Taunton - Academy Update - July 2016

Academy Schools
Accounting and tax update seminar July 2016

pkf-francisclark.co.uk
.
Housekeeping

Agenda
• Accounts Direction 2016 – Stephanie Henshaw
• New information request spreadsheet – Kate
Taylor
• Regularity – Martin Lock
• Multi Academy Trusts – Laura Waycott
• VAT Update – Liam Dushynsky
• Tax Update – Martin Lock
• Q&A - All

Accounts Direction 2016
Stephanie Henshaw

Academies Accounts Direction 2016
This session will cover:
• What has changed for 2016
• What this means in practice for the information
you will need to provide
• What other changes you will see in the financial
statements

.
FRS102
• 2015 accounts were prepared under a framework of
accounting standards which formed UK GAAP
(Generally Accepted Accounting Practice)
• Complete overhaul this year with the introduction of
FRS102
Sounds daunting but in practice the impact on the
numbers in your accounts will be minimal.

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SORP 2015
• The SORP is the Statement of Recommended
Practice which sets out how charities should apply the
accounting standards
• New SORP for 2015 to take account of FRS102, but
includes other changes
• No major impact on the numbers reported, but lots of
changes to presentation and formats

.
What is ‘transition’
There will be reference at times to ‘transition date’ for
FRS102
• This is the date at the start of the comparative period
for the year in which FRS102 is adopted
• For all Academies it will be 1 September 2014

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Key changes
Which areas may impact Academy Trusts?
• Trustees’ report
• Changes to the SOFA
• Balance sheet and cash flow
• Accounting policies and disclosure requirements

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Key changes
Trustees’ report
• Explain arrangements and policies for setting pay and
remuneration of the academy trust’s key management
personnel, including an explanation of any benchmark
or parameters / criteria used for setting pay
Action: determine key management
personnel

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Key changes
Trustees’ report
• Describe the main risks to the academy and
summarise plans and strategies in place to manage
them
Action: ensure that risk registers are
up to date and that strategies are in
place for all key risks

.
Key changes
Trustees’ report
• Compare actual level of reserves to policy and identify
free reserves held
Action: check reserves policy in
place and appropriate

.
Key changes
SoFA
• Presentational changes to headings / descriptions for
various income and expenditure, eg ‘voluntary income’
now ‘donations’
• Governance costs no longer separately disclosed, but
will be included as support costs within charitable
expenditure
Action: Normal analysis of income
and expenditure required – FC will
deal with the changes

.
Key changes
SoFA
• Comparatives required for all columns now, not just the
total
Action: None – FC will deal with
(major headache!)

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Key changes
Balance sheet items
• Software licences that are separable should be
capitalised as intangible fixed assets, where previously
would have been under tangible fixed assets
Action: Identify value of separable
software licences in capital and
consider if material.

.
Key changes
Balance sheet items
• If material to the accounts, an accrual is required for
accrued holiday pay not taken at 31 August
• For most trusts this will exclude teaching staff and
those on term time only contracts, so usually a small
number
Action: List staff with holiday year
other than academic year. Establish
holiday entitlement at 31 August and
compare to holiday taken. Consider
if material.

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Other changes
Balance sheet items
• Option to treat value of property at transition as
‘deemed cost’
• Potential to uplift the property value without getting
caught by the requirements for ongoing (expensive)
valuations
Action: Very unlikely to be of interest, if you think
it may be, discuss in detail with us

.
Key changes
Cash flow
• Presentational changes only
Action: None

.
Key changes
Accounting policies
• Income should be recognised when it becomes
‘probable’ whereas previously it had to be ‘virtually
certain’
• Doesn’t affect GAG and most major sources of income
• May affect academies receiving legacies or gifts
Action: Consider if any income is
subject to performance related terms
or conditions

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Key changes
Accounting policies
• Policies need to disclose both critical accounting
estimates and judgements
• LGPS assumptions will generally be critical estimates
• Judgements may include going concern if 16/17 or
17/18 budgets are tight
Action: Consider where both
estimates and judgements are
included in the financial statements

