Related party transactions in faith trusts

Related party transactions (RPTs) continue to be a perennial hot topic in the world of academy trust financial management. We recently hosted a Q&A session that focused on the completeness of business interests and related party declarations. The session ran for twice as long as expected due to the number of specific questions!

The ESFA also recently hosted a Power Hour session covering the approval and declaration requirements for RPTs. Most of the content was a reminder of what we’ve already been made aware of and should already know. There were, however, some points relating to faith academy trusts that were news to us.

Let’s cover the basics first

Related parties include persons and entities with control or significant influence over an academy trust (e.g. members, trustees, key management personnel, and their close family members), and companies within the same group.

A related party transaction is a transfer of resources, services, or obligations between a reporting entity and a related party – regardless of whether a price is charged. This can cover expenditure incurred and income generated by an academy trust.

The ESFA has introduced various rules and processes surrounding RPTs since 2013. The most recent from 1 April 2019. These changes result in the requirement to report all expenditure transactions to the ESFA before entering into a contract. Where the total contract value in the same financial year is expected to exceed £20,000, there is a need for prior approval from the ESFA. These requirements include agreements being renewed with a related party supplier. Income transactions do not need to be reported.

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.

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, and the license was dated after 1 April 2019, there is a requirement to report the RPT to the ESFA, and obtain approval if the amount involved is greater than £20,000 (which in most cases it will be).

The accounting entries will be reported in the notes to the financial statements, but you can seek advice from your auditors to determine the value of the entries before entering into the transaction. The challenge will be catching these transactions before they are entered into (which is usually at the point of conversion).

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.

Transactions with the diocese which include any element of traded services do require prior approval. So, 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 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.

This blog was written by our Corporate team at Price Bailey. If you need any more information on the content covered in this blog, please feel free to contact us for a no obligation discussion using the submission form below.

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.

For more insight, events and webinars, sign up to the Price Bailey mailing list…