New arrangements for Related Party Transactions

From Monday 1 April 2019, academy trusts must declare a related party transaction before they agree on it with their supplier. They must also seek approval from the ESFA before they agree on any related party transactions (RPTs) over £20,000.

These new rules have been introduced to help government ensure that no further transactions take place that allow misuse of public funds. The process is designed to stamp these out through increased transparency and accountability.

Upon releasing the guidance, ESFA Chief Executive Eileen Milner said “I know this has caused concern for many academy trusts. I want to provide clarity that we are not trying to change the definition or expand the reach of RPTs in any way. Nor do we want to constrain academy trusts’ ability to make good business decisions. All we seek is extra assurance by introducing a system where academy trusts declare an RPT in advance, while continuing to include the transactions in their financial returns.”

So what transactions does this cover?

This reporting requirement only relates to new agreements made with related parties on or after 1 April 2019. Trusts must declare their intention to enter into these new agreements before confirming with the supplier. Any contracts that are existing will only need to be declared when they reach their renewal date and therefore will be deemed “new” from this point.

The ESFA have also confirmed at the recent ESFA Auditor Forum that any transactions with subsidiary companies will also have to be declared to the ESFA as part of the process.

Income transactions (including donations) do not need to be declared between April and September 2019. However, the ESFA will review this approach between now and September 2019.

Trusts do not need to seek approval or declare any RPTs with regards to employee salaries i.e. those on the trust’s payroll.

When do I need to seek ESFA approval?

Prior approval must only be sought on the following transactions:

• A single contract or agreement with a related party that exceeds £20,000
• A contract or agreement of any value where the total value of contracts or agreements with the same related party exceeds £20,000 in a financial year.

For example, a trust may purchase some professional fees from a related party totalling £12,000 in January and some educational books totalling £9,000 in May. This would take total purchases above £20,000 and therefore would need prior approval.

Any contracts/agreements or transactions below £20,000 only need to be declared.

What if I’m a Church School?

The ESFA only expect transactions with the diocese to be declared and not seek prior approval. Where the above conditions are met a single upload of evidence will suffice.

What information will I need to provide?

The ESFA are clear in that the following information will need to be collated prior to submitting the related party transactions online form as it is not possible to partially complete the form and return to the form at a later date.

For the supplier you will need the following:

• Name
• Address
• Company number

Trusts will also need to confirm:

• The relationship between the supplier and the Trust
• The supplier is listed on the Trust’s register of interests
• A Statement of Assurance is in place
• There is an open-book agreement with the supplier

Once this information has been provided for a supplier, the system will retain this unless any changes need to be made.

A copy of a pro-forma Statement of Assurance can be found here.

By “open-book” this means that the Trust will have discussed with the supplier what their costs are and the level of margin (profit) that will be charged on top. This is to ensure that Trusts have considered the “at cost” rules on RPTs of more than £2,500 in value.

In addition to the above, the Trust will also have to:

• Describe the goods or services provided
• Give details of the proposed cost
• Detail the start and end date of the contract/agreement

For those Trusts seeking approval of transactions they need to submit some additional evidence to the ESFA as follows:

• How the RPT was agreed – minutes from meetings or records of discussions
• Confirmation procurement policy was followed
• Evidence the Trust tested the market before making a decision
• Evidence as to how the Trust managed any conflict of interest
• A copy of the proposed contract/agreement

Examples of managing the conflict of interest would be excluding relevant persons from discussions and/or involvement with the transaction and evidence of the declaration.

Once all information has been submitted it cannot be amended or deleted. The ESFA aim to approve RPTs within 10 working days.

The form is accessed through your IDAMS account.

What good practice steps can Trusts adopt?

Below we have set out some key points that Trusts will need to consider to ensure the process runs smoothly.

• Maintain a summary of all RPTs so that you are aware when contracts might expire or need to be renewed in addition to what need to be approved and which do not
• Ensure your register of interests form is up to date and regularly reviewed
• Ensure that a Statement of Assurance is obtained from a supplier and discussions are held to establish the cost and profit element
• Trust board minutes are clear and make good reference to discussions and decisions regarding RPTs prior to any contracts/agreements being entered into
• Look elsewhere for alternative providers, do not just assume the related party is the best option. Ensure you document your findings.

RPTs are one of the biggest risk areas in the sector and therefore it is important that Trusts take the new reporting requirements seriously and adapt their processes accordingly.

RPTs can often help save time and money for Trusts and should be seen as a legitimate way for academy trusts to work. Unfortunately in recent times RPTs have not been used in this way and have caused reputational damage.

Make sure you download your complimentary copy of Kreston’s Academies Benchmark Report 2019 here: http://eepurl.com/ge8wvr

This year the report includes over 350 Trusts representing nearly 1000 schools and is based on those Academies that prepared financial statements for the period ended 31 August 2018 and which were audited by member firms of Kreston UK.