The new related party transactions reporting rules from 1 April 2019

The Education and Skills Funding Agency (ESFA) has issued guidance on the new related party transactions reporting requirements for academies, which came into effect on 1 April 2019.

Related party transactions (RPTs) have been a hot topic in the academies sector in recent years. Although 98 per cent1 of RPTs entered into by trusts are compliant, high-profile cases and scandals involving the misuse of public funds have brought pressure to bear, the result of which is the new RPTs reporting requirements.

On issuing the guidance, Eileen Milner, Chief Executive of the ESFA, said “…we are not trying to change the definition or expand the reach of related party transactions 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 RPTs in advance, while continuing to include the transactions in their financial returns.”

The ESFA guidance can be found here:Related Party Online Guidance from ESFA

What are RPTs?

An RPT is basically a transaction between an academy trust and a “related party”. Although the guidance does not include a specific definition of a related party, it does refer to the definitions in Financial Reporting Standard (FRS) 102 and the Charities SORP as well as the principles applying to RPTs in the Academies Financial Handbook (AFH).  

Broadly speaking though, a related party is a member, trustee (i.e. director or governor), member of the senior management personnel of the academy trust, any close family member of a member, trustee or senior management personnel and any organisation connected to a member, trustee or senior management personnel who these people can exert control or significant influence over the academy trust.

Academy trusts will therefore need to use their judgement on what constitutes an RPT based on these definitions or otherwise seek advice from their accountants and auditors. 

What’s changed from 1 April 2019?

From 1 April 2019:

  • Academy trusts must notify the ESFA in advance of entering into any RPT, regardless of the value of the transaction.
  • Academy trusts must seek the prior approval of the ESFA if a proposed RPT exceeds £20,000 as a single transaction, or where a proposed RPT of any value takes the total value of RPTs with that related party to more than £20,000.

The new requirements mean trusts must notify the ESFA of their intention to enter into the RPT before confirming the agreement or transaction with the related party.

What type of RPTs do the new rules apply to?

The new rules only relate to new agreements or contracts made with related parties from 1 April 2019, so do not impact on existing agreements until they renew or are retendered / renegotiated.

With existing arrangements that roll on indefinitely (i.e., no contract end date), while you could argue these will not fall under the new rules, these should be reported in the spirit of transparency, bearing in mind trusts would need prior approval where the value of the arrangement exceeds £20,000 in a financial year.

Importantly, the new rules do not apply to RPT’s made under an employment contract, although appropriate recruitment policies should always still be followed.

The new rules also do not apply to income RPTs (i.e., receipts from a related party).

Transactions within an academy trust, such as MAT where schools pay a central service charge to the MAT head office, are not RPTs so do not need reporting.

How should I capture related party information and RPTs?

Every academy trust should maintain a register of interests, which should capture the business and pecuniary interests of members, trustees, senior management personnel and any close family members of these people, so this will be a starting point for recording related party information and RPTs.

The register of interests will then need to be expanded to capture the relevant information when transactions arise with a related party, as well as the details of the transactions themselves, so that this information can be used to report to the ESFA.

How do I report RPTs to the ESFA?

RPTs must be reported via an RPT online form, accessed via an IDAMS (Identity and Access Management System) account.  

What information needs to be reported to the ESFA?

Academy trusts will need to ensure they have all the information and documents ready before starting the online form – it’s not possible to partially complete the form and return to it later.

Academy trusts will also need to:

- create a record for each supplier (i.e., each related party)

- confirm details of the relationship between the supplier and the academy trust

- confirm the supplier is listed on the academy trust’s register of interests

- confirm a statement of assurance is in place, and

- confirm that an open-book arrangement is in place with the supplier.

The statement of assurance and open-book arrangements are important because they relate to the ‘at cost’ requirements under the AFH. Academy trusts will also need to include additional evidence of how they made their decision (including minutes of meetings, confirmation that an appropriate procurement policy was followed and evidence of value-for-money considerations), how they managed conflicts of interest, the nature of the goods or services being procured, and a copy of the proposed cost and dates of the agreement/contract.

The ESFA does stress that this is not an exhaustive list, so exactly what trusts provide will depend on the circumstances of the RPT. RPTs should be approved by the ESFA within 10 working days, providing sufficient information has been submitted.

Are there any exemptions for Church trusts?

The good news here is that services procured from the Diocese that are deemed to be ‘at cost’ (i.e., services that provide essential functions fundamental to the religious character and ethos of a school) will not need prior approval from the ESFA. They will, however, still need to be reported to the ESFA, but this can be done as a single notification.

Our top tips

  1. Ensure you have a consistent academy trust-wide process in place to record interests and manage the disclosure and reporting of RPTs.
  2.  Regularly review your RPTs and anticipate whether any are reaching the £20,000 threshold for prior approval.
  3.  Ensure all RPTs are properly procured and approved in line with the AFH requirements and that this is all clearly evidenced.
  4.  Ensure you have all the necessary evidence and information regarding RPTs before starting the online form.
  5.  Ensure you notify the ESFA of your intention to enter into the RPT before confirming the agreement/contract with the related party.

Further guidance and examples *

We have also provided some examples of potential RPT scenarios and how these would be reported to the ESFA along with the documentation to provide to the ESFA as part of the reporting process (if required).

