiling judgement. Management describe their key judgements in Note 16.

Scheme liabilities

As with all defined benefit pension schemes, an actuarial estimate of the liability reflecting amounts to be paid out to members of the scheme in the future involves significant estimation in respect of key financial and demographic assumptions, applied to scheme membership data. While membership remained broadly stable this year, liabilities decreased principally as a result of an increase in the discount rate.

Scheme assets

Because they represent the asset classes with higher levels of valuation uncertainty, I placed particular emphasis on assurance over the valuation of financial assets relating to equity, credit and infrastructure, given the extent of unobservable inputs. My assessment is partly informed by stale pricing risk, i.e. the risk arising from delays in investment managers providing the periodic valuation coterminous with the Environment Agency’s reporting date.

Recognition of surplus

At both 31 March 2024 and 2025, the Environment Agency have considered the difference between the actuarially estimated future service costs, and the minimum employer contributions for the same periods. This calculation relies on the use of financial assumptions used in the preparation of the defined benefit obligation at the relevant balance sheet date, and is particularly sensitive to changes in discount rate, which increased during the year. As a result, while management’s methodology for assessing the impact of IFRIC 14 has not changed, the underlying scheme surplus has moved from being recognised in full at 31 March 2024 to being restricted to £nil at 31 March 2025.

Key observations

I obtained sufficient assurance over this risk through my substantive testing. In the course of preparing the accounts, management adjusted the asset ceiling as a result of both audit work and work with their own experts.

Application of materiality

Departmental group – Overall

Materiality: £147 million

Basis for determining materiality: 1% of the Departmental Group’s assets

Rationale for the benchmark applied: Non-current assets are the largest item in the Statement of Financial Position. Significant public benefit is derived from these, including flood defence assets, driving user interest in Defra’s asset base, including the extent and condition of those assets.

Elements of financial reporting to which the thresholds are applied: All elements not affected by the additional threshold described in the central column. Areas assessed against overall materiality include the valuation of property, plant and equipment and associated non-cash entries; the non-cash valuation movements in pension scheme accounting; and the classification of project expenditure between amounts to be expensed and amounts to be capitalised.

Departmental group – Additional

Materiality: £78 million

Basis for determining materiality: 1% of the Departmental Group’s gross expenditure excluding depreciation and impairment, but including capital additions

Rationale for the benchmark applied: Users are additionally sensitive to misstatements in transactions and balances reflecting the extent of financial activity backed by taxpayers or fee-payers. Capital additions are included since these form part of Total Managed Expenditure voted by Parliament, and depreciation is excluded to avoid double-counting.

Elements of financial reporting to which the thresholds are applied: Those which directly reflect the extent of the Departmental Group’s financial activities, rather than being purely updates to valuation. Areas assessed against this additional threshold include the transactions and balances connected with revenue and cash-based expenditure. The greater part of component audit teams’ effort is applied to work against this additional threshold, and it also forms the basis of considering whether irregularities across the Group are material.

Department parent – Overall

Materiality: £68 million

Basis for determining materiality: 1% of the Department’s gross expenditure

Rationale for the benchmark applied: Expenditure is the most significant financial statements element for the parent and is a fair proxy for user sensitivity given Defra’s role as a spending Department.

Elements of financial reporting to which the thresholds are applied: All transactions, balances and disclosures related to the “Core and Agencies” columns. This materiality is also used to consider whether irregularities in the parent are material.

Defra Annual Report and Accounts 2024-25

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