Building audit readiness for DESNZ Social Housing Fund (WH:SHF) Wave 3

Many housing providers are already familiar with the assurance requirements that accompanied the Department of Energy Security and Net Zero (DESNZ) SHDF Wave 2.1 programme, which funded energy-efficiency retrofit works across the 2023/24, 2024/25 and 2025/26 financial years. A key feature of the programme was the requirement for grant recipients to obtain an independent Reasonable Assurance Report in support of their grant claim for each financial year, providing assurance over expenditure, compliance with funding conditions and the accuracy of reported claims.

As the sector transitions from SHDF Wave 2.1 to the re-branded Warm Homes: Social Housing Fund (WH:SHF) Wave 3, many of the same compliance and assurance principles remain. Grant recipients are required to submit an independent accountant's report to DESNZ no later than six months after the end of each financial year.  Wave 3 is expected to support delivery through to September 2028 and is backed by over £1 billion of government funding, alongside significant match funding from eligible organisations.

We have supported a wide range of housing associations and local authorities through the SHDF Wave 2.1 Reasonable Assurance process, giving us direct insight into the areas where providers most commonly encounter challenges in demonstrating compliance. While every programme is different, a number of common themes emerged repeatedly during our work. 

One of the most common observations was that audit findings rarely stemmed from expenditure being inherently ineligible. Instead, issues were more likely to arise where organisations were unable to clearly demonstrate eligibility, evidence compliance with programme requirements, or maintain a sufficiently robust audit trail to support decisions made several years earlier.

A common misconception is that providers must maintain detailed daily timesheets for every individual involved in the programme. While timesheets can be a useful source of evidence, the key requirement is being able to demonstrate that staff costs allocated to the programme are supported by a reasonable, documented and consistently applied methodology.

In our experience, the strongest claims are supported by evidence generated during programme delivery, such as:

• clearly defined roles and responsibilities
• management review and approval of staff effort assumptions.

The greatest challenges typically arise where cost allocations are reconstructed retrospectively at the point a claim is prepared. Where the methodology was not documented and approved during programme delivery, it can be difficult to demonstrate that the resulting allocation is reasonable, supportable and consistent with the programme requirements.

Property eligibility may appear to be a straightforward requirement, but it remains one of the most common causes of audit findings and claim adjustments.

For capital costs claimed under the programme, auditors will need to verify that the properties receiving works met the eligibility criteria set out in the scheme guidance, including requirements relating to pre-works EPC ratings and qualifying housing stock.

In our experience, the greatest risk arises where the final properties receiving works differ from those originally included in the approved programme. As programmes evolve, properties are often substituted for legitimate operational reasons. However, without appropriate review and documentation, there is a risk that replacement properties may not satisfy the programme's eligibility requirements.

Under Wave 3, eligible properties are generally social homes in England with a pre-works EPC rating below C. The guidance does, however, provide limited exceptions to this general rule, including certain infill properties, non-social homes and social homes at EPC band C or above, and homes receiving specific low-carbon heating measures. These exceptions are subject to prescribed limits and thresholds, which must be monitored throughout programme delivery.

Providers should therefore be able to demonstrate:

• the property's pre-works EPC rating and eligibility status
• the basis on which the property qualified for funding
• the rationale for any property included under an eligibility exemption or exception
• that programme thresholds relating to exceptions were not exceeded
• a clear audit trail connecting each item of claimed expenditure to the relevant eligible property.

A key lesson from Wave 2.1 is that eligibility should not be treated as a one-off exercise performed at programme mobilisation. Any changes to approved property lists should be subject to the same level of review and documentation as the original eligibility assessment. Doing so helps identify and address compliance issues before works commence, rather than during the assurance process.

Cost eligibility involves far more than demonstrating that expenditure was incurred. Auditors will assess whether costs relate to eligible activities, were incurred within the permitted claim period and are supported by sufficient evidence to substantiate the claim.

One of the most common challenges arises where providers can demonstrate that a cost has been committed or paid but cannot clearly evidence the underlying work performed or its connection to eligible retrofit measures.

