Academies may have to seek government approval for related party transactions

Published by on 31 May 2018

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Earlier this year the Public Accounts Committee’s report on academies recommended that schools seek Education and Skills Funding Agency (ESFA) approval for related party transactions going forward as they felt the current rules are “too weak”.

The weakness surrounds whether it is possible to tell if someone is making a profit when providing a service. Current rules state annual amounts above £2,500 must not have a profit element attributed to them but where services are provided this can be “rather complex and open to manipulation” when proving they are “at cost”.

According to reports from Schools Week, the Department for Education has agreed with this recommendation and will look to implement the change “during the 2018-19 academic year” which begins this September. The new rule will be fully in place by August 2019. Therefore it is likely we will see some announcements made in the Academies Financial Handbook 2018 when it is released in the coming months, which applies to the 2018-19 academic year.

Therefore going forward Academy Trusts will have to think very carefully before they enter into a related party transaction and ensure they request ESFA approval in plenty of time before the work is needed to be undertaken. Then, of course, there is the whole debate over whether the ESFA have the resources to give approvals in a timely manner!

In addition, Academy Trusts will need to be very clear on what related parties exist within their Academy Trust at all levels. This information will be key to the Trust’s finance team to help identify such transactions before they are made and will need to be regularly updated (if it isn’t already) to ensure rules are not broken inadvertently.

Some sources have suggested that related party transactions should be banned altogether but there are many suppliers out there who provide good quality services to schools yet the owners sit on Trust boards and school governing bodies. So should they not transact with these entities whilst other schools see the benefit? That hardly seems a fair approach.

It is a shame that this level of bureaucracy is needed. But typical playground rules appear to have been applied here where the minority have spoilt the good use of related party transactions for the majority. Many related party transactions are for the good of the schools and help provide real benefit. As the level of bureaucracy increases more and more schools will be put off even considering entering into such transactions and that won’t benefit the sector at all.

To learn more, please feel free to drop Phil an email here, or call +44 (0)330 124 1399.

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