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Key changes
Accounting disclosures
• Need to disclose total remuneration for key
management personnel as a whole
• KMP broader than Governing Body – will likely include
all SLT members
• Requirement to disclose staff governor remuneration
remains
Action: Identify key management
personnel and total remuneration

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Key changes
• Reinforcement of disclosures around going concern –
either details of any material uncertainties, or positive
confirmation that there are none
• Must state that the Board have considered a period of
at least 12 months from when accounts approved
Action: No change to considerations
required, need to ensure points
above explicitly covered in
disclosures

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Key changes
• All related party transactions must be disclosed
• Must state whether on an arm’s length basis, and must
have evidence to substantiate where this is stated
Action: Continue to identify all
related party transactions

.
Key changes
Accounting disclosures - LGPS
• Detailed valuation requirements have changed – will be
reflected in the report provided
• A ‘net interest charge’ will replace ‘expected return on
plan assets’ and ‘interest on pension liabilities’
• Net liability unlikely to be affected
Action: Request report under
FRS102 rather than FRS17,
including relevant comparative
disclosures for 2015

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Key changes
• Commitments under operating leases will now be the
total minimum commitment for the term of the lease,
not the annual commitment
Action: No change in the information
required, but disclosures will be
different in the accounts

.
Key changes
Transition
• Various notes will be included to explain the transition
to FRS102 and SORP2015
• There will be a note reconciling opening reserves. In
most cases this will only include the pension charge
adjustments, and holiday pay if this applies
Action: None, FC will deal with this

Summary:
• Fundamental changes to the underlying
accounting standards and framework
• Unlikely to be significant impact on numbers
reported
• The changes will mainly come through in
disclosures and formats
• Review the action points

New Information Request Form
Kate Taylor

We have developed a template to assist with the audit
process. It is an alternative to the standard audit request
list.
• Why have we put this together?
• Who will this apply to?
Audit Template
Academy Audit Template

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Introduction
• What is Regularity?
• How is Assurance on Regularity Provided?
• What Should the Academy Trust do?
• What Work do the Auditors do on Regularity?
• Problem Areas Identified by the EFA
• Quick Reminders on Connected Party Transactions,
Leasing Transactions and Staff Severance Payments
• Academies Financial Handbook

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What is Regularity?
• In simple terms the academy is handling public funds and
should use it for the purposes intended
• What are you spending it on? What should you be
spending it on?
• Are you following established delegated authorities?
• Delegated responsibility to the Academy Trust (as detailed in
the Academies Financial Handbook and funding agreement)
• Academy Trust delegates to the Accounting Officer
• Accounting Officer delegates to academy staff through the
scheme of delegation and financial procedures manual

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How is Assurance on Regularity Provided?
• National Audit Office require comfort as the academy trust
accounts are consolidated into the EFA’s accounts
• Accounting officer signs off a ‘Statement of Regularity,
Propriety and Compliance’ in the annual report:
“I confirm that I and the academy trust board of trustees are able to identify any
material irregular or improper use of funds by the academy trust, or material non-
compliance with the terms and conditions of funding under the academy trust’s
funding agreement and the Academies Financial Handbook 2015.
I confirm that no instances of material irregularity, impropriety or funding non-
compliance have been discovered to date. If any instances are identified after
the date of this statement, these will be notified to the board of trustees and
EFA.”

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How is Assurance on Regularity Provided?
• Auditors sign separate Reporting Accountant’s assurance
report on regularity
• ‘Limited’ (negative) opinion required
“In the course of our work, nothing has come to our attention which suggests that
in all material respects the expenditure disbursed and income received during
the period to 31 August 2016 has not been applied to purposes intended by
Parliament and the financial transactions do not confirm to the authorities which
govern them.”

