Providers need to be alive to the risk of contractors becoming insolvent and how to limit the resulting inevitable disruption.
On 1 April 2019, new rules will come into force concerning how academy trusts must deal with reporting related party transactions.
What is a related party transaction?
It is a transaction entered into by an academy trust with any of the following:
- a member of the trust;
- a trustee of the trust;
- a close family member or member of the same household of a member or trustee (e.g. child, parent, spouse or civil partner);
- an individual or organisation carrying on business in partnership with a member, trustee or close family member of the member or trustee;
- a company in which a member, trustee or a close family member of the member or trustee owns more than 20% of the share capital, or can exercise more than 20% of the votes at a members’ meeting;
- any other organisation that is controlled by a member, trustee, close family member of a member or trustee, or any combination of these;
- an individual or organisation with the right to appoint members or trustees of the trust, or any body connected to the individual or organisation; and
- the sponsor of the trust or any body connected to the sponsor.
All related party transactions arising after 1 April must be declared to the Education and Skills Funding Agency (ESFA) before signing any contract with the supplier of the goods or services. The ESFA must approve any transaction with a value of more than £20,000 before a contract is signed. This also applies to a smaller value contract that would take the total value of transactions with the related party to more than £20,000 in any academy financial year.
What else do we need to know?
An academy trust’s Articles of Association also contain rules regarding payments to members, trustees and those connected to them. The limitations imposed and the processes needing to be followed under the Articles where related party transactions are envisaged, need to be carefully considered alongside the requirements of the Academies Financial Handbook. If a payment is not permitted under the Articles, then specific Charity Commission consent will be required before it can be made, even if the conditions in the Academies Financial Handbook can be met.
A trust must always obtain the ESFA’s consent for ‘novel, contentious or repercussive’ transactions (whether with a related party or not), which are defined as follows:
- Novel transactions are those of which the trust has no experience or that are outside its range of normal business.
- Contentious transactions are those that might cause criticism of the trust by Parliament, the public or the media.
- Repercussive transactions are those likely to cause pressure on other trusts to take a similar approach and hence have wider financial implications.
Related party transactions with a cumulative value of more than £2,500 in any academy financial year are also subject to the ‘at cost’ rule, whereby the payment made to the supplier cannot include any element of profit.
Is more guidance available?
Yes. You can check out the detail in the Academies Financial Handbook, and the ESFA has also published new guidance that includes information about what Academy Trusts need to do before completing the online form to advise the ESFA of a related party transaction. You can find this guidance here.
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