truro - academy update - july 2016

WelcomeDarren Perry

pkf-francisclark.co.uk

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Housekeeping

Agenda

• Accounts Direction 2016 – Sam Pascoe

• New information request spreadsheet – Sam Pascoe

• VAT Update – Julie Towers

• Regularity – Darren Perry

• Multi Academy Trusts – Darren Perry

• Tax Update – Darren Perry

• Q&A


Accounts Direction 2016 Sam Pascoe

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



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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


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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 31 August 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


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Key changes

Trustees’ report

• Compare actual level of reserves to policy and identify free reserves held

Action: check reserves policy in place and appropriate


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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


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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.


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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


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Key changes

Cash flow

• Presentational changes only

Action: None


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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


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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


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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 FormSam Pascoe


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

VAT Update Julie Towers

VAT Update - Agenda

Registration Limits

Recharges

Common Supplies and Pitfalls

Sports Lettings

Apportionment



VAT – Registration Limits

• Changes from 1 April 2016Registration £82k → £83kDe-registration £80k → £81k

• Applies to all business income

• Includes all schools within a MAT

• Also includes reverse charges• Agents fees• Software licences• Overseas services

http://www.google.co.uk/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwikg4COk9DNAhULCcAKHVnxBpkQjRwIBw&url=http://dir.indiamart.com/noida/vat-registration-services.html&bvm=bv.126130881,d.ZGg&psig=AFQjCNHb6SQ8D95Z8_9PfguS6I0GqC08RA&ust=1467389792802011


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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

https://www.google.co.uk/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwiu-8PpktDNAhXMJsAKHV54BIgQjRwIBw&url=https://en.wikipedia.org/wiki/Jamie's_School_Dinners&bvm=bv.126130881,d.ZGg&psig=AFQjCNErKTrOJ1m_JhcuAJ-8yS066F4fMg&ust=1467389710632953


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VAT – Common Supplies and Pitfalls

Supply Liability PitfallCatering 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

http://www.google.co.uk/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwjMlZGwk9DNAhXFKMAKHbx-BrsQjRwIBw&url=http://www.playinnovation.co.uk/&bvm=bv.126130881,d.ZGg&psig=AFQjCNGgLZto7P01hW8RPs31xCzjPkY2Vw&ust=1467389854471143


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VAT – Recovery and Apportionment

VAT 126Relates to:

Non-Business Activities – Recover in fullBusiness Activities – No recoveryGeneral (doesn’t fit into above) – Apportion

VAT RegisteredRelates to:

Non-Business Activities – Recover in fullBusiness Activities

Taxable - Recover in fullExempt - No recovery unless deminimis

General (doesn’t fit into above) – Apportion

Fair and Reasonable

Bus Mix NB

NBTax Mix Ex


Coffee Break

Regularity

Darren Perry


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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


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Academies Financial Handbook

• Updated annually – the 2016 version applies to accounting periods from 1 September 2016

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/534149/Academies_Financial_Handbook_2016.pdf

• Fairly limited changes from the prior year


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Main Changes

• Boards of trustees should identify the skills they need and address gaps (including LGB’s)

• Must publish governance arrangements in accounts and on website, including delegation to LGB’s

• Business and pecuniary interests of the accounting officer must be published on the website (even if not trustee), along with members, trustees and local governors

• Clarification that changes in positions (member, trustee, local governor, chairs, accounting officer, finance officer) must be notified to DoE through Edubase within 14 days


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Main Changes

• Variances between budget and actual income/expenditure must be understood

• Exposure to investment products should be tightly controlled so security of funds take precedence over revenue maximisation

• A requirement for trusts to have a whistleblowing procedure

• Trusts should consider opting into risk protection arrangements (unless better VfM can be achevied elsewhere). Linked to this Trust’s must implement reasonable risk management audit recommendations made by risk auditors


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Main Changes

• Audit committee oversight extends to the controls and risks at constituent academies in a MAT

• Audit committee oversight must ensure that information submitted to DfE/EFA that affects funding is accurate and compliant (i.e. pupil numbers and funding claims)

Multi Academy Trusts – some thoughts…Darren Perry


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???



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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!


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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?


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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……


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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

• LGPS Pension Scheme


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Year-end considerations

• Are charts of accounts consistent across all schools?

• “Consolidation”

• Intra-school transactions

• Supporting schedules


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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!

Topical Tax IssuesDarren Perry

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 https://www.gov.uk/hmrc-internal-manuals/employment-status-manual/esm4502

• 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?



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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!


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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


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Rental income or trade?

Examples of services Rental Neutral Trade factorCleaning & preparation of rooms PArrangement of furniture PServices of reception staff P PCloakroom staff PTechnical staff PBasic refreshments P

Topical Tax Issues


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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


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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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