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What Should the Academy Trust do?
• Maintain and follow a financial procedures manual and
scheme of delegation compliant with the Academies
Financial Handbook
• We recommend a Key Financial Controls checklist to
evidence compliance (example pro-forma available)
• Ensure knowledge on the trustee board of the Academies
Financial Handbook
• The above will help enable the Accounting Officer to sign off
his/her statements on ‘Regularity, Propriety and
Compliance’, and the ‘Governance Statement’ in the
accounts

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What Work do the Auditors do on Regularity?
• Further guidance in chapter 9 of the Academy Accounts
Direction
• Significant elements are covered by our ‘True and Fair’
audit work, but additional work undertaken including:
• Reviewing how the Accounting Officer provides him/herself with
comfort to sign off their statements
• Sample testing on staff expenses and credit card payments
• Checking the register of governors interests is up to date
• Reviewing expenditure for items not consistent with running a
school
• Reviewing non-contractual payments to staff

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What Work do the Auditors do on Regularity?
• Reviewing borrowings and leases
• Reviewing purchases or disposals of land and buildings
• Reviewing write offs of debtors / losses
• Reviewing connected party transactions ‘at cost’
• Checking whether the academy receives income from external
consultancy provided by staff
• Checking consultancy payments to the senior leadership team
• Checking MAT central funds are being used appropriately
• Review of internal audit work / RO reports

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Problem Areas Identified by the EFA
• Themes of irregularity identified by the EFA from the prior
year were:
• Lack of prior approval for finance leases (considered
borrowing)
• No statement of assurance for connected party
transactions
• Connected party transactions not at cost
• Non contractual severance payments made without the
required approvals
• Weak internal controls

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Quick Reminders – Connected Party Transactions
• Goods / services provided by a ‘connected party’:
• A member or trustee
• A close relative of a member or trustee (i.e. child /
partner)
• A company / business where the connected party holds
more than 20% of share capital or has the equivalent
control
• Any individual or organisation able to appoint a member
or trustee
• Does not apply to employees unless they are one of the
above

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Quick Reminders – Connected Party Transactions
• Must be ‘at cost’ if cumulative transactions in a financial
year exceed £2,500 with a connected party (element over
£2,500 must be at cost)
• Must be properly procured on an open and fair basis,
supported by a statement of assurance that the charges do
not exceed cost and on the basis of an open book
agreement
• Full cost includes all direct costs (materials/labour) and
indirect costs (a proportionate and reasonable share of
fixed and variable overheads). There must be no profit
element.

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Quick Reminders - Leases
• Trusts do not need EFA approval for operating leases
(except for land and buildings) as these are not ‘borrowing’
• Trusts must obtain EFA prior approval for:
• Taking up a finance lease on any asset / duration
• Taking up a leasehold or tenancy on land and buildings
with a term of 7 years or more
• Granting a leasehold interest or tenancy of any duration
on land and buildings
• Any lease arrangement, even if EFA approval is not
required, should maintain the principles of value for money,
regularity and propriety

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Quick Reminders – Staff Severance Payments
• Payments outside of normal statutory or contractual requirements
when leaving employment
• Any payment must be in the best interests of the Trust
• Any payment should be justified based on a legal assessment of
the Trust successfully defending the case
• If a settlement is justified, it must be less than the legal
assessment of the likely award
• A payment should not be a reward for failure, misconduct or poor
performance
• Delegated authority for non-statutory / non-contractual elements
under £50k

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Quick Reminders
Compensation payments
• Redress for loss or injury
• Any payment must be based on the facts, legal advice and that
value for money will be achieved
• Delegated authority for non-statutory / non-contractual element
under £50k
Ex-gratia payments
• Separate to the above, all ex-gratia payments must be referred to
the EFA for prior approval

.
Academies Financial Handbook
• Updated annually
• The 2015 version applies to accounting periods from 1
September 2015
https://www.gov.uk/government/publications/academies-
financial-handbook-2015
• 2016 version just published (on 1 July - published 22 July
last year), and applies wef 1 September 2016. Only minimal
changes

