14 January 2019
The related party rules which academy trusts have to abide by repeatedly refer to “close family”. But what is meant by “close”?
The AFH specifically mentions “close family or members of the same household”, “who may be expected to influence, or be influenced by, the person.” Children, parents, spouses and civil partners are specifically mentioned but the AFH makes it clear this list is not exhaustive. To get you thinking, how would you feel about the following scenarios?
- Scenario 1 – transactions < £1,000 with a trustee’s aunt/uncle/nephew/niece.
- Scenario 2 – transactions > £10,000 with a trustee’s aunt/uncle/nephew/niece.
- Scenario 3 – any transactions with the Accounting Officer (AO) or Chair of Trustees’ aunt/uncle/nephew/niece.
- Scenario 4 – the trust employing the aunt/uncle/nephew/niece of a trustee.
- Scenario 5 – the trust employing the aunt/uncle/nephew/niece of the Accounting Officer or Chair of Trustees into a relatively junior position.
- Scenario 6 – the trust employing the aunt/uncle/nephew/niece of a trustee into a senior position.
The trouble with all of these scenarios is that it is possible to formulate an argument that any of these are related party transactions, or that any of them are not, depending on how the AFH is applied.
In our view it is important to conduct a ‘sniff’ or ‘tabloid newspaper’ test and consider what the external view would be if there was ever a problem, or even if it somehow came out that the transactions had not been disclosed.
Our view on the above scenarios would be:
- Scenario 1 – most people would probably accept that low level transactions with a more distant relative would not be treated as a related party transaction if properly disclosed and the trustee had no involvement in the process. There is therefore probably no need to disclose such transactions in the accounts, or to pre-notify the ESFA from 1 April. We would, however, expect such a transaction to have been disclosed internally on the trust business interest register.
- Scenario 2 – the interesting point here is that the value of the transactions can sway the conclusion. Everyone may have a different tipping point, but the larger the transaction the more likely it should be treated as a related party transaction. Would the outside world conclude that the individual only gained the opportunity to provide the goods or services because of the connection? The decision to treat the connection as related or not impacts on whether the “at cost” rules of the AFH apply so it is important that this is discussed properly at the outset.
- Scenario 3 – transactions with the AO or Chair of Trustees attract a higher level of scrutiny and it would be reasonable to conclude, as a minimum, that a lower tipping point applies for these individuals.
- Scenario 4 – as for scenario 1 most people would probably accept that this relationship is not close enough to warrant disclosing the employment in the related party note (assuming there are no preferential terms).
- Scenario 5 – this is more likely to require disclosure since third parties are likely to conclude that the individual has only been employed because the family member holds a position of authority. We would expect such employments to be disclosed as related parties. Note that the AFH states that for the purposes of reporting to, and approval by, ESFA, transactions with related parties do not include salaries and other payments made by the trust to a person under a contract of employment through the trust’s payroll.
- Scenario 6 – the more senior the position the more scrutiny the appointment is likely to come under. Would it also make a difference if the member of staff’s relationship was with the Chair of Trustees?
In conclusion
In conclusion, it is clear that there are lots of grey, subjective areas and our advice has therefore got to be “if in doubt, disclose” on the basis that if there is nothing to hide then it is preferable to be completely transparent.
We would recommend that all boards of trustees use the change of rules in April as an opportunity to remind themselves of the rules and to have an open discussion to help decide how they would view certain relationships.
Our recent blog 'Related parties explained' explores related parties more generally.
If you have any questions at all concerning related parties please contact me or your nearest UHY academy specialist.
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