As always, we recommend that all trustees, accounting officers and chief financial officers read and familiarise themselves with these new rules and requirements.

If you are concerned or unsure of any of the changes set out in this update, or have any questions about these new rules and reporting requirements, then please contact one of the Whitley Stimpson Academies Team directly.

Example 1

Edna Everage is a trustee of the ABC Academy Trust (ABC). Her spouse is the sole shareholder and director of IT Limited (ITL), an IT support company specialising in the schools sector. ABC need some bespoke IT support services and through a procurement exercise in line with their financial procedures, ABC decided that a contract with ITL provides the best value option for them.  On 15 April 2019 they award the contract to ITL for a value of £26,000 (plus VAT), with the contract set to commence on 1 May 2019 and run for a 17 month period through to 31 August 2020, after which it will be due for renewal on an annual basis from 1 September each year.

As the proposed contract with ITL falls under the “at cost” requirements of the AFH, as part of the tender exercise, the trustees of ABC have satisfied themselves that the services provided by ITL are at no more than cost and ITL has also provided a statement of assurance to this effect.

In this example, as the total contract value is in excess of £20,000, ABC would need to seek the prior approval of the ESFA before entering into the contract with ITL. As part of this they would need to provide the following information and documentation to the ESFA as part of the approval process:

  • How the contract was undertaken and agreed (e.g. documentation from the tender exercise including evidence of how ITL presented the best value for money option, minutes of a trustees (or sub-committee) meeting where the proposed contract with ITL was agreed);
  • Evidence as to how the academy trust managed conflicts of interest in the tender process (i.e. by ensuring that Edna Everage was not involved in the tender exercise or final decision making in any way); and
  • A copy of the proposed contract with ITL

As set out in the ESFA’s guidance, this is not an exhaustive list and other information or documents that may need to be provided in this instance are:

  • Evidence of how ABC has satisfied itself that the services are at cost; and
  • A copy of the statement of assurance provided by ITL.

The other point to add in this example is that as the initial contract is for a 17-month period, the full value of the contract needs to be declared and prior approval sought from the ESFA.

Example 2

The ABC Academy Trust (ABC) has a trading subsidiary company, XYZ Limited (XYZ), which provides cleaning services to ABC and other local schools which are not part of ABC. ABC have a standing agreement in place with XYZ, which sets out the basis of the charging for the cleaning services and renews at the beginning of each new academic year.  The charges for current academic year (i.e. 2018/19 year) are £2,000 per month.

Although the value of the agreement for the current academic year is greater than £20,000, as this is an existing agreement, there is no requirement to report the transaction to the ESFA or indeed seek their prior approval.

However, at the point the charges for the 2019/20 academic year are agreed and agreement renewed, ABC will need to seek the prior approval of the ESFA if the value of services still exceed to £20,000.  As ABC would need to obtain the ESA’s approval before the agreement renews, then in this example, ABC would need to seek the ESFA’s approval prior to 1 September 2019 when the agreement renewed.

Example 3

Ned Kelly is the Chief Executive of ABC Academy Trust (ABC) and his spouse is to be employed by ABC as a classroom teacher with effect from 1 May 2019. ABC has undertaken an appropriate recruitment processes for the position, which Ned Kelly was not involved in, and the remuneration for the role is in line with published pay scales for the teaching role which is an M6 level. 

Mrs Kelly’s salary does not need to be declared or approved by the EFSA as salaries and other payments under contracts of employment outside the scope of the new reporting rules. However, this will need to be disclosed in ABC’s financial statements as a related party transaction in line with the disclosure requirements set out in the Academies Accounts Direction published by the ESFA.

Example 4

David Gulpilil is a trustee of ABC Academy Trust (ABC) and is also the Finance Director of Learning Aspire Limited (LAL), which provides educational training services to the schools sector. Although David is a director of LAL, there are 5 other directors and he has no ownership interests in LAL. As a result of a recent Ofsted visit, the trustees of ABC have decided to engage LAL to provide some ad-hoc training services to its senior leadership team.  The training is to be delivered over the months of June and July 2019 and the agreed costs of this training are £4,000.  The Business Manager at ABC did obtain an alternative quote from another training provider, which was in line with ABC’s financial procedures, and the trustees approved LAL for the training on the basis they presented the best value for money option.  David is not involved in the delivery of the training services to ABC in any way and excluded from the trustees meeting where the decision to engage LAL was approved.

In this example, LAL would not be considered to be a related party of ABC under the definitions set out in FRS 102 or the Charities SORP as although David is a director or LAL he does not have control or joint control of LAL or is not otherwise considered to be able to exercise significant influence over the financial and operating decisions of LAL.  As such, there is no requirement to report this transaction to the ESFA.

It’s also important to note in this example that the “at cost” rules in the AFH would not apply as LAL would not considered to be a related party for the purposes of this rules as David does not have 20% or more control of LAL or is otherwise able to exercise control over the financial and operating decision making of LAL.

* This publication is for general information purposes only. Whilst every effort has been made to ensure its accuracy, Whitley Stimpson Ltd accepts no liability whatsoever for any direct or consequential loss arising from its use.

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