.
• Little change, but note:
• Board of Trustees (at all levels – so LGB’s as well) to review/identify/action the range of skills and
experience it needs. See Governance Handbook for training materials;
• In line with the Governance Handbook, the school must publish on its website its governance
arrangements (including details of the Scheme of Delegation if a MAT);
• All Trusts must have either their Principal or Chief Exec as Accounting Officer, and the role of AO must
not rotate;
• All Trusts must publish the relevant business and pecuniary interests of their AO regardless of them
being a Trustee, and also local governors (so those on LGBs) are now included in identifying relevant
interests from close family relationships;
• Schools must notify the DfE of the appointment/resignation of members, trustees, accounting officers,
chief financial officers, chairs of trustees/local governing bodies and local governors (as before) but now
must be via the Edubase, and must be notified within 14 days of the change
• The AFH2016 expressly states that variances between budget and actual income/expenditure must be
understood and addressed

.
• Little change, but note (cont.):
• AFH2016 emphasises that exposure to investment products must be tightly
controlled and the Board has an investment policy in place – security of funds
is more important than maximising revenue!;
• Trusts are now required to have a whistleblowing procedure in place;
• Trusts must implement reasonable risk management audit recommendations
provided by their risk auditors;
• In a MAT, the audit committee’s oversight must extend to the financial
controls and risks at constituent academies;
• Oversight must include the submission of information to the DfE/EFA such as
pupil number returns and funding claims.
• So a more settled scene. But suggest read Annex B: “Schedule of
freedoms and delegations” and Annex C: “The Musts”. Otherwise,
are you demonstrating strong governance and financial
management?

Coffee Break

Multi Academy Trusts – some thoughts…
Laura Waycott

Background
• As at September 2015, about 15% of primaries and more than 60% of
secondaries were academies
• There were 391 MATs in March 2011 – rose to 846 by July 2015. And
of these, the number of MATs with 2-5 academies rose from 224 to 517.
• Government Agenda is clear! All schools to become Academies by
2022….?
• Local Authorities struggling to provide level of support and challenge
previously offered – so how do schools get this support? And budgets
are being squeezed. Particularly difficult for small Primaries.
• So Multi Academy Trusts (“MATs”) might be an answer?
Multi Academy Trusts

What is a Multi Academy Trust (“MAT”)?
• A group of schools governed through a single set of members
and directors
• One master funding agreement with the EFA – but a
supplemental funding agreement for each school
• One legal entity, with one Mem & Arts
• One shared ethos and culture???

.
Potential benefits:
• Improve standards in feeder schools
• Shared resources/expertise
• Economies of scale
• Leadership succession planning
BUT planning and due diligence is key. It is a daunting
process!

.
Conversion
• Various grants potentially available, e.g.
• £25k grant available per new Academy conversion
• Sponsor Capacity grant for eligible academy trust to set
up/expand/develop – typically £50k-£100k
• Primary Academy Chain Development grant for primaries looking to
set up a MAT – keeps coming and going….
• Average time to convert over a year! Key considerations:
• Structure/roles?
• Policies?
• Ethos and culture?

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Financial Management considerations on conversion
• What does the Finance function(s) look like? One set of Policies
and Procedures?
• Who keeps what records? Where? Who has what authority?
• Accounting software?
• Intra-school charging
• How many bank accounts?

.
Financial Oversight and considerations
• What does financial governance look like? Director of Finance
(and Operations?)?
• Monthly/termly reporting process?
• How is the central function to be financed?
• Top-slicing or not?
• If so, what percentage? Flat-rate or not?
• GAG pooling? So GAG income can be applied across any
academy within the MAT. Rare……

.
What do the accounts look like?
• One set of accounts per MAT
• Statement of funds
• Costs split by school
• Central services
• Governor remuneration
• Related party transactions and connected parties
• FRS17

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Year-end considerations
• Are charts of accounts consistent across all schools?
• “Consolidation”
• Intra-school transactions
• Supporting schedules

.
Conclusions?
• Planning is key!
• Impact on governance at the school level – how much influence will
existing Trustees have? Do their intended roles within the MAT suit
their skill-set?
• Is there a clear ethos and philosophy shared by all?
• Clarify and challenge the proposed governance, structure, roles and
responsibilities under the MAT before joining. Consider especially
the impact on the Finance function. What does this look like under a
MAT?
• Appoint someone to drive and manage the conversion process!

