Academy Trusts: Related Party Transactions

In this article, we summarise the importance of disclosing related party transactions (RPTs) accurately, the disclosure requirements, and answer key questions frequently raised by school business professionals and trustees.

Why are auditors concerned with related party disclosure?

Audits are carrying an ever-increasing amount of regulation, especially within public funded organisations. With this in mind, the reporting of related parties is under more scrutiny than ever before and is a key area of focus for auditors and regulatory bodies alike.

The ESFA have reported that one of the most common reasons for auditors issuing a modified regularity opinion is due to trusts failure to comply with the RPT rules. Academies follow the Charity SORP 2019 disclosure format for related party transactions, so it’s worth noting that in 2019 the Charity Commission updated their guidance on the reporting of related party transactions, following 335 regulatory compliance and inquiry cases being opened relating to concerns over trustee private benefits and decision making.

What are the related party disclosure requirements?

Section 9.15 of the Charity SORP notes:

“Related parties include the charity’s trustees (and members), their close family members, and those entities they control or in which they have a significant interest. Entities related to a charity include any subsidiary, joint venture, or associate of the charity”.

A significant interest is an individual who has substantial influence, for example, a majority shareholding, an executive director (or non-executive director if they have significant influence), or control through other parties such as holding companies.

For each of the parties, the disclosure must include;

their names,
the relationship between them,
the transaction and amounts,
any terms or guarantees, and
‘any other element necessary for understanding’.

Academy trusts must report all related party transactions (income and expenditure), regardless of value, in their annual statutory accounts.

The process and format in which you store, record and update your related party schedule should be clear and concise.

ESFA reporting requirements:

Academies must declare to the ESFA their intention to enter into a new agreement with a related party supplier before doing so; this includes contract renewals. Academy trusts do not need to declare income transactions with related parties to the ESFA.

Academy trusts must obtain ESFA’s prior approval, using the online ESFA form, for related party transactions starting on or after 1 September 2023, that exceed £40,000 for the supply of goods or services to the trust by a related party in the same financial year ending 31 August. The £40,000 approval threshold applies to single transactions with the same supplier, the transaction value is not aggregated by supplier.

Approval requirements do not apply to transactions for the supply of goods/services to a trust by:

colleges, universities and schools which are sponsors of the academy trust
state funded schools and colleges, including academies.

Although these transactions do not require prior ESFA approval, they still need to be declared/reported on the ESFA online form.

Novel, contentious and/or repercussive related party transactions are subject to separate arrangements. Trusts must obtain ESFA’s prior approval for any transactions with related parties that are novel, contentious and/or repercussive, regardless of value.

The ‘at cost’ requirement applies to contracts with a related party exceeding £2,500, cumulatively, in any one financial year. Where a contract takes the trust’s cumulative annual total with the related party beyond £2,500, the element above £2,500 must be at no more than cost.

Guidance for faith trusts

There are some nuances for faith based academy trusts. In the case of Church of England and Catholic academy trusts, the diocese typically holds a member role in the trust and therefore meets the definition of a related party.

All transactions with a religious authority for the provision of services that are fundamental to the academy trust’s religious character and ethos are regarded as meeting the ‘at cost’ requirements. These transactions must still be declared to the ESFA but do not require approval.

An example of this would be the levy. The majority of faith trusts pay a levy to their diocese. These levies are considered services that can only be delivered by faith organisations and dioceses, which provide essential functions fundamental to the religious character and ethos of the academy trust. These are deemed as meeting the “at cost” requirements. Therefore, these transactions need only be declared and do not require prior approval.

Most faith trusts occupy property owned by the diocese under a license to occupy. Where the value of this license is accounted for in the trust financial statements there is a requirement to report the RPT to the ESFA accordingly.

Transactions with the diocese which include any element of traded services do require prior approval if over £40,000 (on or after 1 September 2023). If the diocese is supplying services that are considered widely available outside of faith organisations and dioceses (financial support services, site support services etc.), the trust would also need assurance that the services are being provided “at cost” from the supplier before declaring the contract, if the annual value of all services is greater than £2,500.

Related party disclosure Q&A

Q Which family members constitute ‘close family members’ of the trustees and members and therefore should be included in the declaration form?

A Spouse, children, grandchildren, parents, in-laws, grandparents, and siblings (including step). For a comprehensive list, please see the declaration form above. Please note, friends with companies who supply services to the school should not be included.

Q Are the names of children required if they are under the age of 18?

A No. Only if they are over the age of 18.

Q Will family trees of our significant decision-makers need to be shared with our purchase ledger departments?

A It’s more likely that the list of members’/trustees’ business interests would be shared with the purchase ledger departments, rather than family trees. The department does not have to know which member or trustee the business interests are related to.

Q Would it be good practice to add a ‘new supplier checked against related party list’ to a purchase requisition form?

A Yes, this would be best practice and a good internal control to introduce.

Q Do we need to keep details of key staff as well, or just trustees and members?

A It is best practice to also include the interests and close family of a trust’s key management with significant influence over finances and spending decisions – as a minimum the Head and Business Manager/CFO should complete declaration forms.

Q Would the local governors [within a multi academy trust] need to complete declarations of interest?

A No, as they do not hold significant influence at trust level. However, there can be exceptions to this – please see the question below.

Q Our local governors make buying decisions for their schools. Should I include them?

A In most traditional MAT structures, local governors do not tend to have significant influence or control at trust level, therefore it is unlikely to result in a related party disclosure.

However, they can complete a declaration form if they make significant executive decisions on spending and buying. Whilst this may be considered over-disclosure, we would encourage transparency.

Q How much information needs to be disclosed on our website? Is consent required for this?

A Only disclose relevant business interests on your website. Please do not list the names of family publicly – you only need to keep individual’s names on an internal register.

Q What about if someone owns a business of no interest whatsoever to a school?

A Still report.

Q What about being a Governor in other schools?

A Yes, still record other governor positions and trusteeships – it is always best to have that information recorded so it can be double-checked.

Q We collect Declarations of Interest each September. In light of the guidance on close family members, do we need to ask the members and trustees to re-submit the declarations?

A Yes, ask your trustees, members, and key management (where applicable) to re-submit the declarations as soon as possible; being sure to capture the latest information on close family for this academic year.

Q What if someone refuses to disclose?

A Normally, if someone refuses to disclose it’s because they believe that the information will be shared outside of the Board, or they don’t want other trustees and members to know who their close family members are.

If this is the case, a solution may be to have one trusted member on the Board who collects all the information privately and securely, whilst also dealing with the members and trustees privately too.

Rarely, a member or trustee may refuse to disclose without a reason. This is a more delicate situation, as unfortunately, from an audit perspective failure to disclose related parties would mean a qualification of the audit under a limitation of scope. As auditors, we are sometimes best placed to explain the reasoning and importance. They may even supply the necessary information directly to us.

Q Is there any burden on us to check the disclosure, or does the onus lie with the trustee to disclose?

A Ultimately, the trustees are responsible for the trust, and when they sign the statement of trustees’ responsibility, they are confirming they have provided all information necessary. Therefore, the majority of the onus lies with the trustees, but the whole leadership team and Board are responsible for gathering the information, ensuring it’s securely stored, and having a process in place for compliance checking.

This article was written by Tom Meeks and Michael Cooper-Davis, two Partners in our Corporate team at Price Bailey. Tom and Michael have extensive experience and knowledge of academy schools and not-for-profit organisations. If you would like support, advice, or have any further questions regarding this article, you can contact them using the form below.

Our summary of Academies Related Party Disclosure is available to download.

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We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.