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Related party transactions: requirements and guidance
Ensure that your academy's transactions and relationships with related parties are compliant with guidance on meeting 'at cost' requirements, maintaining transparency, and managing conflicts of interests.
What is a related party?
Related parties arise "where one party has control or influence over the other, or where the parties are subject to common control". This includes:
- Parties with control over, or controlled by, the trust, e.g. parent and subsidiary companies
- Parties having significant influence over the trust
- Key management personnel of the trust, including any director, whether executive or otherwise
- Close family members of any of the above
- Others subject to control or significant influence by any individual referred to above
This means that related parties include an academy trust's trustees and their close family members and business partners.
This is explained on page 4 of the Education Funding Agency's (EFA's) report on related party transactions. The EFA was the predecessor to the ESFA.
The rules of related party transactions
In a nutshell
No one in the trust should be making a personal financial gain from the trust's transactions. Any deal that involves someone connected to the trust needs to be transparent, allowed by your articles of association (or the Charity Commission) and done for no more than the cost of the good or service.
In more detail
Your trust must be even-handed in their relationships with connected parties by ensuring that:
- Trustees understand and comply with their statutory duties as company directors:
- To avoid conflicts of interest
- Not to accept benefits from third parties
- To declare interest in proposed transactions or arrangements
- All members, trustees, local governors and senior employees have completed the register of interests
- No member, trustee, local governor, employee or related individual or organisation uses their connection to the trust for personal gain, including payment under terms that are preferential to those that would be offered to an individual/organisation with no connection to the trust
- There are no payments to any trustee by the trust unless these are permitted by the articles, or by authority from the Charity Commission, and comply with the terms of any relevant agreement with the secretary of state. Trusts will in particular need to consider these obligations where payments are made to other business entities who employ the trustee, are owned by the trustee, or in which the trustee holds a controlling interest
- The Charity Commission’s prior approval is obtained where the trust believes a significant advantage exists in paying a trustee for acting as a trustee
- You abide by the 'at cost' requirements (set out in the following section of this article)
The board of trustees must ensure the requirements for managing connected party transactions are applied across the trust.
The chair of the board of trustees and the accounting officer must ensure that their capacity to control and influence does not conflict with these requirements. They must manage personal relationships with connected parties to avoid both real and perceived conflicts of interest, promoting integrity and openness in accordance with the 7 principles of public life.
The trust should also be aware of the Charity Commission guidance on trustee expenses and payments.
Trusts must also recognise that some relationships may attract greater public scrutiny. These include:
- Transactions with those in a position of control and influence, including the chair of the board and accounting officer
- Payments to organisations "with a profit motive" (as opposed to public/voluntary sector organisations)
- Relationships with external auditors beyond their delivery of a statutory audit
You must keep sufficient records, making sufficient disclosures in your annual accounts to show transactions with these and other related parties are conducted "in accordance with the high standards of accountability and transparency required within the public sector".
Reporting and approval
In a nutshell
You may need to get approval for a transaction, or at least report it prior to it happening. This applies if its outside your normal activity, could attract criticism, cause wider issues or pushes you over £20,000 with that party.
In more detail
You must get ESFA approval for related party transactions that are 'novel, contentious or repercussive', ie those which:
- Your trust has no experience with/are outside the range of normal business (novel)
- Might cause criticism from Parliament, the public or the media (contentious)
- Are likely to cause pressure on other trusts to act similarly, thus having wider financial implications (repercussive)
You must also, as of 1 April 2019:
- Report related party transactions to the ESFA before the transaction takes place
- Obtain ESFA approval for contracts for goods or services to the trust where:
- The contract exceeds £20,000, or
- It would take the total value of the contract over £20,000 for that financial year (ending 31 August), or
- The contract is with a related party you've already had contracts with exceeding £20,000 in the same financial year
This does not apply to "salaries and other payments made by the trust to a person under a contract of employment through the trust’s payroll".
The register of interests
In a nutshell
You need to keep a register, and in most cases publish online, connections between your trust governors and leaders and any businesses.
In more detail
Your register of interests must record the business and pecuniary interests of members, trustees, local governors and senior employees. For each interest, it needs to cover the name and nature of the business, the nature of the interest and the date it started. Interests include:
- Being a director, partner or employee with a business
- Being a trustee or governor at another education institution or charity
For the above, you must also publish this online for members, trustees, local governors and accounting officers. You can use your own discretion about publishing this online for the other named people on the register.