VAT Update - Agenda
 Registration Limits
 Recharges
 Common Supplies and Pitfalls
 Sports Lettings
 Apportionment

VAT – Registration Limits
• Changes from 1 April 2016
Registration £82k → £83k
De-registration £80k → £81k
• Applies to all business income
• Includes all schools within a MAT
• Also includes reverse charges
• Agents fees
• Software licences
• Overseas services

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VAT – Recharges
Internal
Cost Centres e.g. photocopying, meals – Outside the scope
External
Recharge of time costs for staff – Admin and Teachers
Consultancy – Failing Schools
Catering

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VAT – Common Supplies and Pitfalls
Supply Liability Pitfall
Catering Non-business or taxable Subcontracted out has
caused issues, vending
machines
School Uniform Standard or Zero Reselling at cost assuming
closely connected
School Plays Exempt or Non-business Requirement to pay
changes liability
Before & After Clubs Non-business or Exempt Is there a profit motive
Construction works Standard or Zero Level of business activity
Consultancy Services Standard or Exempt Depends on service
provided
Staff Exempt, Standard or Non-
business
Depends to who, what is
charged and what they do

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VAT – Sports Lettings
Academy
School Use – Free – Non-Business
To public – Members / non-members – Exempt (unless OTT)
Trading Subsidiary
To public – Standard rated if one offs, Exempt if considered land

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VAT – Recovery and Apportionment
VAT 126
Relates to:
Non-Business Activities – Recover in full
Business Activities – No recovery
General (doesn’t fit into above) – Apportion
VAT Registered
Relates to:
Non-Business Activities – Recover in full
Business Activities
Taxable - Recover in full
Exempt - No recovery unless deminimis
General (doesn’t fit into above) – Apportion
Bus Mix NB
NBTax Mix Ex

Topical Tax Issues
Martin Lock

Topical Tax Issues
Employment status of supply teachers and other
staff
• A matter of fact – not a question of choice!
• Teachers supplied via LA and those located through
school’s own contacts likely to be employees – with all that
entails…..
• Agency workers likely to be self-employed
• HMRC Manuals give guidance - see
http://www.hmrc.gov.uk/manuals/esmmanual/esm4502.htm
• Some cases are very obvious – but many are not! Don’t
just look at the contract – look at the substance behind it.
Do actual arrangements mirror the contract?

.
Topical Tax Issues
Do I need a trading subsidiary?
• If income from trading activities more than £50k per annum,
school is liable to corporation tax
• Does not apply to “primary purpose” or “ancillary” trading
• If you are caught, then a trading subsidiary might be the answer?
• Also consider commercial risk, VAT, and practicalities of a
subsidiary – don’t let the tax tail wag the dog!

.
Topical Tax Issues
Income from lettings – is it taxable?
• Rental income usually exempt if profits applied for charitable
purposes
• But when does letting of a premises become a trade?
• Let on a regular basis?
• Provide additional services e.g. conference facilities, IT
equipment, support staff, catering, etc?
• Often hard to determine whether trading – each case will depend
on facts

.
Rental income or trade?
Examples of services Rental Neutral Trade factor
Cleaning & preparation of
rooms
P
Arrangement of furniture
P
Services of reception staff
P P
Cloakroom staff
P
Technical staff
P
Basic refreshments
P
Topical Tax Issues

.
Topical Tax Issues
Fundraising exemption – applies for tax and VAT
• Exempt for tax and VAT for one-off events such as Summer
Fairs, ticketed theatre performances and car boot sales
• Applies to income received – including associated sponsorship
• BUT must not be more than 15 of the same type of event in the
same location in a financial year and event must be promoted as
a fund-raiser for the school

.
New model Gift Aid declaration wef 6 April 2016
• Applies for both single and multiple donations
• Now must include ‘tax to cover’ statement:
“I am a UK taxpayer and understand that if I pay less Income Tax
and/or Capital Gains Tax in the current tax year than the amount
of Gift Aid claimed on all my donations it is my responsibility to
pay any difference.”
• Model forms at: https://www.gov.uk/guidance/gift-aid-
declarations-claiming-tax-back-on-donations#declaration-formats
Topical Tax Issues

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Taunton - Academy Update - July 2016

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