Providers should therefore be able to demonstrate that:

• the cost is eligible under the programme funding rules
• the cost has been appropriately classified as either Administration and Ancillary (A&A) expenditure or Capital expenditure in accordance with programme requirements
• the cost was incurred within the applicable claim period
• capital expenditure can be linked to specific properties and eligible retrofit measures
• capital expenditures are supported by appropriate evidence of delivery, including invoices, statements of work or valuation reports evidencing the value of works completed at the claim date
• sufficient evidence exists to demonstrate that works have been completed, or where permitted, have genuinely commenced.

A key lesson from Wave 2.1 is that demonstrating a cost has been incurred is only one part of the assurance process. For capital expenditure in particular, providers should be able to demonstrate what works were carried out, where they were undertaken, the value of those works at the claim date and how that value was determined. Where claims include accrued expenditure or works not yet invoiced, valuation reports, statements of work and other evidence supporting the stage of completion become particularly important. 

The strongest claims are those where the financial records, contractor evidence and property-level delivery records tell a consistent story and can be traced from the grant claim all the way back to the retrofit works delivered on site.

One of the fundamental requirements of the programme is that providers are generally expected to provide at least 50% co-funding alongside the grant funding received. While compliance is ultimately assessed over the life of the programme, our experience from SHDF Wave 2.1 showed that co-funding should not be treated as a year-end exercise.

Auditors will typically review whether:

• eligible match funding has been clearly identified
• grant-funded and match-funded expenditure have been appropriately separated;
• co-funding expenditure relates to eligible project costs
• the calculation of the 50% minimum co-funding requirement excludes homes benefiting from the on-gas grid low carbon heating incentive offer
• the programme remains on track to achieve the required co-funding commitment by the end of the grant period.

A common issue under previous funding rounds was that match funding was only assessed when preparing the annual claim or approaching programme completion. In some cases, this resulted in providers having to revisit expenditure records, reconsider cost allocations or identify additional qualifying expenditure to maintain compliance.

For Wave 3 recipients, early monitoring will become even more important. The guidance requires applicants to set out their planned co-funding contribution by financial year and introduces minimum annual spending requirements. Grant recipients must spend at least 10% of their total co-funding contribution in each financial year from 2025/26 onwards, while no more than 50% of total co-funding can be incurred in financial year 2028/29. Compliance with the overall 50% minimum co-funding requirement and the annual spending profile will be monitored throughout the programme delivery.

Good practice is therefore to maintain a live co-funding reconciliation throughout the programme, supported by regular management review. This not only simplifies the assurance process but also provides early visibility of any funding shortfalls, timing issues or compliance risks before they become findings during the annual Reasonable Assurance Review.

VAT is often overlooked during programme delivery but can become a key area of focus during the assurance process.

The grant funding received by the Lead Applicant falls outside of scope of VAT, as the receipt of grant funding does not constitute consideration for a taxable supply for VAT purposes.

Where VAT is included within a grant claim as eligible expenditure, it is the responsibility of the grant recipient to demonstrate that the VAT is genuinely non-recoverable. The programme guidance expects organisations to have considered the VAT implications of retrofit works before submitting their application, including the nature of the supplies being received and the associated VAT treatment. Where uncertainty exists, organisations should consider obtaining specialist VAT advice at an early stage.

Our experience from previous programmes suggests that VAT issues are often easier to resolve when they are considered and documented throughout the life of the project, rather than being assessed for the first time during the assurance process. Grant recipients that maintain a clear record of their VAT position including the rationale supporting any irrecoverable VAT claims, are generally better placed to support claims and avoid unnecessary audit challenges.

Our specialist Grant Audit and Other Assurance team can support you in meeting the independent Reasonable Assurance requirements of DESNZ-funded programmes. We provide the annual accountant’s report that grant recipients are required to submit to DESNZ within six months of their financial year-end. 

Drawing on our experience from previous funding rounds, we can help you approach the assurance process with confidence and minimise avoidable challenges during the audit.

Whether you are at the start of your Wave 3 programme or preparing for your first assurance review, we can help you assess your readiness, strengthen your supporting evidence and navigate the assurance requirements with confidence.

If you would like to discuss your Wave 3 programme and how we can support you, please get in touch with your usual Crowe UK contact.