7 January 2019
All academy trusts should be aware by now that the related party rules are due to change from 1 April 2019. All related party transactions will have to be notified to the ESFA in advance, and those exceeding £20,000 will need pre-approval. We expect the ESFA to provide further guidance in the next few weeks to explain how the rules will work in practice.
The need for pre-notification brings into focus the need to be clear on which entities will be treated as related parties. Unfortunately there is no precise list of related parties, and it is sometimes necessary to use your judgement. Here we look at some of the confusing areas within the related party rules, but first let’s look at some of the Academies Financial Handbook (AFH) rules:
- academy trusts must be even-handed in their relationships with related parties;
- trustees comply with their statutory duties as company directors to avoid conflicts of interest, not to accept benefits from third parties, and to declare interest in proposed transactions or arrangements; and
- all members, trustees, local governors of academies within a MAT and senior employees have completed the register of interests.
So who is usually classed as a related party?
All members, trustees, local governors of academies within a MAT and senior employees are related parties and have to complete the register of interests. Close family of these individuals would also be treated as related parties.
Senior employees would usually mean the senior leadership team (SLT) in a single academy trust, however in a MAT this is harder to define. The SLT in each academy could be treated as ‘senior’ or, depending on the scheme of delegation in place and the autonomy the individual academies are given, only trust level senior staff and perhaps Headteachers at individual academies would be classed as senior.
Business relationships also get caught – an individual or organisation carrying on business in partnership with a member or trustee, or a close relative of the member or trustee, would be caught by the rules.
For limited companies with a connection the important consideration is control. Two companies are not automatically deemed to be related merely because they have a director in common. Therefore if a trustee also holds the position of director in another company, that company is not a related entity unless there is also control. This generally arises if the individual holds more than 20% of the share capital or voting rights.
The AFH goes into further detail about other potential related parties so it is important to read section 3.10.12 of the 2018 AFH in full.
At cost rules
Academy trusts must pay no more than ‘cost’ for goods or services provided to it by a member or trustee, or any individual or organisation closely related or connected to the member or trustee.
The ‘at cost’ requirement applies to contracts for goods and services from a related party agreed on or after 7 November 2013. This does not mean that any contracts in place before then can simply roll on ad finitum and if your trust has contracts dating back to before this date that have not been reviewed since, we would suggest that a new contract, which would be subject to the ‘at cost’ rules, should be drawn up.
The de minimus threshold of £2,500 means that lower level transactions are not affected by the ‘at cost’ rules. If the £2,500 threshold is exceeded, cumulatively, in any one financial year the element above £2,500 must be at no more than cost.
Interestingly section 3.10.14 of the AFH states that the ‘at cost’ requirement does not apply to the trust’s employees unless they are also a related party by virtue of also being (or being closely connected to) a trustee or member. This means that whilst senior employees have to complete the register of interests and declare any related party transactions, the ‘at cost’ rules do not apply. The Accounting Officer is naturally always excluded from this exemption.
The register of business interests
This register should form a vital part of the academy trust’s internal control processes surrounding procurement, although having said register in its singular form we actually mean two registers.
It is a requirement to publish ‘relevant’ business interests on the trust website, which means any related party transactions taking place, but it is also good practice to disclose where an individual is connected to another charity or educational institution even if there are no transactions.
The internal register of interests may be much longer, especially in MATs; firstly, because trusts have discretion over the publication of interests concerning close family of trustees/members or concerning trustee employees. Secondly, the interest register should ideally record all potential interests, whether transactions occur or not, in order to give finance staff the opportunity to identify related party transactions should they occur. For example, a trustee’s spouse may have a controlling interest in a commercial company, and this ought to be declared and recorded internally, but there would be no need to disclose this publicly on the website.
The rules over related parties can be confusing, so if you have any questions please contact me or your nearest UHY academy specialist.
Please also see our related blog “How close is close”?
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