The register must also identify "relevant material interests" from close family relationships (close family member or member of the same household with influence over/from the person) between members, trustees and local governors. It must also identify "relevant material interests" from close family relationships between these individuals and employees. You can register other interests too if you see fit. Trustees should keep the register up to date.
Use our template register of interests to help you easily collect and publish the right information for your trust.
'At cost' requirements
In a nutshell
Connected parties can't make a profit from providing goods and services to the trust. This means the trust must only pay for the cost of the goods/services. This cost covers 'direct costs' (materials and labour used in production of the good/service) and 'indirect costs' (a "proportionate and reasonable share of fixed and variable overheads").
In more detail
In certain cases, your trust must pay no more than ‘cost’ for goods or services provided to it by the following parties (‘services’ do not include services provided under a contract of employment):
- Any member/trustee of the academy trust
- Any individual/organisation connected to a member/trustee of the academy trust, such as:
- Close family members
- Individuals/organisations in business partnership with the member/trustee or a relative of the member/trustee
- A company in which a trustee/member or the relative of a trustee/member holds more than 20% of the share capital or is entitled to exercise more than 20% of the voting power at any general meeting of that company
- An organisation which is controlled by a trustee/member or the relative of a trustee/member
- Any individual/organisation that's given the right under the trust’s articles of association to appoint a member/trustee of the academy trust; or any body connected to such individual/organisation (i.e. controls, is controlled by or is under common control with the individual/organisation)
- Any individual/organisation recognised by the secretary of state as a sponsor of the academy trust; or any body connected to such an individual/organisation
The ‘at cost’ requirement does not apply to your trust’s employees unless they are also one of the parties described above. However, salaries should still guided by the principles of securing value for money, which includes managing conflicts of interest.
Working on non-trust business at the trust premises
If any of the individuals set out above work from the trust premises outside of the work they are carrying out for the trust, you must agree with them an appropriate sum for using/occupying the premises.
When these requirements apply
The ‘at cost’ requirement applies to contracts for goods and services from a connected party exceeding £2,500, cumulatively, in any one financial year of your trust. This is for all contracts for goods and services agreed on or after 7 November 2013.
For these purposes, where a contract takes your trust’s cumulative annual total with the connected party beyond £2,500, the element above £2,500 must be at no more than cost.
Legal and audit services
For legal advice or audit services, the 'at cost' requirement only apples where the organisation's partner directly managing the service is a member or trustee.
Contributions you make to your diocese for services associated with securing the trust's religious character and ethos - which only the diocese can provide - are regarded as meeting the 'at cost' requirement.
Your trust must ensure that any 'at cost' agreement with one of the individuals or organisations referred to above is properly procured through an open and fair process and is:
- Supported by a statement of assurance from that individual or organisation confirming that their charges do not exceed the cost of the goods or services, and
- On the basis of an open book agreement including a requirement for the supplier to demonstrate clearly, if requested, that their charges do not exceed the cost of supply
Good practice and how to support your board
Areas of best practice when transacting with related parties and managing conflicts of interest include:
- Trust directors declaring any personal interest in proposed transactions and avoiding conflicts of interest
- Regularly reviewing the register of interests
- Individuals removing themselves from the decision-making process where a potential conflict of interests is identified
- Following competitive, robust procurement procedures
- Making decisions based on an assessment of value for money
This is set out on page 14 of the EFA report linked to in section 1, along with other examples.
Tips for supporting trustees to manage conflicts of interest
- Develop a list or directory of related parties that your trust engages with and the value of the transactions with them
- Ensure that the board of trustees receives this list at least once a year so that trustees can identify, and declare, any connections to the related parties and any interests (this should be done at a full board meeting at the beginning of the financial year so that discussions can be minuted)
- If this list changes as your trust works with new businesses throughout the year, you should keep the board notified so that any new interests can be declared and recorded on the register of interests
This was suggested by Brendan Hollyer, one of our associate education experts.
Sections 2 to 5 of this article are based on requirements set out in the Academies Financial Handbook (see sections 5.34 to 5.38).
Brendan Hollyer is the vice-chair of governors at a primary school and an all-through special school. He has been a national leader of governance since 2014 and provides training and support to schools in the south east. Brendan has also worked as the director of conversions and governance for a multi-academy trust.
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